THE AUDIT SOCIETY AND ITS EFFECTS ON GOVERNMENTALITY AND REGULATION IN SOCIETY

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1 MASARYK UNIVERSITY FACULTY OF SOCIAL STUDIES Department of Sociology THE AUDIT SOCIETY AND ITS EFFECTS ON GOVERNMENTALITY AND REGULATION IN SOCIETY Bachelor Thesis Štrofová Zuzana UČO: Supervisor: Mgr. Benjamin Jeremiah Vail, Ph.D., M.Sc. May 20, 2011 Brno, Czech Republic

2 I hereby declare that this thesis I submit for assessment is entirely my own work and has not been taken from the work of others save to the extent that such work has been cited and acknowledged within the text of my work. Date: Signature: Zuzana Štrofová 2

3 Acknowledgments I would like to express my thanks to my advisor, Mgr. Benjamin Jeremiah Vail, Ph.D., M.Sc., for his support and understanding and for many valuable comments. I am particularly grateful for his critical suggestions and challenging questions that made me to be more conscious about the target of the thesis. Also, I would like to thank him for agreeing to be my thesis supervisor despite his busy schedule and his different research concentration. A very special thanks goes out to Professor Rob Flynn and his lectures in Salford University, due to it crossed my mind to be concerned with the idea of audit society. I am especially thankful for his advice about relevant literature, concepts that are applicable on the examination, and his recommendation about the whole structure of the thesis. I must also acknowledge Ms. Sabina Bajerová, who helped me with the translation and grammar correction and without her, it would be hardly possible to finish this thesis. Lastly, I would like to thank my family for the support they provided me through my entire studies and particularly during my study abroad program that I could finish due to their financial support. 3

4 Abstract The thesis comes to think of new ways of legitimacy and the need to verify or control all elements of social life such as technology, production, policy, environment, education, the process of working, or divisions like hospitals, military, and fire department. The thesis is focused on the problem why and how it happens that society feels the need to have a control over all aspect of our life more and more. To understand this new phenomenon, three approaches are taken into account. Those approaches are the Foucauldian concept of Governmentality (after Michel Foucault), Michael Power s account of the Audit Society, and Beck s concept of Reflexive Modernization and Risk Society. Finally, there is examined the history of an audit in the Czech Republic and compared the conception of verification and trust in time before and after the fall of Communism. Key words: audit society, audit, risk, verification, control, governmentality, reflexive modernization, regulation Number of characters:

5 Content 1 Introduction The Idea of Audit Society METHODS OF VERIFICATION THE GROWTH OF THE CONCEPT OF AUDIT CRITIQUES OF POWER S TERM OF AUDIT EXPLOSION AND AUDIT SOCIETY THE IDEA OF AUDIT AUDIT PROCESS THE AUDIT SOCIETY Auditing and the Invention of Governance NEW CONCEPT OF UNDERSTANDING OF POWER GOVERNMENTALITY REGULATIONS OF THE STATE THE AUDIT EXPLOSION AND THE REGULATORY STATE Audit, Trust, and Risk AUDITING AND TRUST RISK IN MODERN SOCIETY RISK AND AUDIT REFLEXIVE MODERNIZATION AND GOVERNMENTALITY Idea of Audit in the Czech Republic HISTORY OF CZECH AUDIT DEMANDS FOR AUDIT BEFORE AND AFTER THE FALL OF COMMUNISM ROLE OF AUDIT AND CZECH POPULATION IN RECENT TIME Conclusion Index References Figure I: Power s idea of internal and external audit

6 1 Introduction In recent years, there is growing an intellectual recognition that modern states have intensified their surveillance and regulation in most aspects of social being. In our everyday life, we are exposed to so many processes of control and new laws that one can almost forget what it is legal and what is not anymore. For instance, having a driving license, there is almost every month a new regulation such as equipments of first-aid kit, changes in the point system, a classification of speed measurement etc. Of course, these regulations are formed in order to reduce the number of traffic accidents that are incurred, beside carelessness of drives, by new technologies of car industry. However, we need to be aware of quantity of all new regulations that directly or implicitly influence our lives. That is probably why so many social researches have been focused on examination of mutual connection of technical progress and its potential risk to mechanisms of governance and other institutional policies. Concepts such as risk management and audit have become very fashionable and regulatory networks have converted into an object of interest in many different domains of society. The new information structures, which have been developed in industrial capitalism, have resulted that the methods of control had to be changed. Nowadays, business companies are requested more and more to make their process of production and their financial management public, which is often linked to a license acquisition and authorization arrangement that surely play substantial effect on profitability of the organization. It is an exaggeration to assume that modern states have always attempted to control from above, informal methods of not direct verification and state involvement in market have always existed. However, there seems to be such an obvious systematic change of regulatory mood in recent years, in a sense that it is not important to contrast regulation by self and regulation by others any more. [Power 1997] This transformation in control philosophy has created a new demand for ways of decision making in organization and in society itself. Michael Power [1997] argues that the character of modern society requires to challenge and shift the boundaries between insiders and outsiders and to reconnect decision makers with their distant publics. Chains of control practices in which each link controls the next achieve this connection. Thus according to some sociologists, an emerging regulatory style can be 6

