British Accounting Review (1998) 30, 409–422

Article No. ba980078

BOOK REVIEWS

Titles reviewed in this issue

I. Lapsley and K. Kilpatrick, A Question of Trust: Regulators and the RegulatoryRegime for Privatised Utilities

D. E. Kieso and J. J. Weygandt, Intermediate AccountingWitherspoon Limited, Management Accounting Multimedia Case StudyDan M. Guy, R. Douglas R. Carmichael and O. Ray Whittington, Audit

Sampling—An Introduction

Book and other publications for review should be sent to the Review Editor:

Professor Stuart OgdenLeeds University Business School,The University of Leeds,11–15 Blenheim Terrace,Leeds LS2 5JT, UK.

The BAR is always seeking to widen its panel of book reviewers, to represent aswide a cross-section as possible of its readers. If you are interested in becoming areviewer, please contact the Review Editor at the above address.

I. Lapsley and K. KilpatrickA Q T: R R R PUThe Institute of Chartered Accountants of Scotland (1997)

Introduction

Fourteen years have elapsed since the first utility privatization, that of BT in 1984,and 8 years since the last, that of the electricity industry in 1990. The great Britishexperiment of regulation through price-cap control has reached a stage of maturitywhen it is ripe for appraisal and analysis. Predicted benefits had included incentivesto efficiency (by allowing companies to retain operating cost savings beyond thoseassumed in the price cap), efficient capital investment programmes (avoiding the‘gold-plating’ of assets), and a robust regulatory process with a low cost relative tothe alternative of rate of return regulation. Have these been achieved? Further, howfar does the system meet the criterion identified in the recent Green Paper ‘A FairDeal for Consumers: Modernising the Framework for Utility Regulation’ (DTI,1998), of an accountable, transparent, predictable and consistent regulatory process?

Thus, Lapsley and Kilpatrick’s (hereafter L&K) Research Report for ICAS, ‘AQuestion of Trust: Regulators and the Regulated Regime for Privatised Utilities’,

0890–8389/98/040409+14 $30.00/0 1998 Academic Press

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is a timely contribution, as it addresses some of the questions at the heart of suchan appraisal. However, there are some important aspects of the rich and complexregulatory systems which L&K do not address, and which need to be consideredin a fuller analysis of the history and future of utility regulation in the UK. Whatfollows, therefore, first reviews the L&K Report within its own terms of reference,and then widens the discussion to other dimensions of the regulatory process,particularly those of interest to the accountant.

The L&K Report

The Report is quite ambitious in its scope, setting a broad historical and theoreticalbackground before undertaking appraisal of the regulatory regime from a varietyof perspectives. The relationship of trust highlighted in the title has many facets,and early sections of the Report focus on the regulator–regulatee relationship. InChapter 3, L&K sketch the pre-privatization background of the relationship betweenthe then regulators (the sponsoring government departments) and the nationalizedindustries. It is interesting to see here that many of the tensions later identified inpost-privatization regulation were present then: lack of clarity about purposesand responsibilities; intervention in capital investment programmes; ‘completelyinformal, and usually unpublished, exercise of influence’ (L&K p. 19).

Chapter 4 outlines attempts to model the relationship between regulator andregulatee in an agency framework in conditions of information asymmetry. As theauthors acknowledge (p. 36), these theoretical models may inform thinking, butare incomplete and do not offer a model of regulation which could be applied inpractice. Moreover, such models do not analyse the relationship between theregulator and other stakeholders.

Once this background has been set, we reach the central core of the Report, theappraisal of regulation. Chapter 6, the major original contribution, examines therelationship between the various regulators in telecommunications, gas, electricity,and water, and representative regulatees through an interview process carried outin 1994–95. This opportunity to see behind the scenes is the strongest part of theReport, and provides many insights. For example, L&K describe some companies’early expectations of ‘light-touch’ regulation, and their subsequent disillusion atthe demands placed on them by the regulators. In the context of the agency theoryframework, regulators emerge as using the broad discretion given in their terms ofreference to counterbalance information asymmetry.

