Relationships Between Corporate Control Environment and Stakeholders That Mediate Pressure on Independent Auditors in France

Abstract

The purpose of this research is to examine how relationships between corporate control environments and stakeholders mediate the different dimensions of pressure on auditor independence. In France, two (joint) auditors are required by law for listed companies. In this context, we analyze the experiences of higher-echelon professionals of audit firms, controllers, and managers who could elucidate the essence of pressure on auditor independence in their lived environment. An interpretative approach and empirical analysis were adopted for this study to expand on the literature and proffer an answer to the following research question: How does the relationship between a control environment and a stakeholder mediate the pressures on auditor independence? Interviews involved seven participants, mainly higher-echelon professionals of Big Four firms, as well as two members of auditee organizations, and a member of an audit committee. In addition, the narratives from the documents gathered from the EU audit legislation implementation database constitute our data corpus. Thematic coding was used to organize the results. The findings reveal that control environment best practices and down-to-earth corporate governance policies, participated in by both auditors and audited organizations, cushion the pressures on auditors. This, in turn, presents a positive and significant impact on auditor independence. Overall, the dimensions that mediate the pressures on auditors are as follows: the consciousness of pressure in itself; the reputation and experience of the audit firm; and the interactions between the auditors and corporate governance. Other factors include the cordiality of the relationship between the auditor and corporate management and the resulting healthy end of the negotiation between auditors and auditees. This study contributes to the theory and practical discussion of the relationships between the corporate control environment, corporate governance, auditing, and pressure on auditor independence.

1. Introduction

Financial statements ostensibly support decision-makers in the control environment. The reasonable assurance provided by financial statements has gained prominence recently as a result of accounting scandals. This has necessitated the clarification of how errors (fraud) occur under the eyes of management monitoring functions and how the effectiveness of internal controls has been overridden by external factors. The corporate control environment (CCE) constitutes the artefacts that sustain the operational and economic functions of an organization, aligned with the measurable degree of freedom to fulfill assigned tasks. In this context, the CCE, stakeholders’ expectations, pressure, and auditor independence are the elements of a quadrangular relationship that involves the auditor in an assurance process. Generally, auditors map the internal controls, streamline the weaknesses, and suggest (prioritize) a schedule for remediation by management. Unless there is unnecessary pressure intended to undermine the audit’s quality, corporate governance involves the actionable task of monitoring the scope and efficiency of an audit. Therefore, given the role of the auditors in improving the internal control environment and assessing the reasonableness of financial statements in these turbulent times, a challenge has been set. Ensuring the independence of auditors has gained renewed attention, given the financial scandals in which they have been involved (Piot & Janin, 2004).

In France, Rallye holding company, which owns Casino, has recently been accused of manipulating its financial statements to maintain Casino’s market capitalization recorded in its books of account. Thus, in August 2003, France enacted a financial law called the “Loi de Securité Financier” (LSF). According to Cappelletti (2004), the LSF is based on the reliability of the information drawn from a company’s internal controls. The internal control environment refers to all of the artefacts, policies, corporate governance tools, managerial compromises, internal control functions, and accounting information systems put into place by the management to instill confidence in the stakeholders regarding the running of an organization. In the same vein, the control environment consists of the pillars that sustain the operations of an organization (Imoniana et al., 2011).

The increased importance of understanding the different pressures that circumvent an auditor’s work by creating impediments to improving the quality of financial statements is indirectly reinforced with legislation such as the Sarbanes-Oxley Act (2002) (SOX). Despite the fact that the SOX is an American initiative, it has greatly influenced the practices and changes in the French environment in response to the crisis in trust. French entities were alarmed by cases of American financial frauds, such as Enron and WorldCom (Baker et al., 2014).

Prior studies have examined the influence of conflicts of interest (Goldman & Berlev, 1974), competition, size, and financial health, among others, as sources of pressure that impair auditor independence (Umar & Anandarajan, 2004). Studies have also examined how auditors react when they are faced with different pressures, especially in the USA and Australia (Umar & Anandarajan, 2004). Concerning the auditor and auditee’s relationship, recently, Ando et al. (2020) examined auditee attitudes and moods, noting that they have a significant impact. In the same vein, Imoniana and Imoniana (2020) investigated the auditors’ identity crisis impeding auditor independence. However, no studies have analyzed the factors that may cushion the pressures that auditors suffer, so the present research fills this gap with different perspectives. Firstly, French listed firms show a highly concentrated ownership environment and are often controlled through pyramiding and/or double voting shares (Boubaker & Labégorre, 2008). Secondly, according to Faccio and Lang (2002), a large number of companies are family businesses. They analyzed 607 French companies (94% listed companies), of which 64.82% were family businesses, and 14% were financial institutions. Lastly, there has been an American influence on corporate governance, through the SOX, regarding auditor independence and the quality of financial statements, and this is explored in this study. However, we also suggest that there are other factors that have not yet been studied, mainly related to the entire audit process. These factors could arise from the initial negotiation between the audit firms and the companies, costs, and coverage (Gul, 1991). Understanding the complexity of pressures in negotiation may be necessary for understanding the business, with delays in receiving management representation letters on the one hand and the release of the final audit report on the other.