7 characterized by the idea what Foucault calls the conduct of conduct [Foucault cited in Burchell 1991]. Some authors discuss that since the early 1980s there has been a dramatic growth of inspections and evaluations, and more and more agencies have been concerned with measuring and monitoring of performance of other bodies. Thus, the audit activities have spread throughout all economic sectors, both the private and public spheres and it has no exception the audit is applied in medical field, environment, judicial system, educational system or in science itself today. The book called The Audit Society written by Michael Power is the first systematic examination of audit as a principle of social organization and control. The author critically observes the causes, means, and consequences of this explosion and raises important questions about the efficiency of audit processes. He also proposes that the consequences of this must be assessed with awareness [Power 1997]. In this thesis, we will particularly focus on the recent growth of auditing as a form of control of control [Power 1994a] and analyses this process in relation to two other concepts such as governmentality [Foucault 1978] and reflexive modernization [Beck 1992a]. The thesis is divided into four main parts, where each of them is further consisted of relevant subheads. In the first chapter, the thesis is concentrated on the definition of the term audit itself and on a description of characteristics of what Power [1997] termed The Audit Society. In this part of the thesis, we will also study how the idea of audit is adopted and mobilized in modern society as well as when this concept was arisen in history. We will also take a brief view on some Power s critiques where we will observe probably the most critical text written by Josephine Maltby: There is no such thing as audit society. In last paragraphs of the first part, I will move to an examination of conceptualization of terms such as verification and truth. I will show their major role in modern society, presenting here as an audit society. In the second chapter, there will be explored the concept of audit in a wider context, namely the background that gave the basement for its own development. It will be taken into account Foucauldian concept of governmentality that includes an idea of controlling by itself - the main presumption of the idea of audit. In this chapter, we will also consider a connection between audit and regulation, mainly the state regulation, and its principal interest of running the audit. 7

8 The third part of the thesis will be focused on consideration of Ulrich Beck s concept of reflexive modernization, and his suggestion that classical instruments of political direction [Beck 1992a:107] are being displaced by systems of knowledge, which are open and self-monitoring, and are consistent with the emerging regulatory style. Shortly, we will think about a progress of new technologies and their potential risk in a sense of implementing audit everywhere the system functioning has failed or endangered security. In the last part, I would like to examine the history of an audit in the Czech Republic and to compare the conception of verification and trust in time before and after the fall of communism. I expect that this conception will be diverse in relation to different economic, political, and social background of these two periods. 2 The Idea of Audit Society 2.1 Methods of Verification In the introduction to the chapter The Audit Explosion, Michael Power [1994] illustrates in which way people are constantly checking up on each other. As a rational individual, human being is constantly monitoring accounts of his actions, the stream of communicative interactions with others around him or any other acts that constitute his daily life. It is through these actions we can understand the place where we live and keep the process of interactions ongoing. The practice of verification is sometimes more conscious then another time, and normally we even do not know we are really doing it. The explicit actions become objects of very conscious checking especially in situations of distrust, conflict, doubt, and danger. For example, we do consciously check whether the product we want to buy, is not outdated; make sure that the toy for our kid is childproof, recount cash back in a store, ask other doctors for second medical opinion, seek an independent witnesses during a lawsuit, even hire private detectives if we do not trust our partner. All these situations are processes of verification but we attach to each of them a different significance. We might say that methods of inspection and verification are varied from person to person, according to subjects that are in some ways important for him or could be a risk. Having said this, one could imagine a situation when one does not agree being checked, like parents who ask continually their son where he goes out and with whom, in order to make themselves sure nothing wrong can happened to him. 8

