Audit Expectations in Works Councils Ignace De Beelde and Helmut Leydens Ghent University

Many industrialized countries have introduced mechanisms to institutionalize communication between employers and labour. One such mechanism is the creation of works councils. In many countries, these works councils receive information about the company, often including accounting data. In Belgium, of®cial regulations require that works councils should receive extensive ®nancial and non- ®nancial data. To guarantee the reliability of this information, the law provides for the intervention of an auditor to certify the information and to guarantee its completeness. However, this auditor usually also serves as the commissaire, the statutory auditor who certi®es the ®nancial statements on behalf of the shareholders. This raises the question whether the labour representatives in the works councils have faith in the auditor's impartiality. This article reports how the employees' representatives in the works council view the role of auditors and their performance. The article also concludes that cultural differences and company size both have a signi®cant impact on industrial relations.

Keywords: audit expectations, auditing, certi®cation, industrial relations, joint consultation, works councils

Introduction

In industrial relations, the past half-century has seen the development of personnel information and consultation procedures (ILO, 1985). These procedures include self-management systems, worker membership of management bodies and participation through trade unions and collective bargaining. These forms of participation can be classi®ed according to their initiators (Poole, 1975). Joint consultation, for example, is typically introduced by management,

Economic and Industrial Democracy & 2002 (SAGE, London, Thousand Oaks and New Delhi), Vol. 23(2): 229±269. [0143±831X(200205)23:2;229±269;022937] 230 Economic and Industrial Democracy 23(2) and shop-steward movements by workers. The institution of works councils is another possible way to organize industrial relations, with the state usually involved as an initiator. Works councils are one possible organizational structure at the shop-¯oor level without which participation in decision-making on the company level cannot work (Kolvenbach, 1977). They can be de®ned as `institutionalized bodies for representative communication between a single employer (``management'') and the employees (``workforce'') of a single plant or enterprise (``workplace'')' (Rogers and Streeck, 1995: 6). This general de®nition covers the widely varying bodies that have evolved in different countries to establish communication between capital and labour. Rogers and Streeck (1995) list the following characteristics of works councils, which enable them to be distinguished from other labour-involving initiatives.

. They represent all the workers at a workplace, not only those who are members of a union, and not only those from a parti- cular industrial sector or a geographic area. . They are not `company unions' and they are not the same as worker representation on company boards of directors. . They are representative institutions, and representative communication between management and labour can be of all kinds and can originate from either party. . Their structures vary widely across and within countries, and they may or may not have legal status.

Works councils were originally set up mainly to deal with matters of common interest other than those reserved for collective bargaining (ILO, 1985). In some industrialized countries, the works councils acquired powers of co-decision-making, especially in countries with strong trade unions that are represented in the works councils. Like other types of employee participation, they are often studied from a `power equalization' perspective, as they in¯uence the power relationships between labour and management (Poole, 1975; King and van de Vall, 1978; Lorenz, 1992). In some countries, works councils have also become valuable sources of information (ILO, 1985). For this article, this is a very important aspect, as the key issue here is the communication between management and employees. Freeman and Lazar (1995) have built an economic model of the role of works councils, and De Beelde and Leydens: Audit Expectations in Works Councils 231 they demonstrate that councils with rights to information reduce economic inef®ciencies by moderating worker demands during dif®- cult times. Conversely, councils increase the willingness of workers to communicate to management, raising social surplus, because management uses worker-provided information for the bene®t of both labour and the ®rm. The communication between both parties may be limited to the exchange of information, but may also lead to joint consultation or even codetermination if it results in negotiated co-decision-making. A smooth ¯ow of communication depends on two factors: sociopsychological conditions such as status differences between the parties involved, and the quality and extent of the net- work of information channels (King and van de Vall, 1978). In both areas, a works council can be a signi®cant instrument, although recent research suggests that a combination of both direct and representative participation might work best (Sako, 1998). The essential trait of joint consultation is that `employee views may be expressed, discussed and possibly taken into account before management makes a ®nal decision on an issue' (Bougen and Ogden, 1990). Joint consultation should be distinguished from collective bargaining and is often seen as a useful way to disclose information. In this way it has advantages for both labour and management. It provides opportunities for management to clear up any misunderstandings and it enables management to maximize the role of information disclosure as a means of consensus building. As mentioned earlier, practices are highly variable across countries. This can be explained by differences between industrial relations systems, and differences in the relations between unions and works councils. Generally, Anglo-American models are quite different from continental European developments (Rogers and Streeck, 1995). The German model has been extensively studied (among others, Wilpert et al., 1978; ILO, 1985; King and van de Vall, 1978; Kolven- bach, 1977; Tabb and Goldfarb, 1970; Hoffmann, 1976; Hassel, 1999). In Germany, the works councils have codetermination rights on social and personnel matters; information and consultation rights over personnel planning, changes in work processes, working environment and jobs; and information rights on ®nancial matters and alteration. The last goes through a standing committee of the works council, the Wirtschaftsausschuss, which serves as a ®nance committee and is elected by the works council. It meets monthly, and its meetings are attended by the management, who 232 Economic and Industrial Democracy 23(2) must provide information on the ®nancial position of the company (MuÈ ller-Jentsch, 1995). The Dutch works councils have rights of consultation (e.g. on mergers and takeovers, changes in activities and restructuring the company); codetermination (e.g. on pensions, pro®t sharing, health and safety and job consultation); and monitoring (e.g. on implementation of state regulations concerning equal rights for men and women) (de Groot, 1990). The works council should receive all the information that it reasonably requires in order to do its work, and at least twice a year it should receive data on the ®nancial position of the company. The council has the right to hire an outside expert at the ®rm's expense to check ®nancial statements (Visser, 1995). The French system of labour involvement is rather complex(ILO, 1985; Wilpert et al., 1978; Delamotte, 1988). The comiteÂ d'entreprise is entitled to receive information and advice on the organization, management and operation of the company (Tchobaian, 1995). It should be consulted in case of mergers, collective layoffs and the introduction of new technology. This committee also receives ®nancial statements and can ask for the help of a certi®ed accountant. Research into actual practice suggests that these schemes do not have a signi®cant impact on management. The legal rights of Spanish works councils include rights on information, consultation, legal action, negotiation, strikes and managed social funds (ILO, 1985; Kolvenbach, 1977; Escobar, 1995). Apart from the information given to shareholders, works councils should be informed quarterly about the economic development of the ®rm, sales and employment prospects. On the European level, at the beginning of the 1980s there was an attempt to develop a directive to regulate works councils: the so- called Vredeling Directive (Streeck and Vitols, 1995). The Vredeling draft was not well received by business, and was replaced by a directive on European Works Councils in 1994 (Directive 94/45/EC of 22 September 1994). This directive states in general terms that the European Works Councils are entitled to receive information on the development of the company, and that they can consult experts. A proposal for a council directive of November 1998 recommended the introduction of a general framework for informing and consult- ing employees in the European Community about matters including the economic and ®nancial position of their company. De Beelde and Leydens: Audit Expectations in Works Councils 233