Therefore, this study argues that there are still pressures that are exercised on the auditor. J. Cohen et al. (2002) capture the experience regarding the interactions between auditors and the audit committee and board members, which influence the audit process. Thus, the current study extends the prior works and pinpoints the impact of the corporate control environment, hereinafter referred to as policies or corporate governance, on the pressure exerted on the auditor. It is not sufficient to consider only one country when studying sources of pressure impairing auditors’ independence (Umar & Anandarajan, 2004). In summary, the following research question is investigated in this study: How does the relationship between a control environment and a stakeholder mediate the pressures on auditor independence?

The remainder of this paper is structured as follows. Section 2 provides a brief overview of the background literature covering the independence of the auditor as well as a dialogue on the sources of pressures that auditors face in French companies; the current explanations based on main theories; and a reflection upon the social factors that influence auditors. Section 3 outlines the research method. Section 4 presents the results of the study. Section 5 discusses the findings as part of a theoretical repositioning. Finally, Section 6 presents the conclusions.

2. Literature Review

2.1. Auditor Independence

The cornerstone of the auditors’ role is independence, and this is explained by agency theory, according to which the stakeholder has the guarantee that the auditor’s opinion is totally objective with respect to the financial statements. Independence is the foundation of the public accounting profession, and the profession’s strength and stature depend on this principle (Moore et al., 2006). Further, Carey (1970) simply stated, “Auditors are required independent from and unbiased by their client’s interest”. Despite these traditional definitions, the independence of the auditor remained only an elusive promise (Moore et al., 2006). Only after the Enron case did various institutions, including regulators, awaken from their slumber.

Moore and Loewenstein (2004) explain that accounting scandals are attributed to a change in corporate ethics from a focus on what is morally right to a focus on what is technically legal. This weight of immorality may be the cause of the failure of the auditor’s independence, particularly with the judgement of what is ethical being influenced by pressure.

In the European context, the European Commission (EC) consultative paper states the following: “Objectivity and professional integrity should be the overriding principles behind statutory auditor’s audit opinion on financial statements”. Independence can be seen as a proxy for integrity and objectivity. Also, the aim of EU-ALID (2021) is to improve statutory audits in the EU by reinforcing auditors’ independence and their professional skepticism toward the management of the audited company. Unlike the Anglo-Saxon context, the European model generally presents a less extensive code of ethics and a different approach to issues such as employee conduct, suppliers, and customer relations (Stevenson, 2002). J. R. Cohen et al. (1992) supported this argument. They suggested that the implementation and acceptance of international ethical codes are hindered by societal and cultural factors.

Specifically, in France, the Code of Ethics adopted by the CNCC (Normes–Commentaires Déontologie) states that the laws, regulations, and ethical professional code must be independent. The auditors must not only retain an independent attitude but also be free of all current ties that may constitute an obstacle to integrity and objectivity.

2.2. Pressures on Independent Auditors

Pressure in the physical sciences refers to the perpendicular force per unit area or the stress at a point within a confined fluid (Britanica, 2022). Thus, pressure in auditing may be likened to a force exerted on an individual in order to persuade them to act in a manner contrary to their judgement. In the same vein, independence is essential to independent auditors, and it becomes a challenge to cultivate the trust and confidence of the different users of financial statements. Since maintaining independence is a significant challenge, it is, therefore, also a kind of pressure in itself. Nevertheless, despite the variabilities of norms and regulations issued by monitoring bodies such as the LSF or PCAOB (Public Company Accounting Oversight Board), those with calculated intentions will exert pressure as an ancillary tool to drive particular interests.

Audit fees and pressure

There is evidence of the relationship between audit fees and the pressure exerted on the auditor. A reason that audit fees can affect the auditor’s work is their economic effect. Ettredge et al. (2014) point out the existence of a relationship between downward audit fee pressure and audit quality during the economic downturn referred to as the “Great Recession”.

Another reason that audit fees exert pressure on the auditor is the existence of an audit committee. Goodwin-Stewart and Kent (2006) point out that the relationship between audit fees and the audit committee is complex. On the one hand, the presence of the audit committee may lead to increased audit rates because the audit committee needs to ensure that audit hours are at an adequate level that does not compromise the audit quality (Jack, 1993). On the other hand, the audit committee’s involvement in strengthening internal controls might reduce the assessed level of control risk, resulting in less substantive testing and, therefore, lower audit fees (Collier & Gregory, 1996). According to Goodwin-Stewart and Kent (2006), the existence of an audit committee is associated with a higher level of audit fees.

