Identical or different? Similarities and variation in the required competencies to become partner between two Big four firms in The Netherlands

Identical or different? Similarities and variation in the required

competencies to become partner between two Big four firms in

The Netherlands

Type: Master’s thesis Track: MSc Accountancy Supervisor: Sakshi Girdhar Co-assessor: Dennis Veltrop

Date: 17-6-2017 Word count: 9776

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The thesis combines the beliefs of institutional theory, a study of homogenization and the understandings of practice variation, a study of heterogenization. With the purpose to identify similarities and variation in the required competencies to become partner between two of the Dutch Big four accounting firms. By conducting a cross-case analysis on verbatim reports of conducted interviews, multiple similarities and differences were identified. Previous research noted that commercialism was of increasing importance. However, coercive isomorphism has caused a shift in The Netherlands. This expresses itself by the fact that both studied firms have the same most important competency requirement to become partner, namely audit quality. This is a result from the recent scrutiny of the audit profession in The Netherlands by the Authority of the Financial Markets. The thesis contributes to the literature by examining individual differences between two Big four firms. Furthermore, the scope of institutional analysis has been expanded by adding practice variation into the analysis.

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Table of contents

Section 1: introduction page 3

Section 2: theory page 6

Section 3: methodology page 12

Section 4: results and limitations page 15

Section 5: conclusion and discussion page 27

References page 30

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Section 1: introduction

Neo-institutional theory is currently a dominant perspective in organizational analysis (Lounsbury, 2008). However, research considering practice variation and organizational heterogeneity has also become an important new line for institutional research (Cruz et al., 2009). This implies widening the area of such studies further than isomorphism and symbolic conformity (Lounsbury, 2008). Which is done by focusing on actors, practices, the relationship between institutional forces and micro-processes (Lounsbury 2008). The central insight of neo-institutional theory has been that guidelines and procedures appear to entities as taken-for-granted. This suggests that organizational fields and individual organizations merely replicate externally imposed institutional forms without changing them (Cruz et al., 2009). Where organizational groups are defined as groups of actors like regulatory authorities that provide rules or guidelines and other stakeholder groups, for example suppliers or consumers. Institutional logics consider organizational beliefs that affect knowledge and guide decision making in a field (Friedland and Alford, 1991). By integrating practice variation into the institutional analysis, researchers acknowledge that organizational fields consist of multiple logics and that the existence of diverse logics enables organizations to differentiate from others (Lounsbury, 2008). This research avenue adds to a better conceptualization of how institutional pressures are applied to actors that operate in fields with multiple logics and how these imposed pressures, together with multiple logics emanate in divergent practices of individual organizations (Cruz et al., 2009). Research regarding institutionalization and practice variation has already been extended by for example Døving & Gooderham (2008). They study diversification in Norwegian accountancy practices by analyzing human capital, internal development routines and alliances with complementary service providers of accountancy firms. The current study broadens institutional research and practice variation by analyzing how institutional pressures and diverse logics evoke similarities and differences in the required competencies to become partner at Big four firms in The Netherlands.

This thesis addresses the case of institutionalization and practice variation by examining the extent of differences and similarities in the required competencies to become a Big four partner in The Netherlands. Studying institutionalization and practice variation among the Big four is expected to be fruitful. First, previous research has not focused enough on changes in

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the context of professional work (Suddaby et al., 2009). Preceding studies inclined to presume that professionals who work in organizations as in-house counsel or internal auditors are subject to eloquent bureaucratic pressures, but those who work in traditional professional service firms are not (Suddaby et al., 2009). However, the Big four are larger than most fortune 500 enterprises (Suddaby et al., 2009). Furthermore, work within the Big four becomes more fragmented and specialized, which implies that the Big four are similar to large bureaucracies (Leicht & Fennell, 2001). Second, partner autonomy is constrained in the Big four and other large accounting firms as a result of increasing professional control in the aftermath of the collapse of Enron (Gibbins & Jamal, 2006). Which could imply that competency requirements to become partner are standardized in the Big four firms. Third, the current literature considering partner’s competencies is scant. Some of the aspects that have been studied were: Change in identity of accounting firm partners (Carter & Spence, 2014; Covaleski et al., 1998), the identity of partners (Knechel et al., 2015) and the competencies of subordinates (Kornberger et al., 2011; Bots et al., 2009). Carter & Spence (2014) write about the identity of a successful Big four partner. There has been a shift in the identity of partners, there used to be different types of partners: commercial, technical and partners who could do both. Partners of today are of the latter type, they are commercial, active, energetic, open people (Carter & Spence, 2014). The main reason hereof is that success in the Big four is measured in terms of economic capital. This can be illustrated by the fact that partners nowadays hardly do auditing themselves, because they have other commercial activities to attend to. Another finding is that the most important thing to become a partner is “a raw capitalist mentality” (Carter & Spence, 2014, p. 977). Capitalism regards organizations that have a calculative mentality considering the rate of profit (Bryer, 2012). Thus, capitalists seek accumulation of capital through pursuing the highest rate of return, in other words: profit maximization (Tyson et al., 2013). Which implies that competencies regarding commercialism (winning new clients in order to make profit) are imperative for future partners of Big four firms. The thesis aims to add to the scant literature on partner’s competencies by studying similarities and differences in the required competencies to become partner between two Big four firms.

The case of required competencies to become partner is addressed through two theoretical frameworks, namely institutional theory and practice variation theory. Former

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studies in the area of partner’s competencies have only studied the Big four as a whole. Carter & Spence (2014), Covaleski et al. (1998) and Knechel et al. (2015) conducted their studies at the (previous) Big N firms. Their studies narrate about the Big four as a group. No research considering partner’s competencies has been done among Big four firms. Thus, there is also a clear gap in the literature: variation and similarities among Big four firms considering the required competencies of partners.