The experiences in Continental European countries are more relevant to the Belgian case than those in the UK with its decentralized wage-setting system. Bougen and Ogden (1990), for example, with reference to the UK, state that in joint consultation, the decision to disclose information is made unilaterally by management. They draw attention to the marginal role of trade unions and the minimi- zation of the in¯uence of collective bargaining. This seems to contra- dict the Belgian experience, which is discussed later and where the provision of information to the works councils is more extensively regulated. However, even if more information has to be made available to the labour representatives in the works councils, a general problem of asymmetry with respect to control over information continues to exist and to complicate the communication process (see also Freeman and Lazar, 1995: 33). This asymmetry typically also exists between the managers and the owners of a company, and in that context, it gave rise to the need for the intervention of independent auditors in ®nancial reporting (Flint, 1988: Lee, 1993). Similarly, the Belgian regulation requires the intervention of an independent auditor on behalf of the works council. This then provides a link with the literature on audit expectations (Porter, 1991: Humphrey et al., 1993; Garcia-Genau and Humphrey, 1993; Gramling, 1996), because in Belgium the works council's auditor is the same person as the auditor for the shareholders. Consequently, the key item in this article is an investigation into the expectations of works council members concerning the role and function of the independent auditor. The remainder of this article is organized as follows. In the following section, the general regulation of works councils in Belgium is summarized. Then, the intervention of the auditor is discussed. The next section reports the results of a survey of the experiences of labour representatives in works councils regarding the intervention of the auditor. The article ends with some conclusions on this apparently unique relationship.

Works Council Regulation in Belgium

Works councils were introduced in 1948 and consist of an equal number of elected employee representatives and employer representatives (Law of 20 September 1948). The chairperson is the 234 Economic and Industrial Democracy 23(2) employer, the secretary is elected from among the employee representatives. All companies with 100 or more employees are obliged to establish a works council. The main tasks of the works council are: laying down the standing employment conditions, supervising the employment of disabled persons and work placement projects for young people, intervening in the organization of part-time jobs and making sure that the provisions of social legislation are observed and correctly applied. In order to make informed decisions, works councils must receive extensive information from management (Law of 20 December 1948 on industrial organization, Royal Decree of 27 November 1973 on ®nancial and economic information to the works councils; an evaluation of this regulation is given by Lefebvre et al., 1995). This information can be organized as follows (see Appendix1 for more details).

Basic Information

The `basic information' includes general data on the company and its ®nancial structure, and reports on its competitive position, productivity, employment policy and perspectives. It must be made available to the members of the works council within a period of two months after their (re)election, and should be discussed during a special meeting of the works council, which lasts at least eight hours. The basic information must be provided to the members of the works council at least 14 days before this special meeting, to enable them to study it.

Annual Information

The purpose of annual information is to inform the members of the works council about the evolution of the company in the past year and about the expectations for the following years. This information must be provided to the members of the works council before the general meeting of shareholders. It can be subdivided into three categories: updates to the basic information, ®nancial information and information on employment. De Beelde and Leydens: Audit Expectations in Works Councils 235

Periodical Information

Periodical information consists of data about the company's commercial and economic activities, the management and the realization of investment plans with government assistance. This type of information must be provided to the members of the works council at least every three months.

Occasional Information

Occasional information consists of information about non-recurrent events that have an impact on the company. These events might be out of the in¯uence of management or decided upon internally.

Intervention of the Auditor

Research on the intervention of independent auditors in industrial relations is limited, but it seems that the comprehensiveness of the Belgian system is rather unique. Hassink (1995) studied the role of auditors in collective bargaining agreements in the Netherlands and concluded that reference was made to auditors in only 12 out of the 765 cases he studied. The country studies in Rogers and Streeck (1995) also suggest that an explicit role for auditors is rather exceptional. Contrary to this, Belgium imposed a legal requirement for a generalized intervention of auditors. The intervention of the independent auditor vis-a-vis the works councils was signi®cantly expanded in a law of 21 February 1985. All companies having a works council should elect a certi®ed auditor to attest the information presented to the works council. Most companies that have a works council also have a commissaire, the statutory auditor who reports to the general meeting of shareholders on the ®nancial statements. In such situations, this statutory auditor also acts on behalf of the works council; in other companies, an auditor must be elected speci®cally for the works council. In both cases, the auditor should be supported by a majority of works council members and by a majority of employee representatives in the works council. In case the auditors also serve as commissaires, the works council has to approve them before the general meeting of share- 236 Economic and Industrial Democracy 23(2) holders can approve them. The task of the auditor was de®ned as follows.

Reporting on the Financial Statements and on the Annual Report of the Board of Directors

These statements are audited in accordance with the general audit standards of the Institut des Reviseurs d'Entreprises, the Belgian professional body to which all independent auditors belong. The aim is to receive information from an independent expert on the faithfulness of the ®nancial statements. The report is the same as the traditional audit report to the shareholders.

Checking the Completeness of the Financial-Economic Information that is Provided to the Works Council

The auditor should check what kind of information the company is obliged to provide and to what extent the company's administrative department is able to provide it. If the auditors ®nd that the information is incomplete, they will inform the directors. If the latter fail to provide the missing information within a period of one month, the auditor should report to the works council that the provided information is incomplete.

Certifying the Faithfulness of the Economic and Financial Information Provided to the Works Council

Faithfulness must be certi®ed only for accounting data, excluding prospective data. If the auditors are of the opinion that the completeness of the information cannot be certi®ed, they have to inform the works council on their own initiative.