Chapters 7 and 8 move on from examining the dynamics of regulatory relationsto attempting to measure regulatory outcomes, using publicly available material.This focuses on another facet of the trust relationship, as it is from such materialthat external stakeholders, such as consumers, can assess whether the regulator hasprotected their interests. Three different approaches are adopted. The first tabulatesthe tightening of price caps, across all the utilities, as they were subject to resettingby the regulators. These facts are by now well documented, but it is useful to havethem collected in one place. The second approach examines reported financialperformance, presenting tables of utility operating profit, return on capital employedand gearing, drawn from the published statutory accounts, and comparing returnsboth across utilities and with other heavy industrial sector. L&K preface theiranalysis with the comment that it is ‘an initial, broad brush exploration of an

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extremely complex area’ (p. 91). However, ignoring some of these complexities cangive misleading results. For example, the return on capital employed in water andsewerage is described as ‘not excessive on a historical cost basis, though it is at thehigher end of the range of heavy industries’ (p. 93). Examination of the accountingpolicies in W&S reveals that their ‘infrastructure assets’ (pipes, sewers, reservoirs)are shown in the accounts at gross amounts, the depreciation charge being replacedby an infrastructure renewals charge, which is a provision for the current cost ofmaintaining the network. Thus, compared to usual accounting practices, assetvalues are increased, and operating costs increased, both factors tending to reducethe return on capital employed. A similar caveat applies to the comparison ofcurrent cost returns in electricity and water and sewerage (p. 96). A further problemis that, generally, only data for the years to 1994 are presented, so the impact ofthe tightened price caps for electricity and water identified in the previous chapterare not examined, significantly reducing the value of the analysis.

The third approach is to examine non-financial performance indicators. Aconsiderable armoury of standards of quality of service has been developed to meetthe problem (seemingly unrecognized at privatization) that the efficiency incentivesof the price cap also provide incentives to reduce quality. Although concluding thatthese non-financial performance standards seem effective, L&K rightly highlighttheir possible lack of robustness.

Chapter 9 introduces another stakeholder, the shareholder, in analysing shareprice performance from privatization to early 1997. L&K present some convincingevidence that early large returns are greatly reduced once the regulators have actedto tighten the initial price cap. But these early returns cannot be attributed to weakregulators. Some gains are due to the issue of shares at a discount to ensure thesuccess of the privatization process. More importantly, it cannot be repeated toooften or too strongly that any slackness in the initial price caps cannot be held tobe the responsibility of the regulators, but instead must be attributed to thegovernment departments responsible at privatization.

Again, however, the analysis may be criticized as a little broad brush. For example,there are likely to be comparability problems in both water and electricity as thenumber of companies with a separate stock market quotation fell substantially overthe period due to takeovers and to mergers which formed multi-utilities. Forelectricity, only three companies out of the original 18 remained at February 1997,for water and sewerage companies six out of ten. Further, the stock market quotationrelates to the company as a whole, rather than to its regulated activities.

In the wide canvas covered by L&K’s Report, it is inevitable that a reviewer willnot concur completely with the weight given to individual topics, or with the detailof the analysis attempted. But this should not detract from the Report’s achievementin drawing together a large amount of material, which will provide a usefulintroduction to utility regulation, and in throwing light on many issues which areincreasingly recognized as important. For a deeper appreciation of the complexityof utility regulation, however, a number of further dimensions have to be considered.

The development of the regulatory process

L&K triangulate their evidence from three sources: interviews with regulators;interviews with regulatees; and publicly available data on regulatory outcomes

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(p. 8). A further rich source, which they have not considered, is the materialpublished by the regulators documenting the development of the regulatory process,in particular the re-setting of the price caps.1 This provides evidence relevant tomany of L&K’s propositions; for example, the re-setting of the electricity price-caps in 1995 included specific penalties for RECs whose actual capital expenditurefell below that allowed in the price cap, illustrating L&K’s points on informationasymmetry, and ‘regulator obfuscation’.

This source material shows a convergence of approach to the resetting of pricecaps in the network industries of water and sewerage, electricity and gas distribution,and electricity transmission. In essence, forecasts of revenues are made which coveroperating costs, depreciation on, and a return to, existing assets, and a return forfinancing new capital expenditure. While early comment focused on the appropriatecost of capital to use, attention has recently shifted to the correct valuation baseto use for assets. Contestable markets theory would suggest that current cost assetvalues should be used. However, in all these network industries, the starting pointfor valuation is now the stock market value at privatization, adjusted for depreciation,additions and disposals, and for price change. The regulators’ discretion in choosingto use market based values, rather than the larger CC values, has had a verysignificant effect on the tightening of the price caps. Further, there is no consistentmethod for determining these values across the regulators, and the discretioninvolved in the calculation processes can be wide. The tightening in the revisedprice cap proposals for electricity distribution in 1995 can be attributed almostentirely to a change in asset valuation procedure.