The thesis makes several contributions. First, this study increases the scope of institutional analysis by analyzing variation and similarity in the competency requirements to become partner among the Big four. Second, it provides an extension of the current scant literature on partner’s competencies. Third, earlier studies have seldom been done outside the U.S. and the UK (Girdhar, 2015). This research aims to cover this gap and to produce an understanding of variation and similarities in the required competencies of partners between two Big four firms in The Netherlands. The Dutch setting for this study is interesting because of several reasons. First, it is obligatory to define a list of required competencies to become partner in The Netherlands (Monitoring Commissie Accountancy, 2016). Accordingly, the firms have done this, see appendix 1 for an anonymized example. Second, the culture in the accountancy profession has to change (Dijsselbloem, 2015). This applies to all of the Big four firms in The Netherlands. This may lead to changes in the required competencies for partners. Furthermore, partners have been engaged in the partner selection process themselves, so they should have considerable knowledge on these subjects. Therefore, it is expected that interviewing partners from The Netherlands gives fruitful information. This emanates in the following research question: To what extent are the required competencies to become partner similar among the Big four in The Netherlands?

The thesis is presented in five sections. The next section provides two theoretical frameworks in which the research is set. Section 3 elaborates about the research methods. Section 4 notes the results and last, section 5 handles the conclusion, discussion, the limitations regarding the thesis and provides some avenues for future research.

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Section 2: theory

Three issues are discussed in this section. First, institutional theory is discussed, linked to the thesis and justified. Second, the three types of isomorphism are discussed and applied to the thesis. Last, practice variation theory is elaborated about.

The first theoretical argument of this thesis is institutional theory. Institutional theory indicates that in order to survive, organizations must live by the rules and belief systems that make up the environment (DiMaggio & Powell, 1983; Meyer & Rowan, 1977). This assumes that organizations morph into structures which are considered socially and organizational acceptable in their field (Rodrigues & Craig, 2007). Organizations will lose legitimacy if they do not change to acceptable forms (DiMaggio & Powell, 1983). The key element of institutional theory, isomorphism, proposes that firms become more and more similar to each other, because they copy rules and processes of other organizations that have high legitimacy (DiMaggio & Powell, 1983). This phenomenon expresses itself in three forms, structural isomorphism, competitive isomorphism and institutional isomorphism. Structural isomorphism posits that organizations or institutions adapt the same structures, without necessarily improving efficiency (DiMaggio & Powell, 1983). Competitive isomorphism concerns the proposition that, when a way of doing things is proven to be the best or most efficient, other organizations will copy this behavior (DiMaggio & Powell, 1983; Rodrigues & Craig, 2007). Institutional isomorphism suggests that organizations respond in the same way to similar problems by adopting the same practices in a reaction to these problems (DiMaggio & Powell, 1983). This implies that the Big four become increasingly similar to each other. Which results in similar practices considering the partner promotion process and required competencies to become partner.

The three main types of institutional isomorphism, as stated by DiMaggio & Powell, (1983) are normative isomorphism, coercive isomorphism and mimetic isomorphism. Coercive pressures are applied to Big four firms by other organizations and cultural or social expectations. This sort of pressure is defined by Oliver (1991) as “conscious obedience to or incorporation of values, norms or institutional requirements” (p. 152). An example of a coercive pressure, which clearly affects accounting firms in The Netherlands, is the scrutinizing of audit quality by the Dutch Authority of the Financial Markets (Autoriteit Financiële Markten, 2014;

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Autoriteit Financiële Markten, 2015). Each year, the Authority of the Financial Markets investigates the audit quality delivered by the Big four. In 2010 the Authority of the Financial Markets issued a critical report about the audit quality of the Big four. The Authority of the Financial Markets has the authority to impose fines on the Big four, which has also been done recently (www.FD.nl, 2016). The scrutinization of the audit quality emanates from the social expectation that the audit quality has to increase (Scholten, 2015). To enhance the audit quality, the Koninklijke Nederlandse Beroepsorganisatie van Accountants (NBA, the Dutch version of the AICPA) issued fifty-three measures to improve the audit quality delivered by the Big four. This is done to enhance the legitimacy of Big four accounting firms, because complying with these measures elevates the company from public criticism and financial penalties of non-compliance (Oliver, 1991). Thus, the audit quality has to increase across the Big four firms. Individual partners greatly influence the audit quality (Gul et al., 2013). This may lead to similar practices among the firms considering partner’s competency requirements.

Normative pressures are defined by DiMaggio & Powell (1983) as professionalization, and considers mutual values which involve harmony of ideas and methods within institutional environments. Two important institutions through which harmony of ideas and methods could be achieved are the educational system and the political regime of the country (Boolaky & Soobaroyen, 2017). There are only seven institutions that offer the theoretical part of the accountant’s education in The Netherlands (NBA, 2017). Moreover, every accountant has to meet the competency requirements set by the Commissie Eindtermen Accountancy (CEA, 2015). Thus, the Big four draw from the same pool of people with the same competencies, who are educated by a small amount of institutions.The educational system also considers training of personnel. Partners in The Netherlands undergo a lot of trainings during their career, because they have to maintain their knowledge by means of permanent education (NBA, 2017). A part of the trainings are similar to each other. For example, in 2017 there is an obligatory subject considering fraud risks (NBA, 2017). Therefore, partners may become increasingly similar to each other in terms of competencies. The second part considers the filtering of personnel. Evidently, partners have not been filtered out. The people who are fired or the people who leave, because they want a new challenge are filtered out. Thus, it could be stated that partners are in a far stage of professionalization, because they were not filtered out and they followed a

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lot of training and education (Vinkenburg, 2015). Which could also be a reason of similarities between the competencies the partners possess.

