Social Relations and the Differential Local Impact of Global Standards: The Case of International Standards on Auditing
Abstract
This article contributes to the literature exploring the contextual conditions that lead international standards to produce a differential impact with regard to inducing convergence in local practice. The article documents three types of responses by local audit firms to the implementation of International Standards on Auditing (ISAs) in Russia, namely: (1) those that claim to follow the national auditing standards modelled on ISAs and mandated by audit law; (2) those that voluntarily provide ISA audits in accordance with original ISAs; and (3) those that provide pseudo audits (‘black audits’) and ignore auditing standards. The study investigates a link between these different responses and the degree of the indigenous firms' social embeddedness in relation to the international audit firms that first introduced ISAs to Russia. The article argues that the higher the embeddedness levels the more likely the audit firms will genuinely commit to following the standards. It also shows that social embeddedness is influenced by a number of conditions, including geographical proximity between the indigenous and international audit firms, as well as commonalities in their professional characteristics, such as aspiration to intraprofessional status and target clientele. The study's findings demonstrate that the local impact of international standards is dependent not just on the characteristics of the local institutional environments in which the adopters operate but also on the social structures and relationships within which they are embedded.
Introduction
Many studies have documented the proliferation of international accounting and auditing standards in the modern globalized world (Roussey, 1996; Bennett et al., 2006; Kotlyar, 2008; Brown, 2011). The importance of these standards in the building of the new international financial architecture has been reinforced as a result of the global financial crises of the last 20 years (Humphrey et al., 2009). What appears to be happening now is a shift in rhetoric from discussing adoption of international standards to a realization of the importance of compliance with standards. The extant literature provides ample evidence suggesting that the actual outcomes of the international accounting and audit standardization projects vary not just across countries but also significantly differ from those intended (Nobes, 2006, 2011; Walter, 2008; Daske et al., 2008, 2011; Leuz, 2010). Some scholars, for example, warned of the existence of a ‘compliance gap’ (Walter, 2008, p. 43), especially in developing environments, in terms of differences between desired and actual compliance with international standards despite significant pressure from global regulatory and market institutions. Among the likely causes of such differences are the characteristics of not just the standards themselves but also of the standardization environments. Leuz (2010) points to the significance of the elements of a country's broader institutional infrastructure that serve as the contextual conditions that can significantly modify the intended impact of international standards. Prior research has identified a number of such contextual factors, including: a legal and judicial system, such as securities laws, tax rules, and commercial codes (Bushman and Piotroski, 2006; Zeff, 2007; Holthausen, 2009); market forces, such as the size of the country's capital market versus its public debt (Ball et al., 2003); a political system, such as the extent of government involvement in regulation and internal politics (Ball et al., 2003; Zeff, 2007; Walter, 2008); law enforcement practices (Daske et al., 2008, 2011; Holthausen, 2009; Byard et al., 2011; Landsman et al., 2011); traditions and culture (Gray, 2005); the level of education (Judge et al., 2010); and the residual effects of previous practice rules replaced by the new standards (Eden et al., 2001). It has been argued that these environmental conditions create incentives that shape the local adopters' behaviours and attitudes towards international standards (Ball et al., 2003; Bushman and Piotroski, 2006; Daske et al., 2008, 2011).
This study contributes to the literature by providing further insights into the effects of environmental influences on the dynamics of standardization. The article's empirical focus is on the standardization of Russian auditing along the provisions of International Standards on Auditing (ISAs) developed by the International Auditing and Assurance Standards Board (IAASB).1 With reference to a common view of standardization essentially as a process of dissemination of knowledge about best practice (see, for example, Brunsson and Jacobsson, 2000), the study explores how the local audit firms' social ties influence the outcomes of such a process. The reference to ‘outcomes’ does not mean that the study seeks to determine the level of local compliance with auditing standards or indeed the quality of audit reports before and after ISA adoption, but rather to establish local audit firms' perceptions of, and stated commitment to, following the standards.