Time pressure and performance

One of the objectives of audit firms is managing costs and maximizing efficiency to remain competitive (Power, 2003). As audit firms are also business-inclined, they must be efficient and effective to be competitive, meaning doing more with less. Auditors should gather enough evidence to meet professional standards, and they should effectively audit while minimizing or controlling costs (Arens & Loebbecke, 1997). McDaniel (1990) analyzed the relationship between time pressure and effectiveness and efficiency and mentioned that an increase in time pressure reduces audit effectiveness. This is supported by psychology research pointing out that efficiency improves as structure eliminates the time needed to develop or organize an approach to a problem (Macgregor et al., 1988).

In today’s practical environment, time budget pressure is perceived to be a real problem by auditors, which could reduce audit quality practices (Gundry & Liyanarachchi, 2007). However, studies show that not all auditors react in the same way under time budget pressures. Similarly, psychology research has shown that some people are more likely to engage in dysfunctional behavior than others when their stress level increases (Maule & Svenson, 1993). Within the audit environment, studies identify two forms of time pressures, time budget pressure and time deadline pressure (Kelley et al., 2005). Time budget pressure occurs when a firm allocates insufficient time for auditors to complete specified procedures, while time deadline pressure occurs when it is difficult for auditors to complete work by a required deadline (Kelley et al., 2005).

Time pressure, in general, has been shown to have a detrimental impact on individuals’ decision-making processes (Gundry & Liyanarachchi, 2007). In general, stress and performance tend to have an inverted relationship, and time pressure can be a major source of stress (Maule & Svenson, 1993). Improving corporate governance performance can alleviate this type of pressure.

2.3. Pressure and Corporate Governance

One of the main characteristics of corporate governance that mediates the pressures on auditors is the implementation of the audit committee. Different countries require listed companies to have an audit committee whose function is to supervise financial reports, internal controls, and the independence of the external auditor. Collier and Zaman (2005) point out that the main purpose of an audit committee comprising non-executive board members is the supervision and oversight of auditing activities.

Audit committees act as arbitrators between two parties to weigh and exchange different opinions to produce balanced and more accurate reports. Furthermore, many studies affirm that the audit committee is a protective mechanism of auditor independence. For example, Moore et al. (2006) suggest that the auditor should be hired not by management but by the audit committee for a period of five years and that the client should not be able to dismiss the auditor during that period. However, Nelson (2006) considers this disadvantageous since the client would be unable to change the auditor in the case of poor-quality service. In the case of the European Union, the European Commission actively promotes the implementation of audit committees, in some cases with a corporate governance code. Specifically, in France, Bouton (2002) suggested improvements concerning the board of directors (stronger independence). The board committees (audit, remunerations, and nominating) can increase the independence of legal auditors to contribute to restoring investor confidence (Charreaux & Wirtz, 2007). Additionally, French corporate governance policies recommend that the audit committee should have the following characteristics: (a) The committee does not act in the place of the board but rather as an extension of the board, facilitating its work. (b) The proportion of independent directors should be raised to two-thirds of the total number of directors. (c) The committee should be responsible for selecting the statutory auditors. Also, the effectiveness of the audit committee can be measured through factors such as meeting attendance (Abbott et al., 2000, 2004). The governance code does not indicate minimum requirements regarding the frequency of the audit committee meeting attendance, but it is recommended that meetings be held at least four times a year. In that sense, Carcello et al. (2002) highlight that due to the legal vacuum, audit committees frequently do not meet the standards set by their charter.

2.4. Underlying Theories Tied to Agency and Neo-Institutional Theory

A major concern of corporate governance is avoiding material misstatements in financial statements and instances of (accounting error) financial fraud that affect performance. Indeed, depending on the size of the company, financial fraud can cause the economy of a country to collapse, as in the case of Lehman Brothers, which withheld losses (Swedberg, 2010) that were not disclosed in a timely manner. The said hidden information compromises the relationship between the principal and the agent. Agency theory is based on the premise that the agent has more information than the principal, and this information asymmetry affects the principal, generating agency costs (Jensen & Meckling, 1976). The principal incurs monitoring expenses, for instance, in monitoring the auditing of financial statements by external auditors. On the other hand, agents, in some cases, also incur expenses, for example, the implementation of internal auditing to support audit committees (Adams, 1994).

One of the factors that motivate auditors’ reluctance to attest to erroneous financial statements is the pressures that companies exert on them, for example, in the case of roundup reports with relevant issues untreated. These factors relate to social expectations that are explained by neo-institutional theory (Christopher et al., 2009). The theory mentions that the structures of organizations and managerial controls tend to conform to social pressures and expectations (Di Maggio & Powell, 1983; Meyer & Rowan, 1977; Scott, 1987). Several studies use neo-institutional theory to explain the behavior of different companies in different countries, according to Di Maggio and Powell (1983, p. 152).

This study found factors that affect the independence of auditors. For example, Morin (2005) mentions that France promotes and emphasizes its labor laws but at the same time hinders and damages its corporate governance. Further, the implementation of laws or mechanisms (codes of conduct or audit committees) within companies to obtain reliable financial information due to international pressures is nothing more than “myth and ceremony” instead of a corrective action (Spira, 1999; Wright & Rwabizambuga, 2006). Based on this reasoning, one could take the position that elements of the corporate control environment such as audit committees are put in place in response to a range of control and compliance issues with shareholder expectations.