Explaining the Meaning of the Information Provided

The auditor has to explain and analyse the information that is provided to the works council. It is the auditor's task to try and give a De Beelde and Leydens: Audit Expectations in Works Councils 237 better understanding of this information without passing judgement on the management of the company. To report on the assignment, the auditor should attend the meetings of the works council. According to Article 15b of the Act of 20 September 1948, the agenda and the minutes of the meetings of the works council during which economic and ®nancial information is provided are to be presented at the same time to the members and to the auditor. The auditor has the right to attend this meeting. The auditor is obliged to attend this meeting if requested to do so by the company management or by a majority of the employee representatives. The auditor might be asked to attend separate meetings with various groups or with individual members of the works council, for example the representatives of labour. The Conseil SupeÂ rieur des Professions Economiques (a body that supervises the auditing profession) suggested that the auditor must build up a relationship based on mutual trust with both employer and labour in the works council. If the auditor believes that it may be useful, within the framework of this relationship, to attend such separate meetings, it is allowed. If the auditor receives information during these meetings from people other than the management, the auditor must judge in a professional manner whether or not the information will be used within the framework of the auditing task. If the auditor does use the information, the source of information should not be made known to the management unless the person in question relieves the auditor of this obligation.

Research Objectives and Methodology

The independent auditor certi®es information prepared by management and made available to the works council. In this way, the auditor reduces the asymmetry of access to information. For the auditor to play this role effectively, it is essential that the works council's members consider the auditor to be reliable, objective and independent. The aim of this investigation was to ®nd out how the representatives of employees in the works council view the auditor's task and the performance of the auditor. A questionnaire was developed by the authors, in consultation with representatives of the Ministry of Economic Affairs (in which an Industrial Organization Department supervises the application 238 Economic and Industrial Democracy 23(2) of social legislation) and ACV and ABVV, the two major Belgian labour unions. These representatives were very familiar with the way the works councils function and how auditors intervene. Their involvement in the preparation of the questionnaire guaran- teed that all signi®cant issues that arise in the actual operation of the works councils were addressed. The questionnaires were sent in 1998 to the secretaries of the works councils, who are labour representatives and generally union members. Some respondents indicated that they completed the questionnaire individually, others said that they consulted the other labour representatives in the council. Most of the questionnaires were returned anonymously. Belgium is an essentially bilingual country where the location of the company de®nes the language to be used for of®cial and internal communication: the Walloon provinces have to use French and the Flemish provinces, Dutch, whereas in Brussels companies of both language groups can be found. Consequently, a French and a Dutch version of the questionnaire were prepared. Speakers of both languages checked both versions to make sure that they were equivalent. The questionnaire included ®ve parts. A ®rst series of questions related to the appointment of the auditor and the impact of the works council on this. The second category of questions focused on the attendance of the auditor at the meetings of the works council. The objective of the third group of questions was to collect information on what the auditors are doing with respect to works councils, and a fourth category dealt with the attitude of the auditor. Finally, there was a series of questions including identi®cation data. For most questions, the respondents were asked to indicate the extent to which they agreed with the statements on a seven-point scale. The tables in Appendix2 report the survey results in three categories to increase readability. From the seven-point scale, scores 1±3 resulted in the category `unimportant', score 4 in `neutral' and scores 5±7 in `important'. The tables generally also report the median score. In Appendices 3 and 4, a distinction is made, on the one hand between Dutch- and French-speaking companies, and on the other hand, between companies of different sizes. The tables in these sections only report those questions where differences between populations were signi®cant, based on the Mann±Whitney test for Appendix3 and the Kruskal±Wallis test for Appendix4. The population was identi®ed on the basis of data that had been provided by the Ministry of Economic Affairs. At the time of the De Beelde and Leydens: Audit Expectations in Works Councils 239

TABLE1 Degree of Response per Language Group

Total Dutch-Speaking French-Speaking

Random sample 2512 1547 965 Degree of response 538 424 114 Degree of response 21.42% 27.41% 11.81%

mailing, this population consisted of 2512 works councils, 1547 of which were Dutch-speaking (61.58 percent) and 967 of which were French-speaking (38.42 percent). Questionnaires were sent to the total population. The response rate was 21.42 percent. Table 1 shows the degree of response per language group. The lower response rate among French-speaking companies is probably a consequence of the fact that the Ghent University is located in the Dutch-speaking part of the country and it commonly happens that the degree of response in the other part of the country is lower. To check for non-response bias ± clearly an issue with low response rates such as these ± the answers provided by the ®rst 20 respondents who returned their questionnaires were compared with those of the last 20. A t-test did not reveal any signi®cant differences between these two groups of respondents. On the basis of the identi®cation data, respondents could be classi®ed according to company size based on number of employees. Table 2 shows the degree of response for the size categories.

TABLE2 Degree of Response According to Size of Firm

Total % Dutch- % French- % speaking speaking

<100 employees 64 11.90 51 12.03 13 11.40 100±199 employees 175 32.53 138 32.55 37 32.46 200±499 employees 150 27.88 121 28.54 29 25.44 500±999 employees 85 15.80 67 15.80 18 15.79 >999 employees 62 11.52 46 10.85 16 14.04 Unknown 2 0.37 1 0.24 1 0.88 Total 538 100 424 100 114 100 240 Economic and Industrial Democracy 23(2)

An analysis of the type of industry of the respondents revealed that chemicals and public health institutions are the ones that had the highest number of respondents.

Research Results and Discussion

The survey results are reproduced in tables that are included in Appendices 2, 3 and 4. Appendix2 reports the overall answers to the survey questions, Appendix3 lists the signi®cant differences between Dutch and French speakers and Appendix4 includes the questions where signi®cant differences existed between companies of different sizes. Rather than copying the structure of the questionnaire, the following sections were organized around themes that allowed a discussion of broader items than just the reactions of the respondents to the intervention of an independent auditor. First, there are a number of items relevant to the way the works councils operate, followed by opinions on the impact of the works council and the role of the works council as a communication channel. Finally, opinions on task performance by the auditors are reported.