Industry diversity

The Report might have given more weight to the diversity within the group ofutilities studied. The markets in which they operate range from sustainable regionalnatural monopolies of water and sewerage with heavy sunk costs, and little technicalchange, to the (now) highly competitive market in telecommunications, whichlargely resulted from the rapid introduction of new technologies. Even within asector, different markets can be identified. Thus, the electricity sector includes:generation, which is not regulated through a price-cap regime; the high voltagetransmission network, in England and Wales a natural monopoly, carried out by asingle company; the low voltage distribution network, consisting of 12 regionalmonopolies; and supply (the purchase of electricity and its sale to the finalconsumer), which can be opened to competition, so long as access to the networkis ensured. The regulators’ roles thus range from the active encouragement ofcompetition where success can be measured by the withdrawal of regulation, toproviding a surrogate for competition in its absence, where issues of the ‘correct’price will persist indefinitely. These differences will inevitably be reflected inrelationships between regulators and their regulatees. Indeed, shadows of thesedifferences can be detected in L&K’s interviews, though analysis is hampered bythe necessary anonymity of their respondents.

Regulator diversity

A further consequence of the broad discretion given to regulators is the extent towhich their personal inclinations and backgrounds can colour their approach. Thus,

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Ian Byatt, the Director General (DG) of Ofwat, with a background as a civilservant, is responsible for an influential report on the control of nationalized utilities(Byatt, 1986). The regime which he has developed can be characterized as beingstrongly accounting-orientated (accounts are prepared on a real financial capitalmaintenance basis, within a framework of Regulatory Accounting Guidelines) andtransparent (the assets values used to set price caps are regularly disclosed and thepublished accounts give detailed cost breakdowns for both water and sewerageoperations). In contrast, the regime of Stephen Littlechild, the academic economistand progenitor of price-cap regulation now DG at Offer, can perhaps be char-acterized as more broad-brush and less transparent. He is less concerned withstandardized accounting detail, and although explaining his methodology for thecalculation of regulatory asset values, the values themselves were not disclosed,even to the regulatees concerned. These personal approaches can also interact withthe industry characteristics identified above: for example, the water and seweragesector will need a long-term working relationship with their regulator.

Accountability and accounting

Sir Bryan Carsberg comments in his preface to the Report: ‘I have often thoughtthat accounting lies at the heart of utility regulation’. Certainly, the reporting ofperformance of the regulated activities is a crucial element in the development oftrust between regulator and consumer. At present, the main vehicles for suchinformation are the regulatory accounts. These are public documents, containinga sub-set of the information provided to the regulator, prepared on a current costbasis.

However, if regulatory accounts reported using the market based regulatory assetvalues used in setting price caps, the reported rate of return could be directlycompared with that allowed in the price cap. This would give a much more focusedappraisal of performance than the L&K’s method of comparing returns from thestatutory accounts with returns in other heavy industry sectors. Moreover, it wouldthen be possible to separate the reported profit into the allowed return and anyefficiency savings, directly measuring any laxness of regulation, and allowing‘yardstick’ comparisons of efficiency across multi-company industries.

The future of regulation

L&K conclude (p. 132) that the current regulatory regime is an improvement intransparency over the pre-privatization one. The Green Paper (DTI, 1998) sees‘strong merit’ in the price cap system, and it seems certain to continue. The GreenPaper, however, puts considerable emphasis on further increasing transparency andconsistency, and on the need to protect the interest of consumers. Accounting thushas an important part to play. As suggested above, there needs to be more rigorousappraisal of the asset values used in regulation, and methods of performancereporting need to be developed that articulate with the regulatory process. Inaddition, there are many other accounting aspects of the increasingly complexindustry and market structures which it has not been possible to discuss here; forexample, the impact of changing ownership as utilities are taken over, issues of costallocation and ring-fencing in multi-utilities, and problems of cross-subsidy betweenutilities and across markets. We live in interesting times!

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Notes1. The Reports produced by the MMC when a referral is made to them following regulator/

regulatee disagreement also provide relevant information.

LYDIA THOMSONUniversity of Aberdeen

ReferencesByatt, I.C.R. (1986). Accounting for Economic Costs and Changing Prices: A Report to HM

Treasury by an Advisory Group, 2 volumes, London, HMSO.Department of Trade and Industry (DTI) (1998). A Fair Deal for Consumers: Modernising

the Framework for Utility Regulation, CM 3898, London, the Stationery Office.