2.5. The French Auditing Legislative Environment

In France, two (joint) auditors are required by law for listed companies. As observed by Francis et al. (2009), this unique institutional setting creates a more complex auditor environment than the typical Big Four/non-Big Four dichotomy in other countries.

According to Vu and Flecher (2023), the regulation and profession of auditing in France have been subject to regular changes since they first appeared in the Company Law of 23 May 1863 on limited liability companies. The fundamental legislative changes have been the Law of 24 July 1867 on commercial companies, the Decree-Law of 8 August 1935 relating to the assignments of the auditors, Law no. 66-537 of 24 July 1966 on commercial companies, and Law no. 84-148 of 1 March 1984. Corporate Law no. 2003-706, dated 1 August 2013 (LFR), was recently created with the aim of fundamentally changing the regulation of the auditing profession in the context of intensifying corporate issues.

This external regulation for the auditing profession is designed to strengthen the independence of the audit. The law also grants new powers to the Garde des Sceaux (Ministry of Justice).

The French auditing profession is a highly regulated one owing to bureaucratic processes aimed at curbing malpractice. One might, therefore, assume that all aspects of fraud risks are mitigated by auditors as they comply with the standards. In this vein, it is considered that changes in governmental environments are not part of French culture (Hofstede, 2000).

The changes in auditing in France over the past two decades provide evidence of the shift from autoregulation. These changes occurred within the sphere of the supervision of the accounting profession, auditing standardization, and the auditing market. They mirrored the dynamic nature of auditing in itself, which is a product of political, historical, social, and institutional contexts.

Per EU-ALID (2021), these changes reflect all the discussions observed in relation to the roles of auditing in the European Union. This suggests that the pressures faced by auditors are also moderated by French legislation.

3. Method

Qualitative research and an interpretative perspective were adopted in this study to analyze the experiences of higher-echelon professionals of audit firms, controllers, and managers who can elucidate the essence of pressure on auditor independence. Qualitative research enables the description and study of subjects’ real actions in real-life contexts (Gephart, 2004). Consistent with King and Brooks (2017), qualitative research often aims to explore the meaning of experience. Theoretical interpretivist perspectives emphasize the understanding of the social world by examining the interpretation of this world by its actors (Bryman, 2012, p. 380).

This study relies on interview data, the interview being an appropriate method for researching perceptions, attitudes, and experiences within complex social relations. It consists of seven interviews of mainly higher-echelon professionals of Big Four firms, two members of auditee organizations, and a member of an audit committee. In addition, the narratives from documents gathered from the EU audit legislation implementation database constitute our data corpus. As it is known that audit managers and partners are difficult to contact for interviews, we explored the possibility of including members of the IESEG Network Alumni Association as auditor participants, and the researchers were able to contact people from each Big Four company in France. As a result, the study was conducted in 2020 and 2023 in person and through Zoom calls, which were recorded with the authorization of the participants.

The interviews, which were originally conducted in French and translated into the English language, were guided by a semi-structured interview guide of 26 questions. Each interview took approximately 45 min. Participants were informed that the objective of the study was to record their experiences with audit clients and auditors, and hence, there were no right or wrong answers to the questions. Further, as is customary in such studies, participants were informed that their responses would be anonymous. With permission, interviews were recorded to ensure completeness and accuracy. Recordings were later transcribed following a coding scheme for each question developed for this study.

Thematic coding was selected as the most appropriate method for the analysis of the interview transcripts. According to Clarke et al. (1997), this is a rational choice. Thematic analysis is a method for identifying, describing, analyzing, and reporting themes and patterns within data (Braun & Clarke, 2006). It can be used to analyze data obtained under several qualitative theoretical frameworks, including grounded theory (Braun & Clarke, 2006). Further, in performing the thematic analysis, all transcripts from the interviews conducted in this study were read several times, and notes were made to reflect each category.

Table 1. Demographics of the participants.

Interviewee	Position	Auditor/Auditee	Enterprise	Years of Experience
G.W. (Participant 1)	Financial Controller	Auditee	IDEMIA France	7
M.E. (Participant 2)	Senior Manager	Auditor	DELOITTE	10
L. L. (Participant 3)	Senior Manager	Auditor	EY	7
B. D. (Participant 4)	Partner	Auditor	DELOITTE	11
G. R. (Participant 5)	Partner	Auditor	KPMG	13
P. R. (Participant 6)	Senior Manager	Auditor	DELOITTE	12
N.P. (Participant 7)	Manager	Auditor	KPMG	10
M. B. (Participant 8)	Manager	Auditor	EY	12
A. L. (Participant 9)	Manager	Auditee	Controller	14
A.D. (Participant 10)	Audit Committee Member	Board Member	IDEMIA France	8

provides the demographics of the participants and their professional experience. As indicated, the managers had an average of 10 years of auditing experience. In most cases, the managers had experience with clients that are listed on the stock exchange and contact with audit committees.