Operation of the Works Council

Works councils are extensively regulated in Belgium, and in many respects, detailed procedures have to be observed. One standardized procedure is relevant here: the legally proscribed procedure with respect to the auditor's appointment. It was generally respected, with 12 percent of the respondents mentioning departures from this procedure. As mentioned earlier, the external auditor has four speci®c tasks with respect to the works council. The survey indicates that not all of these tasks are considered to be of equal importance by all our respondents. Table A3.1 shows that in the Dutch-speaking part, labour representatives in works councils consider the fee and reputation of the auditor more important than their counterparts in the French-speaking part; regarding the pedagogic qualities of the auditor, it is the other way around. Explaining the meaning of ®nancial data, one of the tasks of the auditor, seems to be less important in Flanders. This might be a consequence of differences between De Beelde and Leydens: Audit Expectations in Works Councils 241 both parts of the country regarding training provided by unions to individual representatives. Overall, the ChristianDemocrat union, ACV, is the strongest in the Dutch-speaking part, Flanders, whereas the Social Democrat ABVV seems stronger in the French-speaking part of the country. Employee representatives are trained by their unions to understand the information that they receive during works council meetings. Possibly the extent of training is different in each union and consequently in each part of the country. Another aspect of the operation of the works council is the organization of preparatory meetings. Such meetings are organized by the labour representatives themselves, in the absence of representatives from management. The willingness of the auditor to attend preparatory meetings is considered more important the larger the company becomes (increasing from 49 percent in the smallest to 80 percent in the largest companies; see also Table A4.1). This is probably related to the fact that such meetings are organized less often in smaller companies. Differences with respect to whether the auditor attended preparatory meetings can to a large extent be reduced to the question whether preparatory meetings are organized or not (Table A4.2). Of the companies with fewer than 100 employees, 28 percent do not organize such meetings, a percentage that falls to 9 percent of the companies with more than 999 employees. If preparatory meetings are organized, absence from preparatory meetings is considerably higher than for other meetings of the works council. This is mostly because the labour representatives in the works council do not consider it necessary for the auditor to attend preparatory meetings and consequently do not ask for the auditor to be invited (Table A2.5). An invitation to the of®cial meetings comes in 57 percent of the cases from management. Another 33 percent of respondents say that management and the representatives of the employees invite the auditor together. Apparently, the auditor is more often present in French-speaking companies when annual reports and other economic and ®nancial information is discussed (see Table A3.2). Whether or not our respondents consider it necessary for the auditor to attend meetings, also depends on company size (Table A4.2). Approximately 39 percent of the respondents in all companies with fewer than 200 employees agree that it is not necessary. The percentage falls gradually to 21 percent in the largest companies. The larger the company, the more importance the labour representatives in the works council attach to the auditor's presence at their meetings. 242 Economic and Industrial Democracy 23(2)

That the nature of industrial relations changes with the size of the company is con®rmed by the signi®cant difference concerning the statement that the works council cannot invite the auditor because that would be too expensive. Employee representatives seem to accept this kind of concern by management more easily in smaller companies. This statement was agreed with by 18 percent of the companies with fewer than 100 employees, and the percentage of agreeing respondents decreases as the number of employees increases (11 percent 100±199 employees, 10 percent 200±499, 9 percent 500±999 employees and 8 percent for more than 999 employees). One of the stated roles of an auditor to improve the way in which the works council operates, is to react when information is incorrect or incomplete. In addition to the question what data the labour representatives in the works council receive, they were also asked whether they were aware of possible differences of opinion between the auditor and the employer. That was the case for 13 percent of the respondents. If problems arise, 23 percent of the works councils contact the Inspectie der bedrijfsorganisatie (Inspector of Corporate Organizations) of the Ministry of Economic Affairs. It is also worth mentioning that 49 percent of the respondents answered that there were no problems. An observation that follows from this is that the role of the state as a supervisor of these arrangements of worker consultation remains important. In fact, it is the main party that is called upon in case of con¯icts. Different traditions in both parts of the country are re¯ected in the fact that works councils in the French-speaking part contact the Ministry of Economic Affairs more frequently in case of con¯icts (Mann±Whitney test, Z À2:033, asymp. sign. .042).

Impact of the Works Council

In Belgium, independent auditors are elected for a renewable three- year period. Both the works council and the employees' representatives have a veto right against the auditor. In 80 percent of the responding companies, the current auditor had been in of®ce before and their mandate had been renewed. Auditor replacement was most frequently (30 percent) blamed on pressure from the group to which the company belongs, indicating that the choice of an auditor is often made at the corporate level. Other reasons De Beelde and Leydens: Audit Expectations in Works Councils 243 were `natural' causes such as the retirement of the auditor. Occasion- ally, cost savings were mentioned. These results are quite interesting. As mentioned above, the works councils have a right of veto right against a candidate-auditor. In case of con¯icts between shareholders/management and works council over the appointment of an auditor, both parties can turn to the Court of Commerce, which will then decide on the temporary appointment of an auditor, either the candidate supported by the management or another auditor. These con¯icts often relate to the preference of management to replace auditors in subsidiaries or individual plants in order to have one audit ®rm auditing the whole group of companies under their control. Often such decisions are made at a worldwide level in multi- national companies. If works councils are satis®ed with their local auditor, such decisions often lead to interventions of the Court of Commerce. Generally, however, the courts tended to support the management's point of view. Table A2.2 shows that the labour representatives in the works councils would like to have more in¯uence in the actual choice of an auditor. The Belgian regulations reserve the right to present a candidate to the management of the company, and the works councils can only accept or reject this candidate. Although the majority of our respondents do not have signi®cant problems with respect to the suf®ciency of information on the candidate, there still is a feeling that choices are basically made by management. This suggests that, even though there is a formal model of co- decision power in selecting the auditor, many of those involved experience that their in¯uence is less than what would be expected. This sentiment is different in both parts of the country, with 59 percent of the Dutch-speaking councils con®rming that employers in fact select the auditor, whereas for the French-speaking companies this is only 40 percent (Table A3.1). This difference is even more obvious when we look at the number of companies disagreeing with this statement: 29 percent of the Dutch-speaking and 51 percent of the French-speaking companies. Moreover, it appears from the study that it happens more often in French-speaking companies (46 percent) than in Dutch-speaking companies (33 percent) that works councils do not get enough information to be able to decide on the auditor's acceptance. These results seem somewhat contra- dictory: the Dutch-speakers are better informed but feel that they have less in¯uence on decision-making, while the French-speakers are less informed but have more in¯uence. This suggests that in 244 Economic and Industrial Democracy 23(2) both parts of the country, either industrial relations are different, or that works councils have a different self-perception.