The study shows that the adoption of ISAs has so far produced divergent responses by Russian audit firms. Specifically, three types of responses have been identified, namely: (1) firms that voluntarily provide the so called ISA audits; (2) firms that commit to the ‘minimum’ required by law, which is compliance with the national auditing standards; and (3) the so called ‘black auditors’ that show a complete disregard of auditing standards. The study employs a qualitative research methodology together with a social network perspective to explore the relationship between these different responses to standardization and the local audit firms' social embeddedness in relation to members of the international audit firms that first introduced ISAs to Russia (Granovetter, 1973, 1985; Davis, 1991; Davis and Greve, 1997; Gulati and Gargiulo, 1999). The article argues that the higher the embeddedness levels the more prone are the local firms to show genuine commitment to following the standards, and identifies the conditions that influence social embeddedness. Among such conditions is geographical proximity (Yeung, 1998) between the local and international audit firms, as well as similarities in their professional characteristics, such as their aspiration to intraprofessional status and the target client base (Abbott, 1988). This analysis provides an alternative rationalization for the local sources of a differential impact of international standards, which has so far been overlooked in prior literature. Specifically, the article points to the need to see the local adopters' behaviours and attitudes towards international standards as not only shaped by the institutional environments in which they operate but also by the social structures and relationships in which they participate.2
ISAs in Russia—Some Historical Background
The introduction of a financial statement audit and the adoption of ISAs in Russia were part of economic reforms that started in the second half of the 1980s and continued into the post-Soviet period. As has been shown in prior works by Mennicken (2008a, 2010) and Samsonova (2008), the first legislative acts where the term ‘auditing’ was mentioned in Russia were the state Decrees (Nos 48 and 49 of 13 January 1987) on joint venture operations, both prescribing that ‘checks of financial and commercial activities of joint ventures on the correctness of tax calculations are carried out by a Soviet self-financing audit organisation for pay’. Mennicken (2010, p. 338) points out that in this regard the Decrees were effectively the ‘official point of departure for Russian audit development’, marking the beginning of the time when ‘financial controls were no longer exclusively carried out through the control apparatus of the state’. The demise of the Soviet Union in 1991 and the subsequent emergence of the new Russian state under President Boris Yeltsin brought further relaxation of state controls and their gradual replacement with market-oriented governance structures with the aim of stimulating private business undertakings (Gustafson, 1999; Kotkin, 2001). At this time, what became widely known as the shock therapy (Gaidar, 2003) began—a program of economic reform designed along the principles of neoliberalism with radically diminished state intervention. The program triggered, among other things, the privatization campaign that began in July 1992 and the establishment of the country's capital market (Gustafson, 1999; Westwood, 2002). The common winners of privatization were company insiders and party nomenklatura who used their political affiliations to obtain exclusive control over privatized companies. This was a period of massive embezzlement and unlawful sales of corporate assets when quick fortunes were made (Kotkin, 2001; Stroev, 2002). In contrast to the initial goal of commercializing the economy and dispersing business ownership, privatization led to monopolies in most key industries. Ledeneva (2006) shows how large industrial enterprises dominated the market and funded (effectively bribed) the state in exchange for monopolized controls. These events set the scene for the corporate environment of today's Russia dominated by insider ownership and hindered by bureaucracy and multi-layered corruption (Ledeneva, 2006).
In Russia's turbulent post-Soviet economic realities, the practice of auditing had to play a significant role (Enthoven et al., 1998; Enthoven, 1999; Mennicken, 2008a, 2010; Samsonova, 2008, 2009). In many respects, it was an order-making tool for disciplining the emerging private sector with its extreme imbalances, while at the same time gradually loosening some government controls (Petrov, 2000; Shokhin, 2002). In this sense, the aim of auditing was to ‘redefine the roles of the state, enhance efficiency, reduce bureaucracy and extend rationalities of market-oriented exchange and accountability’ (Mennicken, 2010, p. 338). The first Russian audit firm was established in 1987 as a result of the issuance of the aforementioned Decrees on joint ventures, followed by a rapid growth in the number of audit firms and practitioners in subsequent years.3 However, accounts of that period (Terekhov, 2003; Guttseit, 2003; Sokolov and Terekhov, 2004; McGee and Preobragenskaya, 2005) show that Russian audit beginnings were significantly influenced by the Soviet accountancy culture that emphasized state revision4 (the pre-existing means of financial control over Soviet enterprises). Specifically, in the early 1990s, when auditing had just emerged, the vast majority of first auditors previously had years of experience as enterprise accountants or state revision inspectors. This led to revision techniques often being integrated into developing audit practice and to auditing itself being seen as a monotonous routine concerned with ensuring that company reports complied with government directives and regulations (Danilevsky et al., 2001; Guttseit, 2003; Remizov and Podlesnyh, 2003).