9 Another example might be a situation where an adult checks his eighty years old mother, whether she turned off the gas after cooking, for a reason her memory is not in a good condition anymore. In short, there are clearly many situations where we think that some checking and monitoring is reasonable, even if the other side does not like it or thinks it is inappropriate. In these kinds of situation, the one who is being checked might feel like losing his authority or credibility but for our reasons we maintain a checking. On the other hand, there are some circumstances where checking could be unjustified, like when a partner constantly checks with whom and where his partner goes out. Thus, the decision we need to make as individuals, organizations, societies, is how to balance checking and trusting. For answering this dilemma, Power [1994:2] suggests to ask such questions: What kinds of activities should be checked?, How much explicit checking is enough?, How does checking affect those who are checked and when does the demand for monitoring become pathological, Can the benefit of checking be clearly demonstrated? It is the aspiration of this thesis to give certain answers for these questions. At this moment, it is essential to understand that the process of verification is not simply a matter of technical pragmatism but it is also a cultural issue. As Power [1994:2] mentions: it is a product of the communities in which we live and the forms of accountability, approval, and blame that constitute our normative environment. When we examine practices of checking, we need to be aware that the distinct patterns of institutionalized checking and trust have developed in societies differently. For example, the technologies of security checks are used very variously and even the opinion of their utilization is varied from culture to culture. In the USA, we would be asked to go through a body scan during every visit of cultural monument, while in the Czech Republic you can cross the Charles Bridge even no security knowing about it. These distinct patterns of checking are different both territorially and historically. For example, we could see a change of manners of verification in the Czech Republic itself. In the Communism era, mothers often left prams with their children in front of a store while they did shopping. In recent times, we can hardly notice any children running in front of a store without seeing any parent around them. In general, the practices of checking are included into the everyday structures of human actions, especially when we are in a situation of doubt, disagreement, mistrust, and risk. Nevertheless, concrete practices of checking can vary significantly 9

10 according to particular culture in terms of a history as well as territory and personally. It depends on what the society itself demands to be checked and this relates to what the society is prepared to trust and considered as a risk. 2.2 The Growth of the Concept of Audit In the previous chapter, we demonstrated a fact that a human being, as a rational individual, is exposed to many circumstances when checking and demands for proof are just inseparable components of human actions. In this section, we will examine a magnified growth of demands for verification and an accompanying process of auditing. According to Michael Power [1994:3]: There is an interesting point that during the late 1980s and early 1990s, the word audit began to be used in Britain with growing frequency in a wide variety of contexts. The word audit is connected mostly to a financial matter in a sense of controlling companies accounting. In addition to that meaning, there are also practices of environmental audit, value for money audit, management audit, forensic audit, data audit, intellectual property audit, medical audit, teaching audit, and technology audit. All these new types of audit have emerged and acquired a degree of institutional stability and acceptance. In short, many other departments besides the original corporations began to experience of formalized and detailed checking up on what they do. For presenting reasons, why the growth of audit applications have been happening and what exactly the audit explosion means for a modern society, at first, we need to go through a methodological examination of the concept of audit itself. Michael Power deals with the idea of audit from a point of view that there is no precise agreement about what auditing really is. He argues that definition of auditing is largely an attempt to say what it could be rather than giving any specific meaning. He brings two reasons of inability to define this concept. First, there is no precise agreement about what auditing really is, as compared with other types of evaluative practices, such as inspection or assessment., Second, one must in any case understand that the production of official definition of a practice like auditing, in legislation or promotional documents, is an idealized. [Power 1994a:5] Despite this recognition of ambiguity of this term, Power essentially perceives an audit as what we call financial audit - the way that compensates the inherent mistrust, which unavoidably exists between investors and managers [Maltby 2008]. His study is based on the idea that in the audit society, the trust of auditors is before workers and 10

11 therefore audit has developed as a way of making financial markets work. This means that audit has occurred from the distrustful relationship between principals and agents, the people whose interests are to do an audit and those who are audited. Therefore, there raised a need to engaged independent agents - the auditor. For implementing this body to the process, the agents work has to be executed in an auditable form, which involves not only ex post control by the auditor, but also condition of what is actually being done. In my point of view, I use the concept of audit in this thesis in term of financial audit, which can be defined as an independent verification and expressing an opinion about final accounts of a company as a whole. Notwithstanding, the concept of audit seems to be very ambiguous, understanding the background where this term has been developed is more important than a precise definition. Michael Power inclines forward medieval origins by pointing out that the audit was initially an audience. The history of audit closely relates to the expansion of accountancy. Italian trader and merchants for registering possession and protection against alienation, which resulted from frauds and errors in incorrect filling [Janouskova 2003], already used both methods. However, most scientists proceed to the agency theory, the widely accepted characterization of the source of demand for audit. The agency theory explains the separation of ownership and control means that investors distrust managers to the extent that they cannot monitor them personally; therefore, it is beneficial for managers to bring into play the third party. Maltby [2008] challenges this theory with two specific problems. The first one is based on the idea that the goals of the principal and agent do not have to be always in conflict, such as a problem of efficiency. It is an interest of both to make the company efficient as much as possible. At this point, I would rather take Power s side, because as he also argues, the aim might be the same for both side but the choice of means to its achievement can vary enormously. The second problem, Maltby points out, is Power supposes that both the principal and agent reconcile diverse toleration for risk. As she disputes, there are situations when none of them would expose themselves to a risk, in the case of burst of nuclear energy or air pollution. I agree that this challenge needs to be taken in more details and I will come back to this point in the chapter three. 11

