From Accounting, to Accountability, to Accommodation: Economic Rationalism, Audit Quality and the Victorian Audit Office 1992 - 1999 Judy Nagy University of Wollongong
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University of Wollongong Thesis Collections University of Wollongong Thesis Collection University of Wollongong Year 2002 From accounting, to accountability, to accommodation: economic rationalism, audit quality and the Victorian Audit Office 1992 - 1999 Judy Nagy University of Wollongong Nagy, Judy, From accounting, to accountability, to accommodation: economic ratio- nalism, audit quality and the Victorian Audit Office 1992 - 1999, Doctor of Philosophy thesis, School of Accounting and Finance, Faculty of Commerce, University of Wollongong, 2002. http://ro.uow.edu.au/theses/1910 This paper is posted at Research Online. From Accounting, to Accountability^ to Accommodation: Economic rationalism, audit quality and the Victorian Audit Office 1992 -1999. A thesis submitted in fulfilment of the requirements for the award of the degree DOCTOR OF PHILOSOPHY From UNIVERSITY OF WOLLONGONG By Judy Nagy B.Com. Department of Accounting and Finance 2002 Certification I, Judy Nagy, declare that this thesis, submitted in fulfilment of the requirements for the award of Doctor of Philosophy, in the Department of Accounting and Finance, University of Wollongong, is wholly my own work unless otherwise referenced or acknowledged. The document has not been submitted for qualifications at any other academic institution. Please see print copy for image Judy Nagy 1/ 'r'UaZ HI Acknowledgements Endeavours of this type require that sacrifices are made over a long period of time. Those that are required to be understanding and above all forgiving of the continuous distraction and mental absences are usually closest to home. I wish to thank my family and friends for their tolerance, patience with my work habits and for their unfailing support to ensure that the time needed was available. In particular my guys, Spencer, Christopher, Robert and Tony together with my parents Violet and John, to whom this thesis must have seemed to be an endless task. Thanks are also due to my supervisor, Professor Warwick Funnell, for his patience, support and advice (above and beyond) that allowed me to grow, explore and learn as 1 was ready. I wish also to thank Professor Michael Gaffikin for his encouragement and interest as well as the staff at the Department of Accounting and Finance, in particular Helen Irvine, for their thoughtful suggestions and hospitality on my numerous visits to New South Wales. IV ABSTRACT Economic pressures over the last three decades have encouraged governments in western style capitalist countries to change the ways in which governance is provided. The adoption of public choice theories has encouraged governments to divest themselves of many activities to concentrate resources on policy formation and implementation. The application of economics principles, that suggest efficient resource allocation is best attained by competitive markets, has meant that management tools derived from the private sector have been presumed to be equally appropriate for use in government. This presumed market superiority has created a conflict between the underlying public interest motivation of government and the profit motivation of private sector providers of goods and services. Using largely a historical perspective, the