Mimetic isomorphism results from standard responses to uncertainty and expresses itself when organizations imitate the behavior of other actors that are recognized as successful, in an attempt to enhance their own legitimacy (DiMaggio & Powell, 1983). The environment of the accountant is changing (Huber, 2015). Examples of change in the profession are scrutiny by regulators like the Authority of the Financial Markets, trends in continuous auditing, continuous monitoring, data analytics and process mining (Nixon, 2016). It is quite likely that routine jobs in accounting will be replaced by IT or robots (www.FD.nl, 2016). In order for the accounting profession to survive, it is essential that they exploit these pressures in a positive manner (DiMaggio & Powell, 1983). An implication for future partners is that they should embrace changes and adjust their business in such a manner that the firm benefits from that particular change. Moreover, all the partners develop one common vision in where the firm should be headed. Partners are responsible that this vision is carried out, through their leadership, by their subordinates. Mizruchi & Fein (1999) argue that mimetic isomorphism is the dominant factor leading to homogenization. Mimetic pressures involve benchmarking with other organizations and the identification of best practices in the field (Tuttle & Dillard, 2007). A possible source of mimetic isomorphism is that employees, including partners switch between Big four firms and thereby taking practices along into other firms. This may imply that accounting organizations mimic each other by demanding the same competencies from candidate partners. Moreover, copying processes may grant feasible solutions with little expense in the case that an organization encounters dilemmas with equivocal origins or multiple solutions (DiMaggio & Powell, 1983).

The use of institutional theory is justified for several reasons. First, accounting firms in The Netherlands become more and more similar to each other because of pressures from regulators (Autoriteit Financiële Markten, 2014). Second, Big four firms are centralizing, which implicates standardization and thus homogenization of the offices (Letartre, 2017). Third, coercive pressures are considered to be a more active form of isomorphism (Oliver, 1991). Last, from the contemplation above it can be concluded that normative and mimetic isomorphism are also in play and thereby influence the required competencies to become partner. Therefore, it

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is expected that the use of institutional theory in the explanation of the results is fruitful for this research

The previous paragraphs have highlighted the application of homogeneity through institutional theory. The second theoretical insight which is used in this study is practice variation, a study of heterogeneity. Early statements signaled the importance of studies concerning both homogeneity and heterogeneity (Meyer and Rowan, 1977). Practice variation is based on the acknowledgement that organizational fields are assembled by rival institutional logics rooted in an institutional setting (Lounsbury, 2008). Because the Big four are active in multiple organizational fields with different logics, they have the need to vary their practices (Cruz et al., 2009). A reason hereof is that these logics are experienced differently and to different extent, therefore their response is different as well (Greenwood et al., 2011). Lounsbury (2007) studies how practice variation emanates from competing logics at mutual funds. In this research, Institutional theory is diverted away from isomorphism, towards how numerous forms of rationality govern alteration in organizational fields (Lounsbury, 2007). In the case of Lounsbury (2007), different geographic locations were the roots of different logic. Funds from Boston based their choices on relative efficiency, while funds from New York based their choices on relative performance. Which lead to divergent practices in the way mutual funds set up agreements with professional money management firms. The Big four are also subjective to different logics. The first logic considers bureaucratic pressures from inside the organization that directs the Big four in The Netherlands to profit maximization. Partners of the Big four get objectives imposed on them from the top level of the organization, which could be in form of growth or financial targets (Dirsmith et al., 1997). This is underlined by the fact that the Big four had an average growth of 2.8% in 2015 (Lindy & Powell, 2016) and 9.4% in 2016 (Lindy & Powell, 2017). This internal logic could influence the required competencies to become Big four partner in The Netherlands. The second logic is quality awareness and emanates from regulatory institutions (for example the Authority of the Financial Markets in The Netherlands) that exert influence on the Big four in terms of regulations considering quality (Autoriteit Financiële Markten, 2014; Autoriteit Financiële Markten, 2015). As discussed above, the Authority of the Financial Markets is scrutinizing the audit quality in The Netherlands. As a result of this scrutinization, a number of improvements are being

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implemented to enhance the audit quality (Autoriteit Financiële Markten, 2015). These improvements are also being monitored by the Authority of the Financial Markets (Autoriteit Financiële Markten, 2017). Thus, there are two logics defined on beforehand, namely quality and profit maximization. The individual identities of the organizations guide decision making and the practices. (Thornton & Ocasio, 1999) This implies that the studied organizations could base their decisions each on another logic. Which probably results in divergent practices considering the required competencies to become partner.

Most scholarly attention has focused on institutional theory and isomorphism (Lounsbury, 2008). Moreover, there is little comprehension about why actors’ responses to institutional pressures differ (Friedland & Alford, 1991). There have been two common lines of study in the institutional diversification of new practices and structures (Lounsbury, 2001). The first line concentrates on the comprehension of temporal or spatial differences in institutional processes which structure diffusion, advancing to variations in the actors’ adoption of a practice (Lounsbury, 2001). The second line of research is aimed at the clarification of variation in organizational practices. Here researchers separate institutional pressures that lead to conformity and the distinctive characteristics of individual organizations, which lead to practice variation (Lounsbury, 2001). The thesis can be placed in the second line of research, it seeks to explain why the required competencies to become partner are different. Moreover, aiming attention at the staffing processes is a useful way to explore differences in organizations’ reactions to their environments, because this is an indication for stakeholders considering the compliance to regulations (Rao & Sivakumar, 1999). Considering the thesis, this could result in that one firm takes fifty-three audit quality improvement measures in account. While another firm perceives these measures as less important, resulting in diverging required competencies to become partner for both firms. An example hereof is a regulation from the minimum percentage of hours that senior managers and partners have to make in the audit (Monitoring Commissie Accountancy, 2016). Practice variation would express itself in hiring policies and the ex-ante ratio of hours of the organizations. It is suggested that some areas are divided into fragments and incorporate competing requirements and prescriptions, which lead to ambiguity and variation (Lounsbury, 2008). Moreover, there is always a given amount of practice variety that results from individual performances of actors as they perform a particular practice

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(Lounsbury, 2008). It is fruitful to apply practice variation to the thesis because it can enable deeper connections between institutionalists and scholars (Lounsbury, 2008) interested on the practices considering the partner’s required competencies. Moreover, multiple logics on which the Big four can base their decisions have been identified. Thus, there is a decent indication that the diverging logics have led to practice variation. Furthermore, it cannot be determined on beforehand whether there is solely isomorphism, practice variation or a mix of both.