We adopted the qualitative data analysis tool MAXQDA to assist in organizing the ideas in codes derived from the data corpus. A summary of codes can be observed in Figure 1, containing the main code types and their description and interpretation.

4. Results and Analysis

In Figure 1, we present the codes extracted from the various sources. The results are presented following the said codes, and summarize their ideas and significance.

Furthermore, we expatiate below on the significance derived in order to give details on the categorical representations. The explanations arrived at by the interviewees drive home the perceived understandings aligned with the stream of experience of the authors.

Conceptions of corporate governance

The lived experience of the respondents with corporate governance influences their actions. Thus, given the relationships between the control environment, the stakeholders, and the auditors, it is necessary to comprehend the symbols of corporate governance (CG) and the general description of its function. In the majority of cases, it consists of the tasks of the administrative or management boards or the fiscal or auditing committees tasked with reviewing policies and management powers by monitoring the higher echelons. The conceptions of CG highlighted by the monitoring procedures are important aspects that mediate auditor pressure in the corporate control environment, notwithstanding the mitigation of risks. The management, board, and three other participants share the same views:

“The importance of management and the Board are relevant for good corporate governance, I think it is mainly member of Board of directors, CEO or the president, these kinds of persons saying their minds”.

(Participant 8)

Unless the CEO has a dual function, this may be a misconception of the respondent. However, the definition given may depend on factors such as the size of the company and its environment; for instance,

“I mean for big companies mostly, you have corporate governance elected by the shareholders, and from them, regarding the part of regulation, they are independent from the CEO of the company or CFO, it is an external party”.

(Participant 2)

Emphasizing the importance of interdependence in the control environment

“The Corporate governance we’ll say depends on the environment. It necessarily depends on the environment of the company; it can be then the involvement of auditing committee or the general director. There are different ways of corporate governance. For me is a group of people both operational or in the general direction and in strategic it will be more within the administrators in response to the owners”.

(Participant 7)

Finally, only one participant included the control environment and corporate control environment in the conceptions. Thus, the findings suggest that most participants define corporate governance in terms of the management and board of directors as opposed to control activity. One potential reason that the audit committee was not mentioned is that it is viewed as a group of people in charge of the operational cycle of the company, while the management and board of directors are viewed as a group of decision-makers.

Reputation of the audit firm

Klein and Leffler (1981) observed that the auditor brand name is directly related to audit quality. A complementary approach indicates that the auditor size and reputation are usually linked. Piot (2005) suggests that the demand for auditor reputation varies according to the local environment. Additionally, France has a proportional liability regime, which limits lawyers’ incentives in taking legal action. The findings strongly support the notion that the reputation of audit firms is important in the audit process. The Big Four are identified as high-reputation audit firms.

“… I think the requirements by Deloitte at least and for all big 4 are higher, is more demanding than for other audit firms, so I guess this is because they try to keep better reputation, and it is always better for them to have audit sign by a big 4 than by another audit firm”.

(Participant 6)

In addition to the strong reputations of the Big Four, their methodology and approach are considered superior to other audit firms.

“Reputation is important, big four has more mechanism and a more developed audit methodology; so they go into more detail of the audit and can use more developed computer tools. But it is also important to support this reputation by being professional and serious at the team level. I will say that reputation does 20% of the work”.

(Participant 3)

This was confirmed by Participant 8:

“… I am working in EY in a report there is a quality, technical and the report is well prepared. Our procedure is much more develop in EY than lower tier auditors, for example, we are doing lots of test and report. In a lower tier firm is only analytical review as I have worked in one, and for EY is a lot of testing to perform internal control tests. For the client, is the same as when you going to buy shoes you will take Adidas or Nike because is a brand, so EY have that quality”.

Audit appointment and termination

Unlike section 301 of the SOX, which gives the audit committee the authority to appoint and dismiss the external auditor and to determine the audit fee, the LSF does not provide the prerogative to appoint or dismiss external auditors. It only requires auditors to provide an annual management report of the internal control procedures of companies. Contrary to the SOX law, the French commercial code states that auditors must be proposed by the board of directors and appointed at the general meeting of shareholders. In addition, auditors are appointed for a period of six years. Another difference is that with the SOX law, auditors are required to report directly to the audit committee, while under French rules, auditors are required to report to shareholders.

However, in AFEP-MEDEF (2003), exceptions regarding the appointment of the auditor can be sought by the company’s shareholders.

“At the end, it is the CEO of the company but depends on the size of the company. There is not always corporate governance structure in all firms so, for small companies is the CEO or CFO and they choose who is going to audit. For listed companies, the CFO of the company decide”.

(Participant 2)

However,

“I would say it depends. If you are already the auditor is different. But if your auditor gives you too many pains, you can change the auditor. In a very big company, it could be the audit Board, audit committee, but who appoints the audit is the Board actually. My clients were SOX companies. For example, TOTAL, listed in France and in the US. The decision was for audit committee”.