D. E. Kieso and J. J. WeygandtI AWiley (1998). £29.95 (hardback)

They say that everything is bigger in the USA, and this book is no exception. It istruly a mammoth tome—over 1,400 pages—spanning 25 chapters and coveringmost of the areas one would expect (and more) from an intermediate stageaccounting textbook. The book begins with discussion of financial accounting andaccounting standards; far from being a dry, factual account, the authors provideup-to-date scenarios to highlight the challenges facing financial reporting at theend of the century. The evolving nature of accounting is well depicted. The mainparties in the standard-setting process are introduced, including the various usergroups interested in financial reporting. The second chapter moves on to theconceptual framework underlying financial accounting, using real-life cases todemonstrate the important qualities of relevance, reliability, comparability andconsistency. Key accounting principles are explained and discussed in an interesting,straight-forward manner, and the chapter concludes by discussing the constraintson the reporting of financial information. By the end of chapter 2, the reader’sappetite is whetted. Chapter 3 comes, therefore, as somewhat of a disappointment,describing the accounting information sytem and double-entry book-keeping inlong-winded fashion—it seems that even the Americans have yet to find a way ofteaching this necessary but dry part of the syllabus in a lively and inventive way.

The next two chapters look at the income statement, balance sheet and statementof cash flows, and the pace and interest factor pick up again after the lull of chapter3. These key statements are examined, their uses and limitations, with plenty ofexamples and diagrams to aid understanding. Before the book begins its in-depthlook at each heading in the balance sheet, chapter 6 pauses to discuss the timevalue of money, looking at time value concepts (simple and compound interest ratecalculation), present value and annuities. Each chapter begins with a list of the keylearning objectives for the chapter: these are then reinforced by margin notes andend-of-chapter reviews.

Chapters 7 to 16 move chronologically (from a US perspective) through eachbalance sheet heading, examining the components in considerable depth andtechnical detail. Chapter 17 focuses on dilutive securities (convertible to you and

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I) and earnings per share calculation. Chapter 18 (investments) gives a thoroughlook at debt and equity securities, concluding with an up-to-the-minute discussionof derivatives and the problems they pose for financial reporting. Chapter 19 offersa useful look at revenue recognition, covering various types of industry practice(e.g. franchises and consignments) and focusing on long-term contracts. Chapters20 and 21 cover accounting for income taxes and pensions respectively, and aredetailed and technically demanding. Chapter 22 examines lease accounting, byfirstly highlighting the importance of leasing to businesses world-wide and thenmoving on to look at the advantages of leasing and the conceptual ideas underpinninglease accounting. The various types of lease are examined from the lessor and lesseeperspectives.

Chapter 23 looks at how to deal with accounting changes due to new accountingstandards being issued, a change in policy by the company or changes in economicconditions/technology. It also covers the correction of errors in the financial state-ments. Chapter 24 rather oddly revisits the statement of cash flows; having lookedat them in chapter 5, we now get in-depth coverage with some overlap, yet nocross-reference to the previous chapter. The chapter deals with the preparation andusefulness of cash flow information. The book concludes with a chapter on fulldisclosure in financial reporting. A most interesting chapter, it looks at disclosureproblems (inviting students to think how and why companies disclose informationin a certain way), the use and importance of notes, the role of interim and auditreports, and the ever-present threat of fraud. Appendices to the last chapter lookbriefly at inflation accounting and financial statement analysis, attached almost asan afterthought.

The strengths of the book are considerable. Web sites have been set up forstudent self-study purposes. The entire financial statements of Coca-Cola Co. andPepsi Co. Inc. are provided, so that at the end of each chapter there is a comparativeanalysis case based on these companies which requires students to access the Website and perform a comparative study, using the information learned from thepreceding chapter. The cases set are challenging, requiring technical ability inaddition to good analytical skills. Students will almost certainly welcome theopportunity to use the Internet as part of their studies—the Web site is easy toaccess, colourful and inviting. The focus on the Web in this ninth edition of thebook stems from the link-up between the Intel Corporation and the authors. Intel’sPentium logo, familiar to all from regular advertising, features on the cover of thebook, and their financial statements are reproduced at the end of chapter 5,preceded by a glowing testimony to the company. The link continues in theWeb site with the authors describing their book as ‘the hot chip in intermediateaccounting’. Other features on the Web site are faculty (teacher) resources includingPowerpoint slides, transparencies and further course material, student resources,an on-line magazine, FASB news and updates, the Whitepeak simulation wherebystudents have to complete modules from chapter 7 onwards on their own disk, aCPA exam review section, and a feedback prompt for readers to e-mail commentsdirect to Wileys. Throughout the book, there are research-style exercises requiringstudents to access various databases and on-line journals in order to investigate atopic and retrieve information. Each chapter concludes with an extensive sectionof exercises of all kinds—there are the usual short numerical or discussion-stylequestions and problems, but the more interesting work is in the ‘Using YourJudgement’ section, where you find case studies, research exercises as mentioned

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above, writing assignments, group assignments and ethics cases. The amount ofwork which must have gone into the preparation of these sections is staggering—theywould provide enough tutorial/workshop material for many years without any needfor duplication. Overall, the sheer variety of exercises at the end of each chapterwill encourage students to develop a wide range of self-study skills and hopefullyinspire a deeper, more mature approach to the subject than most of us probablysee at present—how difficult it is to inspire second year accounting students whoturn up to tutorials, not for any lively debate and discussion, but to find out whatthe ‘right’ answer is!