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Section 3: methodology

The goal of this study is to research the extent to which variation and similarities exist considering the required competencies to become partner among Big four firms in The Netherlands. Considering the choice of Big four firms, the Big four have the best training and development systems (Craswell et al., 1995). Thus, partners from Big four give the most useful information. Opinions considering competency requirements are quite subjective, for this reason a qualitative research method is chosen. Moreover, qualitative research is more subjective and the researcher is also involved in the process, instead of taking distance (Lacey & Luff, 2001). The thesis studies two organizations within the accounting field because practices are often defined at the field level (Scott, 2001). It is also important to capture information from inside of accounting organizations, to be able to understand the connection between the field level and intra-organizational processes (Lounsbury, 2008). Therefore, nine partners, five directors and eight senior managers from two Big four offices in The Netherlands are interviewed in April 2017, with a total of twenty-two interviews. Five people were interviewed at firm 1 and seventeen at firm 2. It concerns a case study between the two firms where variation and similarities between the firms are discussed. From the levels of senior manager and up are interviewed, the duration of the interviews ranged from twenty-five minutes to one hour. People who did not make it to partner are interviewed because this could yield rich insights. Bourdieu calls it the “lucidity of the excluded” (McNay, 1999, p.110). Subordinates who are too distant from the upper echelons (managers and down) of the accounting firms are not approached, because it is anticipated that they do not have enough knowledge of the themes presented in the interviews.

The research considers an in-depth one-on-one, structured interview. A semi-structured interview allows bringing up more ideas and themes, moreover responses are richer and more flexible (Smith, 2015). The interviews are conducted in collaboration with other scholars who write their thesis also about partner’s competencies. The interview guide consists of five parts, for each researcher one part. It is expected that answers to the other parts also yield valuable data, therefore the complete interview will be analyzed. The data can be considered as nominal. Numerous themes are presented during the interviews in order to answer the research question. Themes relating to the research question are: main tasks and

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responsibilities as partner, partner selection criteria, required competencies for partners, importance of technical competencies to become partner and the increasing commercialism in accounting. With respect to Lounsbury’s (2008) statement that it is valuable to gain inside information from the firms, a competency profile from firm 1 was obtained, which is displayed in appendix 1. To assure anonymity of the organization, only the text of the competency profile is displayed. Unfortunately, a competency profile for partners from firm 2 was not obtained, so the competency profiles of the two firms cannot be compared. All interviews were taped and subsequently transcribed to separate verbatim reports. Next, the verbatim reports were processed into an Excel document to gain a complete oversight. All subjects were listed in the Excel document, and the core of the answers given by the interviewees were also listed. Furthermore, when discovered, potential quotes were highlighted in the verbatim reports as well as in the Excel document. This indicates that the analysis was done manually. Apparent variables which cause conditions and outcomes are analyzed through cause and effect models (Miles & Huberman, 1994). Thus, a cross-case analysis was used to infer results from the data. Quotes from firm 1 as well as firm 2 with each result are given to support similarities or variation between the firms.

Validity concerns the degree to which the thesis achieves what it intends to do (Smith, 2015). Internal validity refers to the ability to eliminate rival hypotheses (Smith, 2015). Internal validity also concerns bias in the research. Researcher bias emerges from the fact that there are five different interviewers. To reduce bias, the interview setup will be thoroughly discussed and role-playing will be done to ensure that everyone knows what information has to be extracted. Another internal validity concern is the answers of the partners, the research relies completely on the answers to the questions of the partners. If the answers are truthful, then one could say that the internal validity is improved. Anonymity of the interviewees is guaranteed, to ensure truthful answers. Also, the interviewers will dress properly, in suit to take away barriers that could diminish the partner’s will to answer. Another issue that influences the thesis is reliability. Smith (2015) defines reliability as the consistency of a research instrument. This means that other researchers should obtain the same data when interviewing partners with the same questions. To increase reliability, the researchers work closely together to assure that everyone knows the goal of each part of the interview. Another issue of reliability exists with respect to the coding of the interviews (Smith, 2015). The coders are the same persons as the interviewers

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and they will code their own interviews. Agreements among researchers and using the same guidelines have to be made to assure that the results can be aggregated into one database (Smith, 2015).

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Section 4: results

This section presents the findings based on the analysis of the conducted interviews. First, an oversight considering the differences and similarities of the required competencies to become partner in firm 1 and 2 is presented. The subsequent paragraphs discuss the content of the table substantiated with quotes. Furthermore, the results are discussed in light of existing literature.

The table presented on this page considers the competency requirements of the firms. The left column of the table notes the order of the competencies. Three different ranks of competency requirements have been distinguished, namely the most important competency to become partner, the second competency and the third competency. The middle column shows the required competencies to become partner for firm 1 and the last column shows the required competencies to become partner for firm 2. The most important competency in both firms is audit quality, without proper audit quality one will not become partner of these firms in The Netherlands. The second competency requirement is different for the organizations. With firm 1, no clear second most important competency could be identified. Firm 2 however, has commercialism as second required competency. For both firms, it was not able to distinguish a clear third competency requirement. However, the interviewees from both firms agreed on several other competencies which are also important to become partner. Consequently, three often other named competencies are listed. These are human relations, communication (as well internal in the team as external with the customer) and decision making.