(Participant 7)

Interaction between auditors and corporate governance

The goal of an organization is to obtain a qualified opinion, so the top management works toward this. The process of expressing opinions through reporting inevitably leads to a certain number of conflicts between auditors and clients (Wright & Wright, 1997; Gibbins et al., 2001). Research has also shown that factors such as the risk of losing the client (Wright & Wright, 1997) and the provision of management advisory services (Gul, 1991) could influence auditors in accepting the position of clients in adjustment disputes. Nevertheless, the LSF strengthens the independence of auditors for listed companies.

“…we feel pressure because that guy has enough experience. Is kind of intimidation that the audit team may have, when you are interviewing a more senior position in the organisation, as you do not want to lose the credibility in asking stupid questions, because you know the guy have strong knowledge in the sector. As a senior manager, if I must speak with the CEO, I will ask less questions …”

(Participant 6)

In fact, the base knowledge of clients of the auditing methodology serves as an incentive for the auditor to contribute to the business by giving significant auditing recommendations. This does not mean there is a possible infringement on auditor independence.

“Except for the quality of work, pressures come from the environment, the PCAOB and the French alternatives SCC and auditing enforcement companies, which are so strong on people and processes. There is a lot of pressures on the quality on auditing and if documented in a poor way, that is the kind of pressure I can feel. Pressures come from the regulators”.

(Participant 7)

Consciousness of pressure

The consciousness of pressure seems to mediate the interactive effect between corporate governance and experience in assurance procedures. The importance of the auditor being conscious of pressure is that it makes them more sensitive to possible influences exerted by companies’ top management.

Therefore, the time invested by the auditor during the audit process, mainly in the closing period, triggers pressures, and the auditor must take this into account.

According to BD,

“Performing the analytical procedures at the beginning of the audit and at the end of the audit, we are aware that management will be willing to rule out all our questions about unusual items on the financial statement, so we already expect it and work on the reasonableness of the explanations we receive.”

Time Pressure

Further, due to the competitive audit market, auditors undertake much more work without a corresponding increase in audit fees (Nor et al., 2009). This cost–quality relationship also increases audit pressure and is reflected in the final audit.

An important question is whether there is a relationship between the time pressure that auditors face and their audit practice capacity. Unlike the SOX, the French Code, Article L 225–228 stipulates that auditors are chosen for a period of six years, and their appointment cannot be revoked during this time because of Article 225–229 of the Code.

“In France we have 6-year mandated period, so is a long-term relationship. Is very exceptional to get fired during this period. Is to protect the auditors at large”.

(Participant 9)

In other words, auditors see the extension of the mandatory rotation period to six years in France as the maintenance of hegemony.

Similarly,

“I have one listed company on which there are lots of pressure, because the financial statement is published on the website and there is a big impact if we do a mistake or if we do not accomplish the deadline. When we have those clients, there are more people working on this entity, is a way to mitigate it, so everybody is on time, we also have more office, because there is much work, so it helps to manage the pressures…”.

(Participant 8)

The pressure faced by the auditor may influence the audit process. It must be noted that an auditor perceived that his audit samples were affected in some way. He stated the following:

“Yes, because at the end for listed company, the CEO and CFO, would say I want to publish my account on for example February 16, meaning that all your test need to be perform and validated before the 16th of the month. Sometimes you receive the documentation quiet delay and you have very few days to perform all the tests. In that sense, it is quite difficult to be sure at a 100%, that all the accounts are good, that is why you must just look in the main risks accounts”.

(Participant 2)

Another way the auditor faces the pressure is through materiality. Some participants mentioned that the pressure depends on the type of company and its size. Therefore, materiality is a potential method to cushion it. This suggests the pressures faced by the auditor and French financial law (LSF) are closely linked:

“…you focus on the financial audit in the point of litigation and where maybe force information in the statutory accounts, and once you identify that and you check that, then you have all the section that you can review later but it is maybe not as significant as the other ones”.

(Participant 2)

Finally, participants also mentioned that the pressure faced by the auditor is transferred to the client when financial documents are requested in closing periods. This generates stress within management because of the deadlines they have for reports as a listed company. For instance,

“Concerning the pressure, I pass it on to the person who has to provide me with the documents, I feel a lot of pressure, but on the other hand I put this pressure on the person of the company to give me the right documents”.

(Participant 5)

Relationship between auditor and management

According to McCracken et al. (2008), management defines the relationship and the roles of auditors. Most participants indicated that a good relationship between the auditor and management enhances the audit process because of its importance. Specifically, three respondents indicated that the auditor provides added value to companies:

“…Good relationship is a professional relationship, meaning that for me, you need to, know the value. You are not as auditor who is going in a room, ask a lot of questions and at the end, say ok your paper is good. What usually the client like is when you challenge a little bit, when you say ok this, you cannot do this, because therefore due to regulation article 1,2,3”.

(Participant 2)

One participant mentioned that a good relationship elucidates the client’s complex transactions. For example, a senior manager stated the following:

“It may to a certain extent, especially when it comes to understanding the processes and controls. However, being too close might induce lower professional scepticism and hence maybe not targeting possible misstatements”.