Another imaginative aspect of the book is the periodic addition of short articlesby invited authors—these cover subjects such as international standard setting,women in accountancy careers, ethical issues and small business accounting—andthe ‘From classroom to career’ narratives by trainee or newly-qualified CPAs, whichgive students an insight into the pressures they will face if they decide to go forprofessional qualification, and the kinds of work they might be doing. The book isgenerally career-focused, since the authors point out at the start how important theintermediate stage is for students deciding whether or not to pursue an accountancy-based career. The Web site talks of the book ‘powering each new generation ofbusiness careers’. This book, with its emphasis on computer-based learning andtopical issues, clear and colourful use of tables, diagrams and examples, its in-troductions to real-life companies and individuals, portrays a very enticing picturefor accountancy students.

The major draw-back for UK lecturers considering using this book is, of course,its US bias. The text is based on FASB statements and US GAAP. There are token‘International Insights’, brief notes in the margins from time to time, mentioninghow items are treated elsewhere in the world, but these amount to nothing morethan a perfunctory nod in the direction of international accounting. The chapterson income statements, balance sheets and statements of cash flows are of little useto students looking at financial statements based on the Companies Act. Theinventory chapter is obviously LIFO-orientated and talks about valuing stock atthe lower of cost or ‘market’. The chapter on fixed assets ignores revaluation ofland and property, the chapter on goodwill and intangibles outlines treatmentsdifferent to UK standard practice. Accounting students, frequently confused byaccounting terminology, would be even more perplexed by the very different USjargon. The tone of the book is often overly jingoistic, for example:

‘The system of financial reporting in the United States is generally considered thefinest in the world.’ (page 1366)

‘. . . the UK wants to establish a policy that says no amortization for goodwill . . . Inthe U.S., we would find that to be a big step backward.’ (page 32) (Someone shouldtell him about FRS 10, perhaps.)

In addition to the problems of national differences, there are some gaps inthe contents, the most glaring being no mention of group accounting (businesscombinations are accounted for differently in the USA anyway), which wouldnormally form a significant part of any intermediate course in the UK. The sectionon earnings per share is rather scant, as is brand accounting and financial statementanalysis. There are no sections specifically on international reporting or social

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and environmental reporting, segmental reporting isis ignored. Yet despite theseomissions, the book covers relatively obscure topics, such as accounting for computersoftware costs and ‘quasi-reorganizations’.

Compared to its UK counterparts at this level, namely Elliott and Elliotts’‘Financial Accounting & Reporting’ (Prentice Hall), Lewis and Pendrills’ ‘AdvancedFinancial Accounting’ (Pitman Publishing), and Alexander and Brittons’ ‘FinancialReporting’ (International Thomson Business Press), this book appears dynamic,immensely readable, and enjoyable. It is more than a book—it offers lecturers acomplete package to cover all teaching and assessment needs, and shifts the focusback onto students to take a greater responsibility for learning (Kieso & Weygandtincorporated recommendations of the US Accounting Education Change Com-mission to involve students more in the learning process), which has to be a goodthing for lecturers and students alike.

There are numerous other US texts coming onto the UK market (e.g. Chasteen,Flaherty & Connor ‘Intermediate Accounting’, published by McGraw-Hill), but atthe end of the day, they, like this one are probably just too US focused to be worthconsideration for a UK-based course. In addition, students may complain aboutthe price (at £29.95 it is £6–8 more expensive than the UK books mentionedabove) and the sheer size of the book, while lecturers may find the contents lackingand be concerned about extra pressure on computer resources. Nevertheless, thisformidable book surely sets the standard which UK authors must aim for whenwriting accounting textbooks for the next century.