Rank of competencies Firm 1 Firm 2

Most important competency Audit quality Audit quality

Second competency Not identified Commercialism

Third competency Human relations

Communication Decision making

Human relations Communication Decision making

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The table above shows that audit quality is the most important competency to become partner in both firms. An important aspect of audit quality in The Netherlands are so called “quality hours”. The quality hours have to be achieved by the candidate partners, 1400 in firm 1 and 1500 in firm 2, in both firms from the level of manager and up. “Quality hours” are hours or work that contribute to a higher quality of the audit reports. This can be done in various ways, for example teaching at universities, providing training, participating in the Professional Practice Group of the company and participating in internal reviews (NBA, 2017). This is a direct effect of coercive pressures from the Authorities of the Financial Markets (Autoriteit Financiële Markten, 2014; Autoriteit Financiële Markten, 2015). Both firms comply with the rules that candidate partners have to make an amount of quality hours, which results in both firms having similar practices. The Authority of the Financial Markets issues reports each year considering the implementation of the fifty-three measures to improve the audit quality (Autoriteit Financiële Markten, 2015). Currently, these reports are considerably positive regarding the implementation of these measures (www.accountant.nl, 2017). However, in the case that the studied companies do not comply with the measures, the Authority of the Financial Markets will probably write negative reports. Which in turn will have a negative impact on the legitimacy of firm 1 and 2. Thus as proposed by DiMaggio & Powell (1983), both firms enhance their legitimacy by complying with the fifty-three measures issued by the Koninklijke Nederlandse Beroepsorganisatie van Accountants (NBA, 2017). Which results in them having the same required competencies to become partner. Coercive pressures are dominant, because these implemented practices are directly derived from the fifty-three measures proposed by the Koninklijke Nederlandse Beroepsorganisatie van Accountants, and the implementation is being scrutinized by the Authority of the Financial Markets.

In contrast to prior literature, where commercialism is of increasing importance (Carter & Spence, 2014; Covaleski et al., 1998). There is clear consensus among the interviewees that audit quality is a “knock-out criteria” [interview 4, director, firm 1]. If the audit quality of partner candidates is found not up-to-standard after internal or external reviews have taken place (by the Authority of the Financial Markets), then that person will not become partner. In some cases, the authorized signatory of partners can be taken away, if the audit quality is not in order. The major part of the interviewees from both firms regarded responsibility for the

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audit report and thus audit quality as the partner’s main task.

“It is evident that you have to deliver high quality audit reports in order to become partner in The Netherlands. If someone is unable to deliver quality, then that person does not qualify to become partner” [interview 1, partner, firm 1].

“The partner has to execute his job in a proper fashion. That is imperative. In such a manner that the audits are qualitatively right” [interview 12, partner, firm 2].

This indicates that required competencies considering quality are in general the most important in becoming partner. It was stated by the interviewees from both firms that this also applies to the lower echelons of the organization.

“In our organization, audit quality is the most important criteria considering the promotion of employees to a higher-level position” [interview 3, partner, firm 1].

“Audit quality a fundamental requirement in this firm, if you want to be promoted to the next level” [interview 11, director, firm 2].

Without quality, someone will not be promoted to the next level. Thus, audit quality has become standard through both organizations. It currently is a given that every partner in the case firms from The Netherlands have got to have high audit quality. Therefore, the studied firms are really similar to each other considering the most important competency requirement. The next finding, which is in line with Carter & Spence (2014). They found that technical ability is not a differentiator within the firms. This also holds up for the two cases of the thesis. The first quote states that quality is imperative, which in turn implies that it is not a differentiator. The second quote from firm 2 states that everyone in the profession has got to have quality, this also implies that quality is not a differentiator.

“Quality is one of the criteria to become partner, and it is a knock-out criteria. If the audit quality is not up-to-standard, then someone will not become partner” [interview 4, director, firm 1]

“It is essential for partners to have the competencies which all our people should have. Accountants have to be precise and careful. They have to hold their ground, and have to defend their point of view. That is not something only a partner should have, but everyone in the profession has got to have those capacities” [interview 12, partner, firm 2].

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There is however one difference between the thesis and Carter & Spence (2014). In The Netherlands, audit quality is a prerequisite to become partner. Both firms are similar to each other concerning the most important competency: audit quality. The reason hereof is the recent coercive pressure applied to the Big four firms in the embodiment of scrutiny by the Authority of the Financial Markets. The Big four conform to the rules imposed on them by the Authority of the Financial Markets to enhance their legitimacy (DiMaggio & Powell, 1983). Oliver’s (1991) statement that coercive isomorphism is an active form is applicable here. It is also the most dominant form of isomorphism. However, audit quality has not always been the most important competency requirement. It has changed from commercialism as important competency to audit quality. Moreover, the interviewees claim that The Netherlands is the first country where the audit quality is being scrutinized this much.

“Traditionally commercialism has been the most important, but I think that audit quality is of increasing importance, now and in the future” [interview 3, partner, firm 1].

“The importance of audit quality is different when the international environment is compared with The Netherlands. I think that the average time spent on an audit is 50% higher in The Netherlands, because our audit quality has to be higher” [interview 4, director, firm 1]

“Commercialism was the most important aspect of our profession, until about five years ago when. Then the Authority of the Financial Markets started scrutinizing us. Audit quality has been priority number one since. This only counts for The Netherlands at the moment. I think that internationally seen commercialism is still the most important” [interview 22, senior manager, firm 2]

Normative and mimetic isomorphism have not been identified as a cause of the shift in most important competency. In this case there is hardly any room for practice variation, because the rules are too stringent. Both firms have subjected themselves to the institutional pressures by making audit quality the most important competency requirement for partners.

The second competency requirement for firm 1 is ambiguous, firm 2 however has a clear focus on commercialism. Interviewees from firm 1 did not agree on the second most important competency. This is in line with the competency profile displayed in appendix 1. The ambiguity in firm 1 can be explained by their competency profile and by the interviews. First,

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the categories (left hand column, “quality and values”, “people engagement and highest performance teaming”, “operations and winning the market”) are not listed by importance, so it is not clear which categories are more important. Second, the interviewees only named quality as most important. All answers that considered second most competencies were different in firm 1.

“Other competencies are maintaining relationships and client acquisition” [interview 1, partner, firm 1].

“I also consider competencies regarding people, operations and communications as being important” [interview 2, senior manager, firm 1].

“Based on the balanced scorecard: knowledge of the customer (customer perspective), markets (financial perspective), giving feedback (learning and growth perspective) and leading the audit team (internal processes perspective)” [interview 3, partner, firm 1]. “Becoming partner is about a balanced image. That you are active in different quadrants: human relations, market and quality” [interview 4, director, firm 1].