One of the effects of post-Soviet economic liberalization was that it opened doors to Russia for the international audit firms—the then Big 6 firms (now Big 4),5 Grant Thornton and BDO—that all opened their offices in the country in 1989 and the early 1990s (Alon and Dwyer, 2012). Internationally, these firms have long been known for their strong reliance on ISAs as a methodology (Robson et al., 2007; Humphrey and Loft, 2010), which has been instrumental in their ability to achieve a dominant position in the global audit market (Cooper et al., 1998; Barrett et al., 2005; Cooper and Robson, 2006; Suddaby et al., 2007). Likewise, soon after their arrival in Russia, the firms, notably the then Big 6, became leaders in the local audit market. In 1995, for example, one of Russia's reputable business periodicals heralded ‘the magnificent six conquer the sixth part of the world’ (Kommersant No. 47, 16 March 1995). Importantly, the international auditors initially were the only firms providing so-called ISA audits, that is, audit checks carried out in full compliance with original ISAs as issued by the IAASB, targeting mainly the Russian arms of multinational companies and also indigenous companies with international capital influence. Such firms effectively were ‘ISA pioneers’ in Russia as they arrived at a time when local firms had no, or very limited, knowledge of a standardized audit process, let alone international standards of practice. Also, it was not until after their arrival in Russia that the country's audit regulator—the government's Finance Ministry—endorsed, in 1993, a first set of 37 national auditing standards based on ISAs. Pyatenko (1998, p. 9, cited in Mennicken, 2010, p. 343) notes in this regard that ‘[i]n the eyes of the Russian reformers and new auditors, the big firms “demonstrated the need for professional services”’ and strengthened ‘the belief that the establishment of private audit firms constituted an appropriate response to the political and economic reform demands’.
Mennicken (2008a, 2008b) and Samsonova (2008, 2009) emphasize that the intention of developing national auditing standards based on ISAs was to move Russian audit practice away from the traditions of Soviet revision towards the ‘forms of Western-oriented audit professionalism’ (Mennicken, 2008a, p. 393), and also, to fill a ‘regulatory vacuum' (Samsonova 2009, p. 549) that occurred after the old system of financial reporting was dismantled. The adoption of ISAs was also promulgated by international agencies, such as the World Bank (WB) and the International Monetary Fund (IMF) (Stroev, 2002; World Bank, 1992, 2002), both of which Russia joined in 1992. Samsonova (2009), however, demonstrates how the Russian government officials' reference to the first auditing standards as ‘ISA equivalents’ was an overstatement as they were highly prescriptive and contained additional provisions. In addition, the use of the standards was voluntary. Therefore, in more recent years, the focus of audit standardization has shifted towards ensuring that auditing standards were used by all auditors, and also, towards moving the standards closer to ISAs. Such a focus on greater convergence with international standards was also reinforced in the wake of the 1998 Asian financial crisis, which renewed calls inside Russia and elsewhere for more economic transparency (Wright et al., 2003; Judge and Naoumova, 2004). Consequently, in 2001, the audit law (Federal Law on Auditing 2001) mandated the standards for all audit practitioners and firms. Also in the same year, a start was made on the development of the second set of national auditing standards more closely compliant with ISAs (Remizov, 2001; Remizov and Podlesnyh, 2003; Shneidman, 2005). As a result, many old standards have since been amended or abolished, and new standards have been introduced (recently, in response to the issuance of new clarified ISAs). The subsequent version of the audit law (Federal Law on Auditing 2008) reinforced the emphasis on achieving full compliance with ISAs.
In the context of Russian auditing, Mennicken demonstrates how, in order to work, ISAs need to be translated into the local auditors' daily routines (2008a, 2008b). Through interaction with one post-Soviet audit firm providing ISA audits, she explores ‘the different connections that are established between the standards, local practices, people and instruments, as well as the wider networks of actors, expectations and demands involved in defining what it means to work in accordance with international standards’ (Mennicken, 2008a, p. 389). Her later work (Mennicken, 2010) expands the above by exploring the significance of a broader societal context and the meaning of audit as a practice that only exists ‘in relation to other arenas of economic, political and social activity’ (p. 335).