JOANNA STEVENSONUniversity of Stirling

Witherspoon LimitedM A M C S

This case study requires students to assume the role of financial consultants andevaluate alternative investment options for a fictional pottery, the fortunes of whichhave declined in recent years. The options are either to purchase a new kiln orautomate the production line. The company cannot afford to do both, so man-agement requires a consultant’s report as to which should be adopted. The CDROM is accompanied by a user’s manual (with installation instructions) and ateacher’s manual. Once installed, the software consists of three parts: (i) anintroductory video in which Witherspoon’s managing director outlines the generalposition, followed by a factory tour; (ii) an animated overview of the productionprocess; and (iii) an ‘office’ where various documentation can be accessed (internalmemorandums, financial statements, a case history, the marketing plan, the or-ganization chart, and the operations and costing manuals). Students will quicklybecome aware that they have to know a great deal about the company’s operationsbefore they can even begin to make any recommendations: it becomes more thanan academic exercise requiring only ‘correct’ calculations.

The case study provides a stimulating and innovative teaching and learning aidwhich offers flexibility for both teacher and student. There is potential for use insecond and/or third year undergraduate programmes as well as postgraduate courses,

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either as the main focus of a module with accompanying lectures, or as an individualor group based case study. The multimedia technology enables students to interactwith subject matter and in a non-linear manner: the video and sound facilitiessimulate real-life situations and locations which allow the student to revisit themas many times as desired and in any order. The video tour of the pottery factory,for instance, shows the actual manufacturing processes, which a more conventional,paper-based case study could only describe. Thus, the student can almost enter abusines environment, a facility which is enhanced by the opportunity of hearingcertain directors speak. The ‘office’ not only permits access to business docu-mentation which can be read, but also allows it to be printed off in hard copy forfuture in-depth perusal and analysis. Access to spreadsheets for their own work isavailable to students by clicking on the ‘office’ computer. A section of tutorialscovers a range of topics (activity-based costing, investment appraisal, capital assetpricing model, a guide to case study analysis and report writing tips) which arenecessary to provide the required report to management. The section on reportwriting is particularly useful. Working through the case on their own or in smallgroups should help students to learn independently at their own pace. In additionto subject-specific skills in management accounting, they will be able to developmore general transferable skills, such as analysis, report writing etc. Students shouldswiftly become aware of the need to consider the relationship between managementaccounting and other disciplines they may be studying as part of their degreeprogramme, for example, human resource management, organizational behaviourand marketing to name but a few. Modularization of degree programmes has meantthat students sometimes see their courses as segmental, ‘stand-alone’ moduleswhich are studied in isolation from other subjects, and hence the links with othersubject areas and the interdependence between them are not explored. This casestudy actively discourages this.

The teacher’s manual accompanying the case provides additional material (typ-ically letters or memoranda) which can be used to give the material read on screena substantially different focus. This is helpful in providing variation if the case isto be used consecutively over a number of years or with different groups. Thismanual also stresses throughout that there is no one ‘right’ answer to the case, buta range of possible answers which should be judged by how well the students haveused and analysed the available material in support of their proposed solution.The available material is, the authors say, deliberately partial, ambiguous andcontradictory, thus requiring students to make sense of it, and make assumptionswhich will need to be justified. Thus, the case moves away from the idea ofproviding perfect information with a pre-defined solution (inherent in many ac-counting questions) to a realistic business environment in which students learn toappreciate that issues and information are frequently unclear.

The user’s manual suggests that the case may be used on a network as well ason a stand-alone PC. The multimedia aspects require high-performance equipment,if maximum benefit is to be derived, though even with this, some of the videoproduction seemed a little blurred—but not distractingly so. As the authors state,in a network environment, headphones are essential so that the sound productiondoes not disturb other PC users. Studying the case in depth will require severalsessions with a PC (some probably lengthy), either individually or in groups, toenable the students to become fully familiar with the material. It will be veryimportant for any purchaser to ensure that the appropriate facilities are available

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to deliver the case effectively to students in terms of equipment and time availablein computer clusters.

JANE FRECKNALL HUGHESUniversity of Leeds

Dan M. Guy, Douglas R. Carmichael and O. Ray WhittingtonA S—A IJohn Wiley £21.95This American textbook is intended principally for external auditors, although thepreface indicates that it should also be useful for internal auditors. The authors’estimation is that it should be easily understood by an entry-level auditing studentwho has some basic knowledge of business statistics. Each chapter is prefaced bya comprehensive list of learning objectives, and the authors provide a suggestedoutline for a course of 10 lectures of one and a half hours each. By the time thestudent has worked through the book, he or she would be equipped with enoughknowledge of statistical sampling for audit applications to cover all likely cir-cumstances. Each chapter contains a glossary of terms, a set of review questions,multiple choice questions from professional examinations and a set of longer casestudy type questions, supported by a disk of spreadsheet-based programs. Thebook is extremely well organized; it leads the student through the various waysof selecting representative samples using comprehensive and easily understoodexamples. It explains clearly attribute sampling, variable sampling for accountingestimation, variable sampling for audit hypothesis testing and probability-pro-portional-to-size sampling (more familiar to some as cumulative monetary amountsampling). The final chapter deals with non-statistical audit sampling, and, as wellas drawing the distinction between statistical and non-statistical methods, explainshow to determine a valid sample size and how to evaluate misstatements whenusing judgemental techniques.