However, the interviewees from firm 2 were considerably clear in the second most important competency requirement.

“The second competency considers the growth of your client portfolio” [interview 15, partner, firm 2].

“A partner has to make sure the pie… is big enough. Thus, that there are enough clients” [interview 16, partner, firm 2].

“The partner is the one who eventually has to sell our brand to the market” [interview 20, partner, firm 2].

“Another important aspect is the binding customers” [interview 21, partner, firm 2].

Thus, the extent to which both firms are similar in terms of competency requirements disappear after the first competency requirement to become partner. Firm 1 is much more aimed at quality than firm 2. This is the first case of practice variation, firm 1 does not have a clear second competency, while firm 2 has commercialism as second competency. Commercialism is

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regarded as an important aspect for one reason: accountancy firms are aimed at profit. The employees get their salary at the end of the month, but the partners live off the profits. So, commercialism is inherent to audit firms. This does not fully explain the difference between the two cases yet, because firm 1 is also aimed at making profit. The literature gives several phenomena that could result in practice variation. The first possibility is that the difference in the individual organizations leads to practice variation (Lounsbury, 2001). The institutional pressure that leads to conformity is the scrutiny by the Authority of the Financial Markets, however the distinctive characteristics of individual organizations lead to practice variation. The second explanation for the difference is given by Westphal & Zajac (1994). They posit that practice variation can emerge from organizations that pursue their own interests, while pretending to act in agreement with institutional demands. Then the own agenda of firm 2 is profit and the institutional demand is quality. It could be that firm 2 opposes more against regulations from the Authority of the Financial Markets than firm 1. The third explanation comes from a study conducted by Goodrick & Salancik (1996). They find that the individual characteristics of organizations are influential in on practice when institutional standards are uncertain. The institutional standards with regard to quality are very clear, the organizations do not divert from these standards. However, there are no standards with regard to commercialism, thus the individual characteristics of the firms exert influence on the second required competence. This expresses itself in the higher focus of firm 1 on quality and the focus of firm 2 on commercialism as second competency. Fourth, institutional fields may have several pressures supplying conflicting cues or signals (D’Aunno et al., 1991). Which give rise to the possibility of idiosyncratic reactions that result in practice variation (D’Aunno et al., 1991). Two conflicting logics in the field of the two studied Big four are the quality logic from the Authority of the Financial Markets and the profit maximization logic, from inside the organizations. This research contends that firm 1 reacts more to the pressure from the Authority of the Financial Markets, with a higher focus on audit quality as a result. Firm 2 focuses more on commercialism than firm 1. Partners from firm 2 also foresee that there will be a shift in required competencies again soon. Which is an indication that firm 2 is aimed more at commercialism.

“An amount of years ago commercialism was restricted. For example, accounting firms could not be sponsor and auditor of the same organizations. It was also forbidden to remunerate people

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based on their commercial performance. The commercial part was forbidden in the profession. In the last years, the emphasis was mainly on audit quality. Actually, commercialism is becoming important again from this year on” [interview 10, partner, firm 2].

“The commercial aspect of the profession has been inferior in the past five to ten years, for a very good reason. We have had a numerous amount of scandals as profession and as organization. There, we have not done our job properly. This has led to a greater focus on audit quality and I think we have made a significant progression. I think it is time to introduce more balance between quality and commercialism, because we are also entrepreneurs” [interview 12, partner, firm 2]. So, the interviewees of firm 2 experience the coercive pressure from the Authority of the Financial Markets as temporary, which could be explained by a research from Kraatz & Zajac (1996). They conducted a large scale longitudinal research among liberal arts colleges and they found that institutional pressures do not always have a staying nature (Kraatz & Zajac, 1996). This implies that the institutional pressures exerted on the studied Big four firms could be temporary. However, none of the interviewees from firm 1 mentioned an impending shift towards a focus on profit. So, the pressures are experienced differently by both firms (Greenwood et al., 2011). Nonetheless, profit counts for both researched organizations in the thesis (after quality). Firm 1 has embedded their aim for profit in throughout their whole competency profile (appendix 1). For example, in the row of operations and under the column experiences. The first bullet considers an increase in fees with existing clients, which is a clear indication of an aim for profit. The third bullet in the same text box is about the increase of the gross margin of the client portfolio, while maintaining or even improving audit quality. Thus, the importance of profit is emphasized, but quality still is more important. Firm 2 has a clear focus on commercialism, they even have it as second most important competency. Thus, the practice variation emanates from the way in which the organizations approach commercialism. Which is the effect of individual characteristics of the organizations (Lounsbury, 2001).

After analyzing the first two required competencies it has become clear that it will take more than superior audit quality and a big portfolio to become partner. With commercialism, there was a clear difference between firm 1 and 2. However, there is no clear consensus between the interviewees considering the third required competency. Not on the individual level of the interviewees and neither on firm level. Some examples are listed below, competencies that were named (not limitative) are: decision making, communication, planning and human relations.

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“There are some developments when someone becomes partner. An important development is that he or she suddenly has to take the final decisions. These decisions can greatly impact the audit quality and the relation with the customer” [interview 1, partner, firm 1].

“I personally think that verbal as well as written communication is one of the critical competencies to become partner” [interview 2, senior manager, firm 1].

“Becoming partner is also about planning ahead, to initiate and activate events by yourself. Making plans, what do you want and where are you headed? How are you going to take care of that?” [interview 8, director, firm 2]

“Human relations, taking care of the people is in my opinion an important aspect of being partner” [interview 14, director, firm 2]

A reason hereof is that these required competencies are different for each candidate partner. These ‘personal’ required competencies are different because not everyone has the same individual competencies. Some people are better in human relations, while others are better at writing management letters. But as partner it is important that he/she is good with people and also is able to write high quality management letters. Therefore, the candidate who is less competent with human relations, will have human relations as required competency. As for the person who is less competent in writing management letters, the required competency will be the writing skills. Thus, individual characteristics of the partners is the underlying cause of the ambiguity in the answers given by the interviewees considering the third most important competency. This is emphasized by the interviewees who are not partner yet, they all know which competencies they still require to improve themselves and thus to become partner. These are dependent on the different persons, and therefore the answers considering the third required competency are also ambiguous.