The Role of the Works Council as an Information Channel

The literature review in the beginning of this article showed that one of the main roles of a works council could be the creation of an additional channel of communication between management and labour. Table A2.6 reports the types of information that the works councils receive. However, a general dif®culty in interpreting these results is that 42 percent of the respondents indicated that they do not see the difference between documents coming from the auditor and documents coming from the employer. This lack of clarity concerning the role of the auditor in the development of these data might raise questions about the auditor as an independent appraiser of information. In many companies, there is indeed one set of documents put at the disposal of the works council, including documents provided by the management and documents prepared by the auditor. In French-speaking companies, the difference between documents received from management and documents received from the auditor is more obvious (Mann±Whitney test, Z À2:740, asymp. sign. .006). A speci®c task for the auditor is giving an opinion on the completeness of the economic and ®nancial information, and in more than 85 percent of the responding companies such a document is indeed prepared. More troublesome is that in 30 percent of the cases, the auditor has to indicate that data are missing, suggesting that a signi®cant number of companies do not voluntarily provide full disclosure to their employees. In more than 75 percent of cases, the auditor also explains ratios and comments on the ®nancial position of the company. However, comments on problems or suggestions for improvement are less frequent. This re¯ects the traditional position of the profession that it should not interfere in the management of the company, which is one of the fundamental ideas underlying the regulation of the Belgian auditing profession. In fact, the original legislation on auditing stressed that the auditor should be an independent technician who should never be involved in managerial decision-making. There are ®ve signi®cant differences between Dutch and French speakers in terms of information received (see Table A3.3). De Beelde and Leydens: Audit Expectations in Works Councils 245

Among the Dutch-speaking respondents, 37 percent received a text in which the auditor indicated which data were missing in the EFI (economic and ®nancial information)®le, whereas this occurred in only 6 percent of the French-speaking works councils. A con- ®rmation of the completeness of the EFI is received by 90 percent of the Dutch-speaking works councils, compared to only 69 percent of the French-speaking works councils. The third difference relates to the receipt of a number of ratios with regard to the ®nancial ®gures of the company. Here too, there are more Dutch-speaking works councils that receive these ratios: 83 percent vs 63 percent of the French-speaking works councils. Similarly, graphs of ratios or ®gures from the annual accounts are more often received by Dutch-speaking works councils (61 percent) than by their French- speaking counterparts (45 percent). These differences all suggest that, at least formally, the regulations concerning information to be given by the auditor to the works council are more strictly observed in Flanders. The last difference according to language groups also relates to the ratios, and more particularly to a comment on the way in which these ratios are to be understood. Such an explanation is given in 80 percent of the Dutch-speaking ®rms and in 67 percent of the French-speaking ones. In conclusion, Dutch- speaking works councils receive more information from the auditor than their French-speaking counterparts. However, as demon- strated earlier, Dutch speakers consider the pedagogic qualities of the auditor to be less important, which suggests that they can make sense of the ®gures themselves. This would only be possible if their unions provided them with practical training. Table A4.3 reports signi®cant differences in this area between companies of different sizes. A document con®rming the true and exact nature of the EFI is received by 78 percent of the companies with fewer than 100 employees. The percentage increases as the number of employees per company increases: 90 percent 100±199 employees, 89 percent 200±499 employees, 94 percent 500±999 employees and 95 percent for more than 999 employees. Perhaps communication between works council and auditor is less formalized in smaller companies, where written documents might be replaced by oral explanations. The opposite is true with respect to comments on the social balance sheet, where the percentage that receives such comments falls from 56 percent of the smallest companies to 36 percent in the largest ones. The larger the company, the less the labour 246 Economic and Industrial Democracy 23(2) representatives in the works council are likely to receive comments on the social balance sheet. For other types of information, the smallest companies tend to lag behind the other business categories.

Evaluation of the Auditor's Performance

The largest part of the survey was an evaluation of the performance of the auditor. First, the survey obtained information on what the respondents considered to be key underlying characteristics for an auditor. Table A2.1 shows that auditor independence and con- ®dence are most important. This is signi®cant in the context of a debate currently going on within the auditing profession. The American Securities and Exchange Commission (SEC) played a key role in this debate. On 21 November 2000, the SEC tightened its regulations on auditor independence in order to maintain public trust in the auditing profession (SEC, 2000). Although the SEC considers investors to be the major users of audited ®nancial information, its recommendations on ®nancial and professional relations with audit clients also seem relevant in this context. Similar concerns are found in a draft statement by the Committee on Audit- ing of the European Commission (EC, 2000), the Independence Standards Board in the US (ISB, 2000) and the Public Oversight Board in the US (POB, 2000). Apart from more general discussions on independence, all of these position papers consider the provision of non-audit services as potentially threatening to auditor independence. In Belgium, these developments resulted in a law proposal that would impose a ban on all non-audit services for audit clients. Contrary to this apparent consensus, the respondents to this survey show quite mixed feelings about the issue of providing non-audit services. A signi®cant percentage of them seem to be quite sympa- thetic to the point of view formulated by the Federation of European Accountants in 1998 that stresses the advantages of providing non- audit services to audit clients (FEE, 1998). Only in 61 percent of the largest companies is the combination of auditing with the provision of other services considered important; in the other size categories only around 35 percent of the respondents thought so (see also Table A4.1). Much importance is also given to experience and the tests planned by the auditor. These probably re¯ect a concern about the quality of the services rendered. De Beelde and Leydens: Audit Expectations in Works Councils 247

Table A2.8 shows that about half of the respondents think that the auditor adopts a suf®ciently independent attitude (50 percent) and that he or she does not adopt a standof®sh attitude vis-a-vis the employees (56 percent). Auditor attendance at meetings has already been discussed earlier. Tables A2.3 and A2.4 show that the auditor usually attends most of the meetings of the works council, unless he or she is not invited. This is re¯ected in the comment that 15 percent of the respondents wrote on the questionnaire, that the auditor attends a meeting when requested to do so by the labour representatives in the works council. This aspect of the performance of the auditor is thus positively evaluated. Table A2.7 reports on a number of aspects of the intervention of the auditor. Overall, the employees' representatives seem satis®ed with respect to the auditor's intervention. This is re¯ected in the 68 percent of respondents who indicate they are satis®ed with the auditor in Table A2.8. The auditor certainly does not seem to act primarily as an agent of management. Independence consequently does not seem to be a big issue from the perspective of labour. How- ever, the auditor should be independent from both parties, labour and management. The fact that the auditor is not regarded as a con®dant (31 percent), and as not having a signi®cant impact on what happens in the company, seems to re¯ect that the auditor is also considered to be independent from the representatives of labour. These representatives also seem to have quite realistic expectations with respect to the impact of auditing. They do not put high trust in the auditor regarding the detection of fraud or the continued existence of the company. Auditors are not seen as having a big impact on industrial relations, the nature of discussions in the company or the quality of management. The main role of the auditor is considered to be increasing the reliability of ®nancial data and explaining the meaning of these ®gures. A survey investigating expectations among bankers and company managers that was carried out in the same period as this research revealed that these parties on average have less realistic expectations (De Beelde et al., 1999). The audit expectations in those groups are rather comparable to what is found in other countries, as can be concluded from the expectations gap literature (Humphrey et al., 1993). The expectations of the responding labour representatives seem to be more comparable to the ideas of auditors themselves. 248 Economic and Industrial Democracy 23(2)