The book deals only with audit sampling as part of the process of auditing. It isuncritical of the audit process, and provides no background debate upon the useof sampling, the validity of sampling methods used in practice, or any commentupon behavioural factors which may influence sampling effectiveness. For example,there is no reference to any of the literature upon the adverse effects of pressurecaused by tight budgets upon the behaviour of auditors in the field (e.g. Willett &Page, 1996 in the UK). Similarly, although alpha and beta risks are carefullyexplained and evaluation of errors found in substantive testing of a statisticallyselected sample is illustrated, there are few indications of the vulnerability of theevaluation to human misunderstanding and error.

Although I found this book easy to follow and comprehensive in its coverage, Ifind it difficult to imagine that it would be much used on either academic accountingor professional courses in the UK. Even where, at undergraduate level, the auditingoption runs over 2 years, there would probably not be sufficient space to cover theten lectures envisaged by this book. To an even greater extent than ever before,undergraduate students expect to have to buy no more than one book per moduleor course unit, and many of them would rebel at a request to buy a supplementarybook for audit sampling only. Lecturers are likely to recommend to their studentsa single volume text which provides good coverage of a wide range of auditing

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topics, for example, ‘Principles of External Auditing’ by Porter et al. (1996); thechapter on audit sampling in that text, supplemented by the lecturer’s own noteswhere applicable, would be sufficient for most purposes. Professional course studentsmay have encountered sampling techniques in practice, and may find the contentof this book of practical interest. However, professional course students expect inmost cases to read only a manual specially written to cover the contents of thecourse; they are resistant to the notion of background reading. Therefore, this bookis likely to be a library choice, indicated for supplemental reading only. Becauseanswers to the questions at the end of the chapters are available only in a separateteacher’s booklet, students are unlikely to feel motivated to answer them. So,although I find this book to be authoritative, well written, well structured and easyto use, I feel that it is of limited use in a UK context.

It will be clear by now that this text is definitely and exclusively located withinthe field of audit process. I would have found it very useful 20 years ago when Istarted my training with a large accounting firm which was a leader in the use ofstatistical techniques in audit sampling. However, auditing has moved on sincethen, and the extent to which a new non-relevant graduate would find the auditsampling text of practical help has perhaps lessened over the years. At the NationalAuditing Conference held in Glasgow in March 1998, Philip Ashton, a PriceWaterhouse partner, explained how he saw the development of auditing over theperiod of almost 40 years since the early 1960s. Detailed substantive testing hasdwindled in importance over this period; taking its place by the 1990s are a higherlevel of analytical review and compliance testing of high level controls (NB: theobservation about analytical review is borne out by Fraser et al., 1997, who observeda substantial increase in analytical review in firms of all sizes since the early 1980s).The new audit methodology requires much more explicitly than before the exerciseof auditor judgement about the competence of management to impose control,and downplays the importance of amassing voluminous quantities of evidence inthe form of detailed substantive and compliance tests. The use of large numbersof new graduates as cannon fodder for the expensive process of preparing theappropriate number of working schedules per client is therefore outmoded. Thechange has come about, no doubt, because of the economic pressures upon thefirms which have squeezed budgets to the point where the parameters of the activitysimply had to alter. A further contributory factor to changing methodologies is thatthe credibility of private sector financial audit has suffered because of the scandalsof the 1980s and the inadequacies identified in audit practice. To some extent, ofcourse, the change reflects what was always the underlying reality; the evidencecollection process had some value in demonstrating to the client at all levels of theorganization that the audit fee was being spent on obvious activity, and the businessinvolved in the audit process, producing a pile of files full of important lookingworking papers, performed the function of reassuring both audit and client staffalike that work of significance had been going on. However, behind the apparentlypurposeful activity, an audit partner would make the really important decisions,based, one supposes, not only, or even mostly, on the basis of files full of pains-takingly-documented evidence, but also upon a set of judgements about relativerisks and the quality of the client management. Very often, the more important thejudgement, the less fully it was documented, although in recent years there hasbeen some attempt to superimpose an apparently rational model upon selectedaspects of judgement. The audit risk model was developed as a kind of algorithm

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for formalizing and recording the process of judgement in audit planning; it willbe interesting to see if and how other algorithms emerge from practice as a meansof documenting judgement in significant areas.