12 2.3 Critiques of Power s Term of Audit Explosion and Audit Society At this point, it seems logic to mention some other critiques of Power s terms audit explosion and audit society. Perhaps Josephine Maltby, a Professor of Financial Accounting at The York Management School in University of York, writes the most meaningful review. Her piece of work named There is no such thing as audit society speaks of several critiques relevant to Power s work. At first, Maltby [2008] points out Power s beliefs about the universality of an audit regime, which began to penetrate the UK public sector in the Thatcher era, and has had a harmful effect on society s behaviour. According to her, this doctrine is too negative and no reversible. It takes into account just suggestion that audit is based on the absence of trust within the public as well as private sector which lead to make auditable everyone and everything. Thus, she challenges Power s ahistorical approach to the origin of audit, and points out the fundamental weakness of Power s treatment of audit as his aversion to empirics. Further, in the text she shortly mentions a studies presented by Hood et al [2004], who in a study of public sector management in eight countries, has come to the conclusion that the role of audit has not increased dramatically but has indeed declined [Maltby 2008]. This is evidently the biggest deficiency of Power s work, as he never presents any empirical data. His research results from growing numbers of companies dealing with audit or risk management. He gives us some examples of British companies such as the Food Standards Agency, the Financial Services Authority or the Commission for Health Audit and Inspection. At the same time Maltby also criticises his expectation that audit may mean different things in different contexts. In defence of his book The Audit Society: Rituals of Verification, Michael Power published a reply to Maltby, where he brings several points to confirm the correctness of his work (for more details see Power 2008). Much more could be said about this disagreement. However, aspire of this thesis is not to examine deficiencies of Power s concepts as it rather seems to be adequate to notice them. Hence, in the following paragraphs, all the ideas will be related to Power, as I did not find out any other relevant critiques to disagree with this author up to now. In contrast, in my opinion he presents certain interesting ideas about a modern society and its view at risk, power, and controlling. 12

13 2.4 The Idea of Audit Although, it is actually unable to define exactly what audit is about. Power argues that it is precisely this fact that enables its movement and importation into wide variety departments of social life such as technology, production, policy, environment, education, the process of working, or divisions like hospitals, military and non-profit organizations. He points out that the problem of the definition is not methodological but a substantive fact [Power 1997]. Certainly, not all practices of verification mentioned in the previous paragraphs represent a process of audit, for example checking a teenager where and with whom he goes out, it is not a process of audit. However, fear, doubt, and mistrust are precisely the primary causes for the development of the idea of audit. Programmatic and technological aspects can characterize any practice. The former one relates to the ideas and concepts, which form the composition of the practice. It formulates broad goals and assumes the practices, which needs to be achieved. At this level, we might perceive the audit process as the demand of regulatory systems [Power 1994]. The later aspect is connected to the more concrete tasks and routines in which the audit works, such as checklists, samples and body of knowledge. Power [1997] emphasizes that this division is helpful in understanding that audit explosion is the explosion of an idea which has become embodied in a wide range of manners of accountability and control. He explains in the chapter Fraud, Expectations, and the Rise of Financial Audit, the level of programmatic that constructs the idea of audit and the level of technology is just secondary element. Thus, one can comprehend the idea of audit as a collection of tests and an evidencegathering task as well as a system of values and goals, which are parts of official agendas that demand it. From this point of view, auditing has spread up for some wider circumstances than just for its basic technological aspect. The idea of audit shapes public conceptions of the problems for which it is the solution; it is constitutive of certain regulatory or control style which reflects deeply held commitments to checking and trust. [Power 1994a:7] I will address this more deeply in the chapter three where I will examine the coherence between audit and regulation. At this part, I would like to come back to a deeper examination of the practice of audit itself. As I have already explained, the term of audit is very ambiguous. However, throughout a history, the perspective on what the audit should be for has 13