thesis examines economic, political, social and administrative factors in the commtmity and government that provided impetus for public sector reforms in Australia in the 1980's and 1990's. That the concern for the public interest is constantly challenged by political expediency, power struggles and the persuasive forces of profit seeking interest groups is analysed using an institutional theory perspective. This thesis is concerned with the implications of government reforms in Australia for government accountability mechanisms, in particular, public sector audit. The increasing use of private sector modes of accotmting and auditing in the public sector has resulted in public sector audit moving away from the role it has traditionally served. In Victoria, this movement has affected the ability of the auditor-general to provide a quality audit function to ensure the accountability of government to the people. The damage to public sector audit quality is shown to be a progressive process. Quality continues to be eroded as procedures and practices of auditing become more generic. The radical government reforms introduced into the Australian State of Victoria, between 1992-1999 imder the Keimett Government, are critically reviewed to demonstrate the extent to which a dominant executive govenmient can undermine government accountability mechanisms, in particular audit. Despite attempts to legitimise the corporatisation (and planned privatisation) of the public audit function, the moves to undermine the role of public sector audit in Victoria were met with condemnation by the public, academics, government and business. Although the reputation of private sector auditing continues to suffer from an 'expectations gap', primarily as a consequence of impaired audit independence, the continued hegemony of private sector business practices continues unabated. The Victorian experiment to radically alter the public audit function, now partially reinstated, provides insights into how the role of public audit may yet evolve should the governments in Australia continue down the current path of economic rationalism. TABLE OF CONTENTS CERTIFICATION ii ACKNOWLEDGEMENTS iii ABSTRACT iv ABBREVIATIONS USED ix CHAPTER ONE - INTRODUCTION LI INTRODUCTION 1 L2 THE MAIN THEMES 2 L2.1 MARKET FORCES AS A REFORM TOOL IN GOVERNMENT 2 L2.2 WHAT IS THE PUBLIC INTEREST? 4 L2.3 THE RELATIONSHIP BETWEEN AUDIT AND GOVERNMENT 10 1.2.4 THE EFFECT OF GOVERNMENT REFORMS ON PUBLIC SECTOR AUDIT: A CASE STUDY OF THE VICTORIAN AUDIT OFFICE 12 1.3 METHODS OF ANALYSIS 14 1.4 THESIS PLAN 20 CHAPTER TWO - THE NATURE OF GOVERNMENT 2.1 INTRODUCTION 22 2.2 ECONOMICS AND PUBLIC CHOICE THEORY 23 2.3 AGENCY THEORY AND EsfTEREST GROUPS 28 2.4 CAPTURE THEORY 31 2.5 n^STITUTIONAL THEORY 34 2.5.1 CAUSES OF ORGANISATIONAL CHANGE 36 2.6 ECONOMIC RATIONALISM AND LEGITIMATED REFORM 41 2.7 ECONOMY, EFFICIENCY AND EFFECTIVENESS 43 2.7.1 ECONOMY AND EFFICIENCY 44 2.7.1.1 Efficiency and the Public Interest 47 2.7.2 EFFECTIVENESS 52 2.7.3 THE AUDIT OF ECONOMY, EFFICIENCY AND EFFECTFVENESS 53 2.8 A NEW ORDER AND BETTER GOVERNANCE? 