(Participant 4)

Negotiations between auditors and auditees

Only one participant mentioned that there is a confrontation with management with respect to adjustments in the sense that management does not initially recognize its errors:

“Extremely. It implies for them to recognize they did some mistakes. They might also disagree because they interpreted accounting standards differently, but interpretation is often an issue”.

(Participant 4)

It must be noted that one of the reasons for auditors’ non-confrontation with management is that they sign financial statements without a note or, better still, sign management letters mentioning issues of material misstatements. An auditor noted the following:

“… If the CFO does not agree to process the adjustments, most of the case, the audit would say ok you do not do it, I sign the accounts, either I put a note in the final report”.

(Participant 2)

This was confirmed by another respondent, who gave the following remarks:

“…for instance, for litigation you can provide for 100k, in this case, we may propose a figure to the management and will come into agreement at the end either we say ok or on this point we are not 100% sure, we will not propose adjustment”.

(Participant 6)

In general, the auditing process of negotiating accounting errors in view of adjustments, whether as omission, principle, or commission because of overvaluation or undervaluation, takes a strategic approach to amicably eliminate pressures. Discussions and reports are presented to management and, ultimately, to the audit committee.

“…we will discuss directly with the accounting team. And if the accounting team does not agree, then there is an issue, we will discuss with the CFO. And if it persists, we will discuss with the CEO and then finally, with the audit committee for example. But most of the time we do agree before the CFO”.

(Participant 8)

5. Discussion

Based on our analysis, this study argues for the understanding of the relationships between the control environment and stakeholders’ experience that mitigate pressure on auditors. That which is set out by French financial law is in line with the effective monitoring approach. In the same line of thought, it is legitimized and consistent with the terms of the agency theory. It is also suggested that statutory auditors are merely symbolic, which is consistent with neo-institutional theory (Di Maggio & Powell, 1983). Corroborating this, J. Cohen et al. (2010) suggest that the two theories are of particular importance to auditing research. In the agency framework (Bathala & Rao, 1995), mechanisms such as corporate governance are designed to monitor management behavior.

On the other hand, institutional theory suggests that corporate governance structures within the organization are relatively passive and inefficient and are manipulators of symbols rather than substance (Powell, 1991). The institutional theory perspective implies that governance entails a ceremonial role; in other words, governance policies and regulations (“substance”) may be introduced but not reproduced (“form”) in the long term. For instance, according to French financial law, an audit committee should ensure auditor independence and spearhead the process of selecting and compensating statutory auditors (symbolic), but in fact, the final decision lies with management, such as the CEO or CFO (substance). Consistent with Kelley et al. (2005), within the French context, auditors face time deadline pressures, and depending on the size and complexity of the client, auditors are required to work overtime to prepare audit reports. The findings indicated that auditors anticipate the final closing on average fifteen days before the final report.

With respect to the phenomenon of corporate governance in the cushioning of pressures, audit managers articulate notions of both agency and neo-institutional theories. Consistent with institutional theory (Di Maggio & Powell, 1983), the findings indicate that auditors always emphasize the role of management according to the definition of corporate governance. This suggests that management still has a very strong influence, which supersedes that of the audit committee. A potential explanation for this result, despite the normative rules followed by management, is that management delegates other employees and empowers them to act in a monitoring role.

An analysis revealed that companies cannot fire auditors but can ask them to resign, which is consistent with institutional theory (Di Maggio & Powell, 1983). Contrary to Sarbanes and Oxley, French corporate law requires that auditors are appointed for a period of six years with no renewal; thus, companies must change auditors every six years or request an exemption from the Minister of Justice when firing an auditor.

Interestingly, at listed companies in France (for instance, TOTAL), the hiring/firing decision is generally made by the audit committee; however, this depends on the company’s size. The key contact for auditors is the financial controller or group controller, who often reports to the CEO and CFO. In the end, the CEO and CFO have the most impact on the final decision. These results indicate consistency with the regulatory reforms in that audit committees lack significant power, and thus, the CEO and CFO play a critical role in decisions with respect to the hiring/firing of auditors.

Prior studies suggested a relationship between time pressure and effectiveness and efficiency in the audit process. McDaniel (1990) stated that time pressure reduces audit effectiveness and efficiency. However, as indicated, auditors in the current study report that time pressure is not a substantial issue in positions of seniority. Auditors recognize the existence of pressure, but it is not a factor that can change their opinion in the audit process. An analysis of the participants’ responses revealed that pressure derives from listed companies because financial statements must be published within a deadline. This view is consistent with psychology research indicating that people are more likely to engage in dysfunctional behavior when stress increases (Maule & Svenson, 1993).

Consistent with Piot (2005), auditor reputation varies according to the local environment. As summarized, this study reflects the importance of the auditor firm’s reputation for audit quality. Auditors recognize that the Big Four audit firms have strong regulations and better methodology than other non-Big Four audit firms. In addition, belonging to a reputed audit brand name generates pressure but also confidence.