French-speaking respondents agreed more with the position that auditors only speak when asked to do so by management, but the median score remains quite low (Table A3.4). The other two signi®- cant differences in opinion between French and Dutch speakers relate to the question whether or not the discussions in the works council are more interesting thanks to the auditor, and to the fact that most of the EFI documents are received in time thanks to the auditor. In the French-speaking part of the country, there is apparently a stronger feeling that having an auditor makes a difference. About 46 percent of the respondents in French-speaking companies agree that the discussions are more interesting thanks to the auditor, yet only 33 percent of their colleagues in Dutch-speaking companies share that opinion. As for the second signi®cant difference, 24 percent of the French-speaking respondents agree with the statement, whereas only 16 percent of the Dutch-speaking respondents agree. In this respect, the impact of auditors on the operation of the works councils seems limited. Experiences vary also depending on company size (Table A4.4). Among the respondents working in companies with fewer than 100 employees, 83 percent consider the auditor's explanations to be clear. In the other categories, this percentage ¯uctuates between 75 percent in companies with 100±199 employees, 84 percent 200± 499 employees, 81 percent 500±999 employees and 77 percent in companies with more than 999 employees. This might re¯ect real differences with respect to the nature of such explanations by the auditor. On other items as well, it seems that the interaction with the auditor is less formal in small companies. Alternatively, it might also re¯ect differences in the nature of industrial relations. If labour in large companies considers the auditor to be an additional source of information, it would have other expectations about the explanations given by the auditor. A second signi®cant difference concerns the statement that the ®nancial policy of the company has improved thanks to the auditor. The larger the company, the higher the disagreement with this statement (from 43 percent in the smallest companies to 60±65 percent in all larger categories). Again, this difference suggests that auditors in the less formal context of smaller ®rms commit themselves more easily to giving advice on ®nancial matters. As a general rule, it is denied that there is an improvement in the discussion of information on employment thanks to the auditor. De Beelde and Leydens: Audit Expectations in Works Councils 249

Only 14 percent of the respondents from companies with fewer than 100 employees feel that the discussion of this type of information has improved. The bigger the company, the lower this percentage, with only 3 percent of the respondents from companies with more than 999 employees agreeing with this statement. These low percentages suggest that the auditors prefer to stay within the con®nes of the domain they know best ± that is, accounting and ®nancial data. A majority of the respondents are of the opinion that the auditor is familiar enough with the operation of the works council (65 percent) and knows what is going on in the company of their clients (66 percent). It was a different case for the managers who responded to a similar survey cited earlier (De Beelde et al., 1999). It indicates again that the gap in audit expectations is smaller for labour representatives than for managers. Table A3.5 shows that the attitude of the auditor is rather differently understood in both parts of the country. The most signi®cant difference relates to the statement that the auditor is a con®dant to the employees. About half of the French-speaking respondents (51 percent) agree with this statement whereas only 24 percent of the Dutch-speaking respondents agree. A second signi®cant difference relates to the statement that the auditor is familiar enough with the operation of the works council. Both subgroups generally agree with this statement. Still, there is a signi®cant difference between the answers given by the Dutch- speaking companies and those given by the French-speaking companies. Among the French-speaking respondents, 81 percent are of the opinion that the auditor is familiar enough with the operation of the works council, whereas only 61 percent of the Dutch-speaking respondents share that opinion. The enthusiasm with which the auditor assumes their task for the works council is also perceived differently in both parts of the country. Among the French-speaking companies, 77 percent agree with the statement that the auditor does not consider time spent on the works council a waste of time, whereas only 55 percent of the Dutch-speaking respondents agree. Similar results are observed for the awareness of what is going on in the company, and the social skills of the auditor. These results suggest that the relation between employee representatives and auditor is closer in French-speaking companies than in Dutch-speaking ones. The Dutch speakers adopt a more 250 Economic and Industrial Democracy 23(2) critical attitude and also consider the impact of the auditor as being more limited than the French speakers do. Such differences might be the consequence of divergent models of industrial relations in each part of the country. Similar differences show up if a distinction according to company size is made (Table A4.5). The most signi®cant difference relates to the statement that the auditor is a con®dant to the employees. As was to be expected, the percentage of respondents who agree with this statement decreases as the number of employees increases. In companies with fewer than 100 employees, 44 percent of the respondents consider the auditor as a con®dant. The percentage gradually falls to around 26 percent in the largest companies. A second difference relates to the statement that the auditor adopts a suf®ciently independent attitude. The percentage of respondents who agree with this statement is higher in smaller companies (with fewer than 500 employees) than in bigger businesses (with more than 500 employees).