There may be some important implications for the work of academics in thefield of auditing. It follows that where judgements as opposed to other forms ofevidence becomes pre-eminent, then what the auditor does in visibly collectingevidence become less important than who the auditor is and how he or she exercisesjudgement. The type of high-level assessment of the quality and ability of clientmanagement which Philip Ashton was talking about can be developed only throughyears of experience. As teachers of auditing, we may have to alter the emphasis ofour courses to focus less upon how to collect visible forms of evidence and moreupon characteristics of judgement and of the effective audit practitioner. This willinvolve a much broader subject base and a move away from the perception ofauditing as a set of techniques with a rational basis towards the softer areas ofhuman behaviour and psychology and a greater emphasis upon individual valuesand the ethics of the profession. Also, the emphasis changes where we are notpreparing students for a working life in auditing in the future; partners are nolonger so ready to foot the bill for training and the traditional route into accountingand auditing via the large firms is becoming less important.

Amongst the significant drivers of the content and structure of auditing coursesin the undergraduate syllabus are (not necessarily in order of importance): firstly,the availability of exemptions from professional examinations; and secondly, theavailability of suitable materials to support the course delivery and also, the lecturer’sown experience of practical audit work, if any. (The availability of outside speakersmay also influence course content and delivery.) These drivers tend towardsperpetuating courses which concentrate upon external audit in the private sector,which is a curiously and increasingly limited approach to dealing with the phe-nomenon of audit. Power (1997) refers to the ‘audit explosion’ which has takenplace across so many organizations in Britain, whilst noting the paradox of financialauditing: ‘it has never been a more powerful and influential model of administrativecontrol than now, at a time when many commentators talk of an auditing crisis’.For a lecturer, there is much to be gained from introducing to students Power’sinsights into the philosophy and sociology of auditing, and the literature producedby the radical critics of the auditing profession such as Sikka, Willmott and Mitchell.However, if much time is to be spent in consideration of the most recent interestingideas about audit, it is at the expense of inclusion of the technical material whichis important for accreditation; this creates a conflict which may not easily beresolved.

How is auditing reflected in the current research literature? A useful way ofassessing the nature and scope of research in a given area is to conduct contentanalysis of relevant journals. I have not undertaken this extensively in the field ofauditing, but for the purpose of this review I have conducted a rudimentary analysisof the content of two significant accounting journals for the last 5 years: BritishAccounting Review (BAR) and Accounting, Organizations and Society (AOS). In bothcases, the content of 15% of the total number of articles appearing over the 5 yearscould be classified as principally to do with auditing (I count 26 articles on someaspect of audit in AOS and 14 in BAR over the 5-year period). The two journalsdiffer in that approximately half of the articles on auditing subjects appearing inBAR originate from the UK, but less than a quarter of the AOS auditing articles

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are written in, or are about auditing, in the UK. Articles from the USA accountfor a large proportion of non-UK articles, and are for the most part accounts ofempirical, often experimental, studies of auditors. In virtually all cases of empiricalwork (i.e. not only US studies), the subjects studied are external auditors workingin private sector company audit. Articles which do not report on empirical workinclude issues such as auditor liability, auditor ethics, the use of new technologiesin audit, and self-regulation by the profession, but these are few in number. Otheraspects of audit (financial audit in the public sector, internal audit and social audit,for example) are accorded little attention. The impression from this limited reviewis that much attention is given by researchers to practices in private sector auditfirms (especially the large ones) but that there is little coverage of the fallout of the‘audit explosion’, or of practices in internal and public sector audit. A moresubstantial study of the content and direction of auditing research would constitutean interesting project in itself; this brief review tends to support my impressionthat the scope of published auditing research may be somewhat limited and thatthere are potentially fascinating areas for further exploration.

CATH GOWTHORPEUniversity of Central Lancashire

ReferencesFraser, I.A.M., Hatherly, D.J. & Lin, K.Z. (1997). ‘An empirical investigation of the use of

analytical review by external auditors’, British Accounting Review, Vol. 29, No. 1, pp. 35–47.Porter, B., Simon, J. & Hatherly, D.J. (1996). Principles of external auditing, Chichester, John

Wiley & Sons.Power, M. (1997). The Audit Society, Oxford, University Press.Willett, C. & Page, M. (1996). ‘A survey of time budget pressure and irregular auditing

practices among newly qualified UK chartered accountants’, British Accounting Review,Vol. 28, No. 2, pp. 101–120.