“My required competencies are: Be more stringent for the employees, demand more results from the team and present more entrepreneurship” [interview 2, senior manager, firm 1].

“So, if you look at my personal characteristics, what I should develop is personal sensitivity. This concerns my communication with people, I can be quite blunt, sometimes I have to express my statements more nuanced manner. That is currently the most important

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development for me” [interview 18, senior manager, firm 1].

There are some must have competencies in order to become partner. As stated above, these are not identical for everyone, because everyone is different. Therefore, three often named competencies are discussed in the following order: human relations, communication and decision making. These three are the third most important competencies in both organizations, thus the firms become similar again. Normative pressures are dominant considering the competency requirement of human relations. These pressures stem from professionalization, practitioners who make it to the elite of their profession are basically indistinguishable (DiMaggio & Powell, 1983). This means that it does not matter for subordinates for which partner of which company they work. Therefore, the two studied organizations are the same. There are also other explanations in the literature concerning the importance of human relations as competency requirement to become partner. Accountants work in teams where interpersonal relations and communication are very important (Kavanagh & Drennan, 2008). Human capital is crucial for the success of the studied firms (Chang et al., 2011). A common phenomenon in the profession is the high efflux of people who work for accountancy firms (Chi et al., 2013). Moreover, without human capital accounting firms cannot exist. By trying to retain their employees, the firms attempt to constrain the uncertainty that stems from employee outflow. The interviewees from both firms thought that not every junior accountant can become partner.

“I do not think that everyone can become partner. First of all, you need to have the desire to become partner. Second, you need luck, there has to be space. Last, you need certain competencies which cannot be attained through working hard. There are a lot of factors which cannot be influenced by yourself, so not everyone can become partner” [interview 2, senior manager, firm 1].

“I do think that every junior staff can become accountant (get the Dutch CPA-title), because eventually this mostly considers working hard. But this does not mean that you can become partner in this organization” [interview 13, partner, firm 2].

In the case that employees do leave the firm, there are three options. The first is to go to another Big four. This option is the most detrimental, because the Big four are direct competitors. Furthermore, it is highly likely that employees start a job at other Big four firms (Hamilton et al., 2008). Because working at a Big four is more prestigious and other Big four firms have better terms of employment (Bagley et al., 2012). Second, former employees can go to non-Big

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four firms, which is less harmful, because firm 1, 2 and non-Big four are not direct rivals. Last, these people have the option to pursue a career elsewhere. Thus, it is important for the firms to retain the right people, because these junior accountants are the future of the firm and might even become a partner. Moreover, the direct continuity of the firms is at stake. In conclusion, partners have a crucial role in the retaining of the right people, therefore are competencies considering human relations imperative in firm 1 as well as firm 2.

“A partner has to be a good employer for his people, he has to provide a positive labor climate.” [interview 3, partner, firm 1].

“And the inside is taking care for the people, that is the recruitment of people, the retaining of new people, the coaching, successions, and the creating of a good work-life balance and a nice working atmosphere” [interview 21, partner, firm 2].

The competency regarding communication consists of two parts. Communication with the customer as well as with the team. The customer is embodied as people who are highly ranked with the customer, individuals from for example the Audit Committee, the Board of Directors and the Supervisory Board. Communication with these people is something else than the average financial administration employee, a partner needs good communicative skills to convince these individuals (Hanson, 1987). Numerous studies have stressed the importance of communication in the accountant's profession (Andrews & Sigband, 1984; Hanson, 1987; McLaren, 1990; Stowers & White, 1999).

“I personally think that communication is an important competency, verbal as well as written. It especially helps when there are particularities in the audit which need to be solved. Then, good communicative skills assist in a successful transfer of information to the client, in such a manner that the client understands you and does not get upset” [interview 2, senior manager, firm 1].

“You have got to have excellent communicative skills. Internally, but also externally with our clients. We have a difficult profession, because we are the messenger with tough news” [interview 12, partner, firm 2].

Communication is less subjective to coercive or mimetic pressures. The dominant form of isomorphism is the normative pressure. A reason hereof is that communicative skills are imperative for a good accountant. Which makes communication a required competency

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throughout the whole profession. Thus, communication will receive a lot of attention during the career of every accountant. Therefore, it is a required competency in both firms.

The last required competency is decision making. When someone is promoted to partner, the impact of his/her final decisions increase substantially. Senior managers can slip off hard decisions to their partners, but ultimately the partner is responsible. Therefore, decision making is highlighted by the interviewees as third competency requirement.

“The partner has to make all the tough decisions, so your decision making skills should be very good” [interview 3, partner, firm 1].

“I think that the logics are different. A partner has the final responsibility while the senior manager still is on the payroll of the organization. There is always back-up for the senior manager, he or she can think: If I do not know the right answers or right decisions, then I can rely on the partner to do the decision making. Now, the partner has to take care of these tough decisions on his own” [interview 7, senior manager, firm 2].

“A great difference is that the signing partner is the end point of the team, he has to make all the decisions. It is his signature and his responsibility, a senior manager has never experienced that” [interview 11, director, firm 2].

The explanation for the identified similarity in the decision making lies in the pyramid structure of the firm. An aspect of the pyramid structure is that subordinates can rely on people who are higher placed in the organization and thus can slip off hard decisions. This phenomenon continues until the partner is reached, all the toughest decisions have to be taken by the partners. It is completely the same for both studied firms, because both firms have the same structure, namely a Limited Liability Partnership structure. This structure has been common in the accountancy profession for a long time (Chandler & Edwards, 1996). So, decision making being an important competency requirement is an effect of mimetic pressures in the past. There is a slight difference between the two firms considering responsibility. Firm 1 has five steps in their organizational pyramid, while firm 2 has (dependent on the education level of the employee) six, seven or eight steps in their organizational pyramid. Thus, the gaps between the positions are bigger in firm 1. Which implies that there is a small difference between the firms, in terms of a responsibility gap between senior manager and partner. This however is compensated by the fact that people on average spend more time in their functions in firm 1. It is a small practice

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variation, which probably emanates from the individual characteristics of the organizations (Lounsbury, 2001).