14 been changed apparently. In the second half of the nineteenth century, the auditors considered question to what kinds of tests must be executed and the extent to which the auditor must examine more than just financial statements. Chandler [1993] considers couple of cases when this perspective an audit completely failed and labels this process as inadequate and gainless. In those cases, the role of audit was to show that the accounts corresponded with the financial statements, and nothing was really said about the credibility of the company as a whole. This has been changed during the end of the nineteenth century, when financial auditing began to emerge as a codified body of operational doctrine and Dicksee s Auditing assumed the status of a practice manual in Britain [Power 1997]. That said, before the auditor chooses methods to ensure the detection of errors, the extent to which an auditor is expected to perform the research needs to be decided. Although, it is in the highest degree of desirable to trace every transaction back to its first steps, it is impossible for auditor to deal like that. [Diksee cited in Power 1997]. This doctrine from 1892 has been the origin of the modern selective audit, based on the control systems of the audit. However, the development of audit was very different in every country. There are mostly taken into account three countries such as Great Britain, USA and France. First establishment of audit is written in British Companies Act 1844, which regulates shareholders to verify balance. Nevertheless, the doctrine from 1892 was fundament for the development of audit also in other countries. Although, there could be said some more discussions about the historical development of audit, I do not consider it too much significant for this thesis as it would mean to present numbers of acts which is hardly possible to understand and in addition they are varied from country to country. However, the general tension seems to be to increase precise codification of the operational dimensions as well as to pronounce definitions about the very purpose of auditing itself. 2.5 Audit Process Nowadays, it is commonly given which company have to be taken into the process of audit by law. This varies from state to state. However, a global organization named the International Federation of Accountants that regularly issues standards exists in order to help particular chambers of auditors in every individual state to set up similar statements of audit. As the global market is developing more and more it seems much more important to unify the standards today. However, doing 14

15 this is much more complicated than one might imagine. In countries such as USA, Great Britain and France were the legal regulations developed very differently, hence the system can be hardly unified in the present time. Nevertheless, there is a basic agreement about the audit process such as it is composed of several steps. At the very beginning, there is a choice of auditing company that will run the process. There are four largest international accountancy and professional services firms called The Big Four, composed of firms PricewaterhouseCoopers, Ernst & Young, KPMG, and Deloitte. The auditor commonly sends a preliminary checklist, which is a list of documents such as organization charts, financial statements that will help the auditor learn about the organization s unit before planning the audit. It is the management who commits the financial statements are true and fair. After reviewing the information, the auditor plans the review, which is the step the auditor takes, before the audit, to identify key areas of risk and areas of concern. This stage is usually accomplished in a series of meetings with auditing team. This leads up to the opening meeting between the auditing staff and senior management of the auditing goal as well as administrative staff. After the opening meeting, the auditor completes the audit plan and begins fieldwork. Fieldwork typically consists of talking with staff, reviewing procedure manuals, and learning about your business processes, testing for compliance with applicable university policies and procedures and laws and regulations, and assessing the adequacy of internal controls. [Cornell University 2007] Throughout the process, the auditor keeps the auditee informed as well as the auditee has an opportunity to discuss problems. After the fieldwork is completed, the auditor drafts a report. The report consists of several sections and includes the distribution list, the follow-up date, a general overview of unit, the scope of the audit, any major audit concerns, the overall conclusion, and detailed commentary describing the findings and recommended solutions. [Cornell University 2007] Once the report is finalized, the auditee is requested about management responses, which includes whether they agree or disagree with the problem, their action plan to correct the problem, and the expected completion date. A closing meeting is held so that everyone can discuss the audit report and review the management responses. This is an opportunity to discuss how the audit went. Thus, the outcome of the financial process is the report that acknowledges that the financial statements are true and fair. 15

16 2.6 The Audit Society Before I will move to the examination of the mutual relationship between the audit society and regulatory state, I would like to describe what Power means by the audit society. According to Power [1994], the audit explosion represents a characteristic shift in regulatory style which reformulates, rather than abandons, an older style of hierarchical control. Auditing can be considered as a form of control of control functioning between regulatory and management systems of control. The idea consists in a fact that control is now exercised in chains; each layer in the chain primarily controls its neighbour by inspiring forms of self-organization and control. Power argues that it is through this chain that the regulator, the state and regulatee are linked in a form of mutual regulation. The former enlists the competence of the latter by delegating control along the chain and, in return, it is provided with appropriate signals of regulatory observance [Power 1997]. For Power [1997:138]: the audit society by definition is one which has come to understand the solution to many of its problems in terms of audit. Thus, it is that many more individuals and organizations are coming to think of themselves as subjects of audit [Power 1994]. He attempts to understand how the rational elements of audit have allowed its wide spreading and appeal to different groups, not least to policy makers. As Maltby [2008] said, audit can be understood as a boundary object for different groups that express their interests in terms of its presumed potential. For Power [1994a:305]: the public perception that an activity is performed, while remaining in substance invisible, is an important strategy of legitimacy in the audit society. The public, according to Power, does not understand the difference between an independent audit and one that serves its own and its auditee s interests, nor is it intellectually capable of criticizing audit failure: The audit society idealizes independent validation without public transparency. [Power 1994a:306] Further, he argues that the audit society is the anxious society, where a decrease of audit concentration, and the possibility of leaving groups and individuals to themselves, is factually impossible [Power 1994a:307]. After having presented the key elements of audit society, I would like to move to a consideration of some other concepts that are closely linked to the development of audit society and by which we will better understand the conceptualization of audit society. In the following two chapters, we will focus on two concepts that will surely 16