Conclusions

The survey results lead to a number of observations with respect to the works councils' operation in Belgium. The main point is that it seems that industrial relations in Belgium, although extensively, and in a uniform way, regulated by the state, are modelled along different lines. In this respect, a twofold distinction can be made. One is the difference between small and large companies; the other is the distinction between Dutch and French speakers. To start with the size criterion, there is evidence in this survey that the nature of industrial relations changes as companies grow. Industrial relations practices become much more formalized in larger companies. A speci®c example of this more structured approach to labour involvement is the organization of preparatory meetings, which seems typical of larger companies. All parties involved ± management, labour and the auditor ± have well de®ned roles in these larger companies and apparently stay within those roles. Interaction between these parties only happens within their de®ned roles. For labour, the role of the auditor is to increase the usefulness of information by certifying its completeness and reliability. In these companies, the auditor is also considered to be a potential source of additional information that cannot be obtained De Beelde and Leydens: Audit Expectations in Works Councils 251 from management; and because auditors generally withstand such pressures, the attitude vis-a-vis the auditor is rather critical. Labour representatives in these larger companies also seem to be better trained to deal with ®nancial and economic information, which is probably a consequence of the stronger position of the unions in large companies. Conversely, small ®rms are organized in a less formal way. The roles of management, labour and auditor do not seem to be as strictly observed. Auditors interact differently and seem to have a broader and more advisory function. Analysing the differences between French- and Dutch-speaking respondents, there is evidence from the survey that industrial relations are different in each part of the country. These differences can be at least partly attributed to cultural differences between each part. The French-speaking part often is considered to be more Latin, whereas the culture of the inhabitants of the Flemish part of the country is often considered to be closer to the Dutch or the Scandinavian culture. Obviously, such differences between the groups are rather a matter of degree and there probably is a high degree of variability within the two groups. Although it is dif®cult to ®nd a descriptor that is suf®ciently subtle, the approach to industrial relations in the French-speaking part could perhaps be labelled as being more `subjective', compared to a more `objective' attitude among Dutch speakers. It was shown earlier that relations between labour and auditor are closer in the French-speaking part, whereas the Flemish had a more aloof attitude. These attitudes are probably also in¯uenced by the dominant ideologies in both parts of the country, with the Dutch-speaking region traditionally being dominated by a Christian Democrat ideology and the French-speaking region by a Social Democrat ideology. These ideological positions might also be an important factor in explaining the observed differences in the evaluation of the impact of the works council. Generally speaking, the importance of works councils as an instrument of industrial democracy is appreciated differently in both parts of the country. Consequently, opinions on auditors also diverge. The survey results con®rm the importance of the works councils as an additional information channel. That an external auditor certi®es this information adds value to the process. However, the labour representatives only believe in this added value if the auditor demonstrates a few key characteristics. Works council members 252 Economic and Industrial Democracy 23(2) have the same concern about independence as investors. However, not all of them take the critical position in respect of the provision of non-auditing services that is commonly found among standard setters outside the auditing profession. Although labour does not feel that it has a signi®cant impact on the auditor selection process, most of them admit that the auditor is suf®ciently independent. The majority of the respondents give a generally positive evaluation of the intervention and the attitude of the auditor. Nevertheless, they also are sophisticated users of this information, who consider the impact of the auditor on industrial relations to be limited. External auditors are not the best fraud-prevention mechanism, and they do not contribute much to the survival of a company. To conclude, the intervention of a certi®ed auditor on behalf of the works council in Belgium is a unique extension of the professional activities of auditors. The attestation of ®nancial information on behalf of the works council can even be considered to be one of the main tasks of independent auditors in Belgium. The survey indicates that overall, labour representatives in the works councils are quite satis®ed with the performance of their auditor. Gaps in expectations between labour representatives in Belgian works councils and auditors are more limited than those observed in other contexts. Other stakeholders in Belgium, such as bankers, seem to be more critical of auditors and to have more far-reaching expectations. In other constituencies, such as the UK, research indicates the existence of larger gaps than were evident from this survey. This leads to ideas for future research. In the present survey, no distinction was made between the union membership of the respondents. It is possible that union membership, which often re¯ects ideological positions, might result in different evaluations of auditor performance. Another issue, not investigated in this article, relates to the evaluation of the role of the auditor in companies with harmonious industrial relations vs companies where there are social tensions. Again, it might be that such differences would have an impact on the evaluation of the auditor. Unfortunately, the Belgian regulation of works councils and the intervention of an independent auditor seem to be rather unique. Consequently, there seem to be only a few opportunities for directly comparative international research. However, this line of research could be a step in a more general discussion of the role of auditing in industrial relations. De Beelde and Leydens: Audit Expectations in Works Councils 253

Appendix 1: Information to be Provided to the Works Council

A. Basic information: a. Speci®c documents: . the articles of association of the company . ®nancial structure . organisation chart of the company b. Reports: . competitive position on the market . production and productivity . budgeting and calculation of the cost price . personnel costs . programme and the company's general forecast for the future . research . assistance received from the government

B. Annual information: a. Updating of basic information: . written report on new data and data that were changed . verbal explanation of every item b. Financial information: . annual statement of accounts . annual report . commissioner's report . consolidated annual accounts . statistical card in connection with the reduction of social insurance contributions, training jobs offering the employees the opportunity to settle into the business, measures regarding successive employment contracts for a de®nite period of time . verbal explanation of all the above elements c. Information on employment: . employment structure . employment evolution . employment forecasts . social measures planned and already taken with regard to employment

C. Periodical information: a. Economic, ®nancial and social information: . commercial activity: sales, orders, market . economic activity: production, costs and cost prices, stocks, productivity and employment . management and policy: execution of the programme, budgetary control and management per objective . realization of the investment plan with government assistance . social policy continued on page opposite 254 Economic and Industrial Democracy 23(2)

b. Information on employment: . to what extent are the projected actually realized . reasons why the forecasts were not achieved . changes in the forecasts

D. Occasional information: a. Financial and economic information: . events that strongly in¯uence the company . decisions that are taken internally b. Information on employment: . mass redundancies or hiring for economic or technical reasons that were not foreseen in the forecasts

Appendix 2: General Survey Results

TABLEA2.1 Appointment of the Auditor

Unimportant Neutral Important Median

Independence vis-a-vis the 1.40% 6.30% 92.30% 7 employer. Independence vis-a-vis the group to 3.50% 9.90% 86.60% 7 which the company belongs. Performance of other tasks within 21.90% 39.10% 39.10% 4 the company. Size of the auditor's fee. 32.40% 39.10% 28.50% 4 The auditor's willingness to attend 10.00% 17.00% 73.00% 6 ordinary meetings. The auditor's willingness to attend 16.30% 19.60% 64.10% 5 preparatory meetings. The auditor's experience. 2.50% 7.40% 90.10% 6 The auditor's reputation. 8.80% 19.10% 72.10% 6 The con®dence the auditor enjoys. 1.40% 2.70% 95.90% 7 Audits and tests planned by the 2.90% 8.40% 88.70% 6 auditor. Pedagogic abilities of the auditor. 8.70% 20.30% 71.00% 6 De Beelde and Leydens: Audit Expectations in Works Councils 255

TABLEA2.2 Appointment of the Auditor (Continuation)