55 2.9 CONCLUSIONS 59 CHAPTER THREE - ACCOUNTABILITY AND THE ROLE OF AUDIT 3.1 ESTTRODUCTION 61 3.2 THE NATURE OF ACCOUNTABILITY 62 3.3 TRUST, ACCOUNTING, AND ACCOUNTABILITY 63 3.4 ACCOUNTABILITY AND AUDITING IN THE CONTEXT OF THE PRIVATE VI SECTOR 67 3.4.1 THE UNDERLYING MOTIVATION OF COMMERCL^LL AUDITING 76 3.5 ACCOUNTABILITY AND AUDITING IN THE CONTEXT OF GOVERNMENT 77 3.6 THE SOCIALLY CONSTRUCTED ROLE OF GOVERNMENT 82 3.7 FORMS OF ACCOUNTABILITY IN THE PUBLIC SECTOR AND THE CONTRIBUTION OF AUDIT 86 3.7.1 ACCOUNTABILITY TO THE PUBLIC 86 3.7.2 FiNANCL\L ACCOUNTABILITY 90 3.7.3 MANAGEMENT ACCOUNTABILITY 94 3.7.4 ETHICAL ACCOUNTABILITY 97 3.8 TERGIVERSATION 103 3.9 CONCLUSIONS 107 CHAPTER FOUR- AUDIT QUALITY AND ECONOMIC IMPERATIVES 4.1 ESITRODUCTION 108 4.2 QUALITY AS CONFORMANCE WITH SPECIFICATIONS Ill 4.2.1 SPECIFICATION AND STANDARDISATION 113 4.2.2 CONFORMANCE/COMPLL«LNCE 120 4.3 QUALITY AS MEETING CUSTOMERS' EXPECTATIONS 127 4.3.1 PRIVATE SECTOR AUDIT EXPECTATIONS 127 4.3.1.1 Independence in the private sector 135 4.3.2 PUBLIC SECTOR AUDIT EXPECTATIONS 143 4.3.2.1 Independence in the public sector 146 4.4 QUALITY AS EXCELLENCE AND VALUE 149 4.5 AUDIT RESPONSES TO ECONOMIC IMPERATIVES 152 4.5.1 RESPONSES TO ECONOMIC IMPERATIVES: THE PRIVATE SECTOR 153 4.5.2 RESPONSES TO ECONOMIC IMPERATIVES: THE PUBLIC SECTOR 156 4.6 CONCLUSIONS: THE INCREASINGLY GENERIC NATURE OF AUDITING 160 4.6.1 THE EFFECT OF GENERIC AUDITING ON PUBLIC SECTOR AUDIT QUALITY 163 4.6.1.1 Stage One- Prior to the 197 O's: Auditing and Accounting 164 4.6.1.2 Stage Two-From the 1970's - 1980's: Auditing and Accountability 164 4.6.1.3 Stage Three- The 1990's: Auditing and Accommmodation 165 4.6.2 FURTHER EVOLUTION? 167 CHAPTER FIVE - THE TRANSFORMATION OF GOVERNMENT: ANTECEDENTS AND OUTCOMES 5.1 INTRODUCTION 168 5.2 HISTORICAL ANTECEDENTS 170 5.3 THE REFORM ERA OF THE 1980'S AND 1990'S 178 vu 5.3.1 THE ECONOMIC AND SocL\L CONTEXTS 178 5.3.2 THE POLITICAL AND ADMINISTRATIVE CONTEXTS 182 5.4 ECONOMIC RATIONALISM IMPLEMENTED 188 5.4.1 MANAGERL*LLISM 190 5.4.2 CONTRACTUALISM 192 5.4.3 GoVERNMENTBUSESIESS ENTERPRISES (GBE's) AND PRIVATISATION 195 5.4.4 GOVERNMENT REFORM IN THE UNITED KINGDOM 198 5.4.5 THE NEW ZEALAND EXPERIENCE WITH ECONOMIC RATIONALISM 202 5.4.6 COMMON THEMES IN THE UK, NEW ZEALAND AND AUSTRALIA 206 5.4.7 AUSTRALIAN NATIONAL COMPETITION POLICY 208 5.5 THE OUTCOMES OF ECONOMIC REFORM 211 5.6 CONCLUSIONS 215 CHAPTER SIX - VICTORIAN PUBLIC SECTOR REFORMS 6.1 INTRODUCTION 217 6.2 THE HISTORICAL CONTEXT FOR VICTORL\ BEFORE THE KENNETT REFORMS 219 6.2.1 THE ECONOMIC CONTEXT FOR VICTORIAN REFORMS 220 6.2.2 THE SocLAL CONTEXT FOR VICTORIAN REFORMS 226 6.2.3 THE POLITICAL CONTEXT FOR VICTORLALN REFORMS 229 6.4.4 THE ADMINISTRATIVE CONTEXT FOR VicTORLMvj REFORMS 232 6.3 THE VICTORIAN KENNETT GOVERNMENT REFORMS 236 6.3.1 THE NEW LEADER-JEFF KENNETT 238 6.3.2 THE ECONOMIC CONTEXT FOR THE KENNETT GOVERNMENT REFORMS 241 6.3.3 THE SOCIAL CONTEXT FOR THE KENNETT GOVERNMENT REFORMS 250 6.3.4 THE ADMINISTRATIVE CONTEXT FOR THE KENNETT GOVERNMENT REFORMS 263 6.4 CONCLUSIONS ABOUT VICTORIA 265 CHAPTER SEVEN- THE TRANSFORMATION OF ACCOUNTABILITY AND PUBLIC SECTOR AUDIT IN VICTORIA 1992-99. 7.1 INTRODUCTION 267 7.2 AGENTS AND MECHANISMS OF TRANSPARENCY AND ACCOUNTABILITY 270 7.2.1 ACCOUNTABILITY UNDERMINED 274 7.2.2 TRANSPARENCY AND COMMERCIAL SECRECY 278 7.3 THREATS TO THE VICTOIUAN AUDITOR-GENERAL 280 7.4 THE KENNETT GOVERNMENT'S REFORM OF PUBLIC SECTOR AUDIT 287 7.4.1 THE OUTCOMES OF THE REVIEW PROCESS 290 7.5 THE IMPLICATIONS OF THE REFORM PRESCRIPTIONS FOR ACCOUNTABILITY AND AUDIT QUALITY 294 7.5.1 COMPETITION POLICY AS THE JUSTIFICATION FOR CHANGE 298 Vlll 7.5.1.1 The Public Audit Monopoly and Independence 302 7.5.1.2 Costs, Efficiency and the Public Interest.