17 underlie the growth of audit; governmentality as Foucault calls it and Beck s concept of reflexive modernization. 3 Auditing and the Invention of Governance In the previous chapter, it was explored the transformation in the corporation environment, in a term of a delegation supervisory power and control means from owners to managers to the extent that they cannot monitor them personally, intensified the demand for bringing a third part into a play, in a form of auditor. The very beginning of this change can be dated in the late sixteenth century and early seventeenth century. It was also argued that financial audit relied to the need for better corporate governance by implementing a benchmark for securing the legitimacy of organizational actions, in a form of audit. However, it was not just a financial audit that found itself as a significant component for enhancing and transforming organizational governance, there were also some other domains. Thus in this chapter, we will move this idea to a wider context, respectively we will focus on exploration of various impulses and demands which have contributed to the expansion of auditing practices in other areas. As Power [1994a] points out, there has been wide-range discussion of governance during the 1990s. Most of these views divide upon what it is and how it might be improved. In general, we might perceive governance as a concern about effectiveness, control, stability, and maximization of values. Of course, there are more environments where the governance can be applied - as a family, a corporation, a state and a society in a global context. For understanding, how a governance could supplied an origin of the modern selective audit, we will be concerned in more details about governmentality; a concept firstly developed by a philosopher Michel Foucault. 3.1 New Concept of Understanding of Power Michel Foucault developed the concept of governmentality more or less between 1977 and his death in 1984, particularly in his lectures at the College de France. Further, it has been elaborated from an Anglo-Neo Foucauldian perspective in the social sciences, especially by authors such as Peter Miller, Nikolas Rose and Mitchell Dean. For fully comprehension of this concept from Foucault s perspective, it is essential to understand that he does not only use the strictly political definition of government that is used contemporary. However, he uses the broader meaning of 17

18 government that was employed until the eighteenth century when the problem of government was placed in a more general context. In addition to control management by the state or the administration, government also signified problems of self-control, leadership for the family and for children or management of the household. In his lectures, he also defines the term of governmentality as the art of government, by which we can better understand that government is not just limited to state politics but we need to take into account also a wide range of control techniques that are applied to a wide variety of objects. All that happens in a complex of structures from one s control to control of others. Thus, Foucault brings a new understanding of power. He evokes us to think of power in a new way, say not just in hierarchical dimension but also in a term of social control throughout the institutions such as schools, hospitals, employment, social clubs etc. He stresses that governmentality is the way to secure population s conformity without using direct state intervention. We will come back to this idea latter in this chapter. However, at this point I would like to focus in more details on a term of governmentality itself. 3.2 Governmentality In the text The Foucault effect, especially in a chapter Governmentality, Michael Foucault [1991:87] explains changes in the political field that had been happening from middle of the sixteenth century to the end of the eighteenth. there develops and flourishes a notable series of political treatises that are no longer exactly advice to the prince, and not yet treatises of political science, but are instead presented as works on the art of government... [Foucault 1991:87]. The author compares two texts that in the very opposition concern with the political form of government. As the central book, he points out the Machiavelli s text The Prince. For Machiavelli:... the prince stood in a relation of singularity and externality, and thus of transcendence, to his principality... [Foucault 1991:90-91]. The power that established his principality may have been acquired through violence, family heritage, with complicity or the alliance of other princes, which all represent a synthetic link, based on no natural and juridical connection between the prince and his principality [Foucault 1991]. In an opposition to this idea, it stays anti-machiavellian treatises, represented by Guillaume de La Perriere s Miroir Politiqve. The fact that distinguishes anti-machiavellian is based on a plurality of forms of government and their immanence to the state. They see the practices of government multiply and 18