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Section 5: Conclusion and discussion

In the thesis, variation and similarities considering the required competencies to become partner between two of the Dutch Big four are studied. The Dutch setting is typified by scrutiny of the Authority of the Financial Markets (Autoriteit Financiële Markten, 2014; Autoriteit Financiële Markten, 2015) and fifty-three improvement measures issued by the Nederlandse Beroepsorganisatie Accountants (Monitoring Commissie Accountancy, 2016). The coercive pressures emanate from the social expectation that the audit quality has to increase (Scholten, 2015) and the subsequent regulations issued by the Authority of the Financial Markets. These pressures have a clear influence on the required competencies to become partner in the studied cases. Coercive isomorphism is the most dominant pressure, it has caused a shift in the required competencies to become partner. The shift concerned a transition of commercialism to audit quality as most important competency requirement. The other sorts of isomorphism, namely normative and mimetic are identified at the third required competency. However, these pressures are limited and did not cause substantial change in the required competencies to become partner.

Previous literature, namely Carter & Spence (2014) and Covaleski et al. (1998) stated that commercialism is of increasing importance in the audit profession and thus that profit is more important than audit quality. Moreover, the conflict between professionalism (audit quality) and commercialism has been widely addressed in the literature (Gendron, 2002). This strife has been going on since the beginning of the profession (Kirkham, 1992). In The Netherlands, the tension between audit quality and commercialism has been reduced by means of the scrutiny on audit quality by the Authority of the Financial markets. Furthermore, the fines imposed on the firms when the audit quality is lacking is also an important reason. The financial crisis of 2007 was the direct cause for the Authority of the Financial Markets to investigate the audit quality of accountancy profession (Autoriteit Financiële Markten, 2010). The main result of the investigation was that the audit quality was way too low and thus had to be improved (Autoriteit Financiële Markten, 2010). The fifty-tree improvement measures issued by the Koninklijke Nederlandse Beroepsorganisatie van Accountants as a reaction on this investigation, along with regulations from the Authorities of the Financial Markets led to the shift in most important competencies.

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Practice variation can still be observed with regard to the second required competency. Within firm 1, there is no clear second competency, they expect to make profit through providing excellent audit quality. It is embedded in their competency profile which is displayed in appendix 1. However, the focus on profit is clearly present in firm 2, there commercialism is the second required competency. Existing research could explain this practice variation. Lounsbury (2007) examined practice variation which resulted from competing logics. Which could also be the case for this research. The firms have their own distinct ways in their strife for profits. This results from idiosyncrasies. Firm 1 has embedded their aim for profit throughout their competency profile for partner, while firm 2 clearly focuses on profits by means of a second ranked competency requirement.

The third required competencies are dependent on the person in question. An explanation hereof is that there is a given set of competencies which someone has to obtain. Each person already has some competencies, and talents for specific competencies are different for each individual. With regard to human relations, normative pressures are dominant. The main reason hereof is that the partners are in such a far stage of professionalization that it does not matter for whom the employees work, because the partners are indistinguishable (DiMaggio & Powell, 1983). Furthermore, when firm 1 and 2 are more or less the same, then it matters less for future employees in which firm they work. With regard to communication, normative isomorphism is superior. The best explanation hereof is that communication is required throughout the whole career of an accountant (Andrews & Sigband, 1984; Hanson, 1987; McLaren, 1990; Stowers & White, 1999). Therefore, the best practices will be applied by both firms. The firms are similar to each other in terms of the decision making competency, the main reason hereof is the pyramid structure of the studied firms.

The thesis makes several contributions. First, the scope of institutional analysis has been expanded by analyzing similarities and differences in the required competencies to become partner in the Dutch Big four firms. Second, this research has added to the scant literature on partner‘s competencies. Third, the results imply intriguing differences with existing literature, in audit quality being the number one required competency. Last, the thesis has provided a new research avenue where differences and similarities among Big four firms are highlighted, while previous research has focused on the Big four as a group (Carter & Spence (2014), Covaleski et al. (1998) and Knechel et al. (2015).

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As with each research, the thesis is subject to limitations. First, institutional changes are frequently treated as periodical events that segregate one relatively steady period of beliefs and activities from another (Lounsbury, 2008). The second, obvious limitation is that this research only covers two of the four Big accounting firms in The Netherlands. Third, the author of this thesis only conducted interviews at firm 1. This could introduce bias in the interviews. Last, it was not possible to obtain the competency profile of firm 2. Therefore, it cannot be verified if the answers given by the interviewees of firm 2 are in line with the competency profile of the firm.

Future research could use multiple methods, because it is fruitful to combine archival data with field study or interviews at multiple organizations within a population (Lounsbury, 2008). Also, researchers should try to obtain the whole population of Big four accounting firms, in order to provide the full picture. Another avenue which could be explored is variation and similarities between Big four and non-Big four firms. Because the Authority of the Financial Markets mainly scrutinizes the Big Four. Therefore, competency requirement in non-big four could be different. It would also be interesting to see how long the Authority of the Financial Markets keeps scrutinizing the audit profession in The Netherlands and therefore exerts pressure on the Big four to keep audit quality the number one required competency. Future research could also uncover if there are other countries where audit quality is imperative for partners, or if there is an impending change in competency requirements. Furthermore, it has become clear that The Netherlands are different from other countries (Canada and the UK by Carter & Spence, 2014, Sweden by Knechel et al., 2015 and the U.S. by Covaleski et al., 1998) in terms of competency requirements. Then, what does this difference mean for example the audit quality, audit fees and litigation against auditors?

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