Disagree Neutral Agree Median

We do not receive enough 40.10% 24.20% 35.80% 4 information to be able to decide on the acceptance of the auditor. The representatives of the employees 16.30% 25.90% 57.80% 5 should have more in¯uence when it comes to the appointment of the auditor. In practice, it is the employer who 33.70% 11.60% 54.70% 5 decides who will be appointed as auditor. 256 Economic and Industrial Democracy 23(2) Unknown Not Present Although He/She Was Invited Not Present Because He/She Was Not Invited The Auditor Was Present TABLEA2.3 5.60%2.10% 68.80% 92.70% 20.10% 1.50% 4.10% 0.90% 3.30% 0.20% Presence of the Auditor The Meeting did Not Take Place 12.00% 20.60%25.50% 58.70% 13.30% 3.20% 53.00% 5.60% ± 8.20% Missing percentages are due to missing values. Did the auditor attend theworks last council meeting during of which the basicdiscussed? Information was Did the auditor attend thecouncil last during meeting which of annual the informationdiscussed? works was Did the auditor attend anycouncil other in meeting 1996 of during the whichinformation works economic was and discussed? ®nancial Did the auditor attend onemeetings? or more preparatory Note: De Beelde and Leydens: Audit Expectations in Works Councils 257 Unknown Concurrent Activities No Invitation Late Invitation Other TABLEA2.4 by Employer Reasons for Not Attending the Meetings Cost Not Aallowed 4.60%2.60% ± 2.00% 37.50% 50.20% 0.90% 0.70% 2.60% 1.30% 19.90% 10.80% Missing percentages are due to missing values. Why was the auditor absentregular from meetings? Why was the auditor absentpreparatory from meetings? Note: 258 Economic and Industrial Democracy 23(2)

TABLEA2.5 Opinion on Attendance

Disagree Neutral Agree Median

We believe that the auditor does 36.00% 30.80% 33.20% 4 not attend enough meetings of the works council. We believe that the auditor does 38.60% 31.60% 29.80% 4 not attend enough preparatory meetings. We cannot invite the auditor 68.20% 20.90% 10.90% 1 because it is too expensive. We believe that the auditor does 47.30% 33.50% 19.30% 4 not make himself/herself available enough. We do not deem it necessary for 50.10% 19.20% 30.70% 3 the auditor to attend the meetings of the works council. We do not consider it necessary for 41.50% 25.00% 33.50% 4 the auditor to attend preparatory meetings. De Beelde and Leydens: Audit Expectations in Works Councils 259

TABLEA2.6 Information Received

Document type Received Not Received

The auditor's report to the general meeting of 84.80% 15.20% shareholders. A text in which the auditor con®rms that the EFI 85.50% 14.50% ®le is complete. A text in which the auditor indicates which data are 30.30% 69.70% missing in the EFI ®le. A text in which the auditor con®rms that the 89.20% 10.80% information in the EFI ®le is true and correct A number of ratios. 78.80% 21.20% An explanation of the ratios. 76.80% 23.20% Comments on the evolution of the most important 80.50% 19.50% items from the annual statement of accounts. Graphs of ratios or of ®gures from the annual 57.20% 42.80% accounts. Explanation of the general state of health of the 79.00% 21.00% company. Comments on the main problems the company is 48.00% 52.00% confronted with. Propositions or suggestions to improve the company 20.40% 79.60% policy in the future. Comments on the social balance sheet. 42.60% 57.40% 260 Economic and Industrial Democracy 23(2)

TABLEA2.7 General Statements with Regard to the Auditor's Task

Disagree Neutral Agree Median

The auditor answers most of the 4.30% 5.80% 89.90% 7 questions asked by the representatives of the employees. The auditor's answers are short. 56.80% 23.30% 19.90% 3 The auditor speaks only if he/she 81.50% 8.00% 10.50% 1 is explicitly requested to do so by management. The auditor restricts explanations 48.80% 17.40% 33.80% 4 to what is strictly necessary. The auditor's explanations are clear. 9.60% 10.70% 79.80% 6 The auditor gives explanations on 19.70% 13.30% 67.00% 5 his/her own initiative. Thanks to the auditor's work, I can 32.00% 34.70% 33.30% 4 be sure that every possible fraud has been discovered. Thanks to the auditor's work, I can 40.90% 31.30% 27.80% 4 be sure about the continuation of the enterprise. It is thanks to the auditor that the 22.30% 27.80% 49.80% 4 EFI is more complete. It is thanks to the auditor that I 16.40% 20.60% 63.00% 5 have more con®dence in the exactness of the information. It is thanks to the auditor that I 24.50% 23.40% 52.10% 5 have a better understanding of the meaning of the EFI. The discussions at the meetings of 33.60% 30.80% 35.50% 4 the works council are more interesting with the auditor present. The auditor assists us to get most 56.40% 25.60% 18.00% 3 of the EFI documents in time. The auditor has contributed to 58.80% 32.10% 9.00% 3 improving the company's ®nancial policy. The auditor has assisted in 69.20% 23.30% 7.50% 2 improving the discussions of information on employment. De Beelde and Leydens: Audit Expectations in Works Councils 261

TABLEA2.8 The Auditor's Attitude

Disagree Neutral Agree Median

The auditor adopts a suf®ciently 22.80% 27.40% 49.80% 4 independent attitude. The saying: `He who pays the piper 30.60% 31.30% 38.10% 4 calls the tune' does not apply to auditors. The auditor does not adopt a 22.90% 21.50% 55.60% 5 stand-of®sh attitude with the employees. The auditor is familiar enough 17.10% 17.80% 65.10% 6 with the operation of the works council. The auditor is a con®dant to the 42.20% 27.10% 30.60% 4 employees. The auditor has excellent social 19.30% 30.60% 50.10% 4 skills. The auditor does not consider the 12.30% 28.00% 59.70% 5 work done by the works council as a waste of time. The auditor is suf®ciently aware of 16.40% 17.30% 66.20% 5 what is going on in our company. We know what it is exactly that the 39.30% 25.00% 35.70% 4 auditor does. Many things have improved thanks 41.60% 37.80% 20.60% 4 to the auditor. We are satis®ed with the auditor. 9.20% 22.50% 68.30% 6 262 Economic and Industrial Democracy 23(2)

Appendix 3: Signi®cant Differences between Language Groups

TABLEA3.1 Appointment of the Auditor