19 concern many kinds of them.... Such the head of a family, the superior of a convent, the teacher or tutor of a child or pupil - so that there are several forms of government among which the prince s relation to his state is only one particular mode; while, on the other hand, all these other kinds of government are internal to the state or society. [Foucault 1991:91] Further Michel Foucault talks about the difference between exercising power in a traditional government and in the era he calls the art of government. This period varies from the previous one in that the state is governed according to rational principles such as political economy, laws and savoir of the state. [Foucault 1991] While the former one, the regent s power was a clear submission to sovereignty, that is to say, obedience to the prince s decisions, the later one is based on a savoir of a state in a sense of its own patterns. This is an essential point for understanding the exercise of power, as we know it in recent time. Furthermore, this change in the perspective of power will also help to comprehend why the role of audit is too significant in modern society. Additional in the text Governmentality, Michael Foucault indicates that, according to him, the essential issue in the establishment of the art of government is an introduction of economy into political practice. Thus, the movement from traditional government, in a form of Machiavelli s The Prince, to the art of government, that understands government not just to a context of a state itself but also to population on the individual stage, means application economy at the level of the entire state. That also means exercising economy towards inhabitants, and the wealth and behaviour of each and all, a form of surveillance and control. [Foucault 1991:92] At this point, we can understand that the essence of government is exercising power in the form of economy. This, I believe, is the essential issue in the primary establishment of audit. As we will concern it in the chapter Regulations of the State, audit has not spread out over the world in a sense of financial verification and control but it had much deeper context in a form of regulation. 3.3 Regulations of the State In the previous paragraphs, we were always talking about the connections between the explosion of audit and the institution of government as well as the emerging new regulatory style in society. However, so far we did not engage with any more specific description of the regulatory state itself. This kind of state is 19

20 generally characterized by the growth of market policies and the development of independent regulatory agencies operating in the public interest. [King 2007:12] While the origin of regulations we might seek in a period before Christ, the last two decades have certainly been an epoch of institutional regulatory innovations. Since the late 1980s (Thatcherism), privatization has been ever more accompanied by the setting of state agencies that exercise regulatory controls over business entities in fields such as telecommunications, electrical energy, post, media, pharmaceuticals, environment, food safety, occupational safety, insurance, banking, and securities trading [Levi-Faur, Gilad 2004:105]. These new bodies, known as independent regulatory authorities, have been endowed some quantify of autonomy from direct political control, supposedly in an effort to raise policy authority in relation to home and international capital. As the authors point out [2004:106]: the term independent regulatory authority is challenging as most these agencies might be institutionally autonomous but in no way independent (in the sense of impenetrable). Although privatization and institutionally autonomous regulatory agencies are the most visible aspects of the regulatory state, it is also necessary to take into account the formalization of an informal way of applying law and regulation and the production of new mechanisms and techniques of regulation, and thus enforce selfregulating system. 3.4 The Audit Explosion and the Regulatory State David Levi-Faur and Sharon Gilad examined in their study The Rise of the British Regulatory State: Transcending the Privatization Debate the link between the audit explosion and the regulatory state. Their work relates to Michael Power s The Audit Society as we were concerned with this idea in the previous paragraphs. The important point that they highlight is Power s explanation of the dynamics of public control over business through one particular instrument of regulation auditing. At this time, auditing acquires a degree of stability and authority that institutionalized it as the most important tool of governance further than the control of business. Let me repeat what Power said about the audit explosion: increasing numbers of individuals and organizations found themselves subject to a new or more intensive accounting and audit requirement and a formalized and detailed checking up on what they do. [Power 1997:3] It had happened that the growth of auditing practices produces the audit society, where the extreme case of checking gone wild, of ritualized practices 20

21 of verification whose technical efficacy is less significant than their role in the production of organizational legitimacy [Power 1997:14]. Building on his observations about the growing importance of auditing, Power sets out to explore the following questions: How and why did auditing become so attractive to so many diverse groups?... How can auditing be such a robust policy tool when it often seems to fail so spectacularly? And how do we begin to understand a society which seems to invest so heavily in such an instrument of regulation? [Power 1997: xii] Thus, there rises a question: What runs the explosion of audit? He sees it as the effect of the 1980s and 1990s reforms in governance in Great Britain, which consisted in the little and non-intervening government on the one side and accountability and transparency of public services on the other one. The effect was dependence on a mixture of state regulation and varieties of forms of self-regulation and auditing. As the state became increasingly and explicitly committed to an indirect supervisory role, audit and accounting practices assumed a decisive function. [Power 1997:11] Thus, auditing became an essential flow line among systems of self-control and state systems of regulation. David Levi-Faur and Sharon Gilad [2004:116] argues that building on Power s studies, there are two progresses occurring all together: reallocation of regulatory functions down to auditors and corporations, and a drift from an inspection to an audit style of regulation. The role of inspectors is to concentrate on the processes and outcomes of regulator s activity, whereas the function of audit is assessing the solidity of internal corporate control systems over these processes and outcomes. The considerable point that all three authors indicate is the risk - this loyalty of both sides may mean nothing about the actual quality of the services in that way provided to the public. To conclude this chapter, it was demonstrated that the regulatory state is not monolithic but it is consisted of different sectors that link to particular policy domains. I gave you an idea about the explosion of auditing as not just a reaction to the problems of corporate control. It is also a cultural attribute of a society inclining to technocratic procedures over individual professional decision-making, as many authors perceive it. 21