According to the agency theory, stronger corporate governance leads to more effective monitoring of controls, thus resulting in more reliance on assessments of control risk and less substantive audit work. This study corroborates this view, in the sense of effective monitoring, in that auditors incorporated governance information in the audit process, specifically during the inquiry session with management. The use of corporate governance information in the audit process in French law in this era continues to be high in the audit-planning phase and in the concluding phase of the audit. Consistent with M. S. Beasley (1996), M. Beasley and Salterio (2001), and M. Beasley et al. (2009), having strong governance with independent members supports the internal control environment because it enforces control. Reviews by the Public Company Accounting Oversight Board (PCAOB), the Blue Ribbon Committee (1996), and French financial law generate pressures for auditors because these regulations provide guidelines to mitigate all types of risk. This highlights the analytical procedures performed at the beginning of the planning exercise and those exercised at the end of the completion stage.

The findings of this study also provide evidence of a reduction in the manipulation of accounting practices. Indeed, in comparison to the SOX, in which auditors are perceived more as reactive players, French practices adhere to French financial law, which is focused on “substance”. On the other hand, there is a notable absence of power for audit committees, suggesting that they play a ceremonial role; nevertheless, auditors view audit committees as a control mechanism, which reinforces their independence.

One of the main discussions at the end of the audit process involves ascertaining that adjustments are posted in the books. As summarized, several respondents emphasized that there is no confrontation with respect to the final adjustments. As in the work of Antle and Nalebuff (1991), some differences between auditors and management lie in the application and interpretation of the standards. However, as discussed earlier, auditors are very transparent since, from the beginning, they anticipate any contingencies. One of the explanations for the best practices between auditors and management in terms of adjustments is the aftermath of a suggested change. Auditors note they are aware of the financial statement figures, and any differences are detailed in the report, which, in the end, is corroborated by a representative of management. This said, the letter protects auditors within the French context. Thus, there is a trade-off between auditors and management.

6. Conclusions

The aim of this study was to explain the relationships between the corporate control environment and stakeholders that mediate pressures on auditor independence within the French environment. Furthermore, this study explored best practices exerted by companies to cushion different dimensions of auditor pressures.

The primary finding of the current study is that different unconscious pressures on auditors lead to the board and management being seen as important factors in the corporate control environment. Top management entrusts the controlling role to senior management, which influences the audit process. Whereas prior studies state that the governance mechanism is effective and consistent with the prescriptions of agency theory, this study found that audit committees are more active and diligent in monitoring activities. Inasmuch as some elements of governance depict auditors’ experience as consistent with neo-institutional theory, and although audit committees appoint and dismiss auditors, management is still seen as having a major role in this process.

In summary, this study finds auditors’ experiences to be indicative of real impact in terms of the key role that audit committee members’ assessment plays in monitoring financial reports. However, this does not influence the role played by management in auditor hiring and termination decisions, but rather the resolution of conflicts of interest.

While former studies found that half of respondents did not perceive that audit committees were effectively involved in resolving reporting issues, this study reports that audit committees are mediators in cases of conflicts of interest. One explanation for this difference is that the auditors wanted disputes resolved before they reached them.

The results of the current study suggest that the corporate governance mechanism instituted in corporate control environments enhances auditor independence. This is consistent with the prescriptions of agency theory, and the use of symbolic activities to maintain their form is in line with the isomorphic strategy of neo-institutional theory. Thus, this contribution represents a combination of both theories.

All public companies must comply with French financial law and thus have two audit firms appointed and audit committees that are independent with only an advisory role. An “in-form” auditor may be deemed as being highly independent in the audit process.

In summary, this study finds a stronger corporate governance environment than in prior studies of coercive isomorphism involving audit committees. This development is a positive one for auditors, who gain new allies such as audit committees and management that view auditors as contributors to the company’s efficiency. This finding also suggests that the Sarbanes and Oxley law only considers business lobbies in the United States; this is a potential reason why French regulators successfully applied French financial law instead.

Further, this study provides evidence that in countries with less external regulation pressure, audit committees achieve effective corporate governance. Future research can provide more evidence and explore whether this is the case for other countries with identical characteristics.

On the one hand, in terms of theoretical implications, this study sheds more light on the thematic evolution of the conceptions of corporate governance. The importance of the control environment, the reputation of the audit firm, auditor appointment and termination, and interactions between the auditor and corporate governance are also emphasized. Other aspects are the consciousness of time pressure, relationships between the auditor and management, and the utmost skepticism in negotiation and at the end of the audit.

On the other hand, given its practical implications, this study assists policy makers, management, and academia in building clear and effective corporate control practices that mediate the different dimensions of pressures on auditors. There is also a need to examine the experiences of more audit committee members and members of boards of directors, assess whether their experiences affected our findings, and determine whether that affects the experiences among the auditors.

Finally, the inductive methodology used has its limitations. We recommend expanding on these findings of lived experiences with further studies employing deductive approaches.