22 4 Audit, Trust, and Risk In this chapter, I explore some of the more general accompaniments of audit society. As we have discussed already, auditing arises from the common human need to ease anxiety. However, it remains to be asked where these anxieties come from and in what other ways they can be repressed. As Power mentions [1997], when owners were generally regarded as truthful and shareholders were perceived as not so much important part of business matters, financial audit existed in a very limited form. According to author, this change turned up in 1930s when the financial audit started to take for granted as a major regulatory activity that was continually extended and adopted in new directions. As we have also discussed, auditing is not simply a set of technical tasks but it is also a programmatic idea that undertakes a certain methods of control and organizational transparency. Thus, we can perceive audit process more as a routine or institutionalized practice than rational response to the need to reduce transactions costs and confirm effectiveness of corporations decisions. One might come to think, what then does mean that society commits gradually to more financial and intellectual methods of verification through auditing? This chapter addresses this question in terms of much-related themes such as trust and risk. 4.1 Auditing and Trust It is hardly possible to describe what trust is as everyone has little bit different view of its sense. In general, trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another [IRS]. If we can surround ourselves with people we trust, then we can create a safe environment in which we feel happy. Nowadays, we occur in a period, when no one trusts to each other as ever before. In comparison to a period of the Communism era, people trusted much more public institutions such as public offices, hospitals, schools etc. Of course, there is a question what made people to trust these institutions. Lots of information in media was censured and it was not allowed to see for example a doctor for second medical opinion. In more details, we will be concerned with this problem in a chapter Audit in the Czech Republic. However, what seems to me important is that mood of trust has been changed a lot in recent time. I consider as one of these reasons a raise of capitalism, where most of decisions and practices are run by the profitability and accompanying efficiency. As we suggested, audits are demanded in the context of relations of accountability between two parties that 22

23 mistrust each other. Thus, the principals and agents find trust through a third part - auditor. This means that financial auditors are social control specialists who oversee the proceduralization of information flows to principals in the form of accounting and disclosure requirements. [Power 1997:134] In short, auditing is demanded under conditions where both sides are entrusted by each other. At the same time, trust is lacking in public and it must be restored by the audited activity. From this point of view, there arises an ironic fact. For example, Shapiro says:... one of the ironies of trust is that we frequently protect it and respond to its failure by bestowing even more trust... [Shapiro 1987a:212 cited in Power 1997:135]. This means we frequently subside a trust towards corporations, public offices, as well as environment organizations and non-profit organizations and we repose it to new guardians, auditors. Power [1997:136] mentions that The relation between auditing and trust become even more complex when one considers the audit process....at some stage in the auditing process, trust must be always invoked - for example, in auditor colleagues, in other experts, in forms of documentary evidence or in management assurance about system integrity. Thus, as the auditing process seems to be developed on mistrust between principals and agents, ironically this process is based on trust to third part represented by auditors. 4.2 Risk in Modern Society In the introduction, it has been discussed that the expansion of audit reflects growing demand for verification, which arises in a society from distrust, doubt, conflict and danger. So far, we have explained the ways in which distrust, doubt and conflict play main roles in settlement of audit society. Thus, at this point, it is straightaway to explore the last circumstance in which people seek for verification. If I consider danger as one of the situations when people call for proof, I do not regard it as a risky situation as rather a situation when one might find own self in a potential dangerous. For example, we seek for second medical opinion because our doctor told us we could suffer serious illnesses, or when one of our friends told us not to eat chicken because it might be dangerous to our life. I choose these examples on a purpose, because there are also many situations when we get knowledge of potential risk from mass media. It is no doubt the media has a enormous impact on people s mind as it was many times demonstrated that people build up their views just based on the mass media. Therefore, media play an incredibly important role in an audit 23