One of the observations made by Mennicken of particular relevance to this study's objectives relates to the significance of auditors' existing identities and environments for their understandings and application of ISAs. Specifically, she argues in this regard that ‘ISAs often come to inhibit multiple, contradictory contexts’ (Mennicken, 2008a, p. 386), and that ‘it is the specificities of “the communities of practice” … within which the standards become circulated that define how ISAs should be used and interpreted’ (p. 390). Further, she portrays Russian auditing as ‘a differentiated environment’ (p. 401) in terms of auditors' views on what counts as auditing as well as the perceived objectives of standardization, noting two conflicting rationalizations—one where ‘auditing and auditing standards were promoted as a means to enhance state control and stimulate compliance with Russian taxation and accounting laws’ and the other drawing on ‘more capital market-oriented views, which regarded auditing as a control mechanism … to enhance the information content of financial statements for economic decision makers’ (p. 402). While acknowledging these contradictory trends, Mennicken's work nonetheless focuses mainly on the audit firms and practitioners that seek to demonstrate their commitment to the Western, capital market-driven approaches to audit practice and to voluntary use of ISAs. This study seeks to extend that work. In particular, by drawing on the imagery of standardization as a process embedded within social structures and relations (Davis, 1991; Davis and Greve, 1997; Gulati and Gargiulo, 1999), it will explore the reasons that lead some Russian audit firms to become more susceptible to the ‘contagion of ISAs’ compared to other firms, and also typify and rationalize other responses to audit standardization, including slower acceptance and even resistance to the standards.
Social Embeddedness and the Dynamics of Standardization
One way to view standardization is as a process of dissemination of expert knowledge about best practice (Brunsson and Jacobsson, 2000). Underlying this process are social relations in the course of which participants acquire an understanding of practice norms conveyed by the standards. Hence, the nature of such social dynamics is likely to have some bearing on the way in which standards spread as well as how they are received by local adopters.
the density of [social] ties among individual actors and the aggregate structure created by those ties … determine the route and speed with which practices will spread. Practices will spread more rapidly in dense networks than in thin ones, just as viruses spread faster in urban areas than in rural ones. (Davis and Greve, 1997, p. 7)
The density of social ties mentioned above—which is ‘the proportion of potential ties [between participants in a network] that actually exist’ (Lazer and Friedman, 2007, p. 677)—is one of the characteristics of social embeddedness. Different parts of the social network may have different density. Dense social relations are characteristic of the central players' effective network with whom they interact ‘most intensely and most regularly’ whereas ‘the remainder constitute the extended network’ (Granovetter, 1973, p. 1370, quoting Epstein, 1969, pp. 110–11). Furthermore, dense social relations between network participants have been linked to a higher likelihood of them developing relational proximity to one another, which is another characteristic of social embeddedness associated with ‘shared norms and values of conduct’ (Nooteboom, 1999, p. 144; see also Schamp et al., 2004). Of course there is also a reverse causality in the sense that relational proximity may in turn encourage more dense social interactions. Therefore, it may be expected that network participants in the effective network of dense social ties are more likely, compared to those in the extended network, to develop more quickly relational proximity to the centre and adopt the central players' norms of practice.
This study uses the above rationalization drawn from the social network perspective to explain the extant variation in the Russian audit firms' responses to ISAs and audit standardization in general. Specifically, it identifies the local audit profession as a social network where different forms of social relations between firms influence their practices and behaviours.6 Furthermore, it considers the arrival in Russia of the international audit firms as a starting point of standardization, and the firms themselves as the ‘centre’ of the social network because, as discussed in the previous section, they first introduced ISAs and the notion of a standardized audit to Russia and hence effectively kick-started the dissemination of knowledge of such an audit across the rest of the network.
This article's focus is on exploring the link between the indigenous firms' responses to audit standardization and the degree of their social embeddedness in relation to the international audit firms. The expectation here is that the knowledge of standards spreads faster across the international firms' effective network of social ties, so the local firms there are among the first to develop a genuine commitment to following the auditing standards. The rationale for this is that dense social relations characteristic of the effective network mean that such audit firms are more likely to develop relational proximity toward the centre and, as a result, adopt the central players' practice rules, such as auditing standards. At the same time, it is the ability of ISAs to penetrate the international firms' extended social network in Russia that determines how far the standards travel and how widely they are accepted and followed. Here, the article argues that understanding the conditions that determine the degree of the local firms' social embeddedness (characterized by the density of social ties and relational proximity to the international firms) may help to explain their varying responses to standardization.
Often, relational proximity has been linked to geographical proximity (Schamp et al., 2004; Yeung, 1998). Yeung (1998), for example, argues that the geographically specific localities that actors occupy influence their practice norms. Indeed, geographical distance is a strong impediment to relational proximity as it greatly restricts the development of social relations. In the words of Greenwood and Hinings (1996, p. 1036), peripheral actors may ‘lack the intensity of commitment to the status quo found in firms that are more centrally located’. Conversely, close geographical proximity to the centre yields an opportunity for establishing and maintaining dense social ties and, with time, relational proximity between network participants. Hence, the local audit firms' geographical proximity to (distance from) the international audit firms may influence their willingness (reluctance) to accept and follow auditing standards.
However, it clearly would be overly simplistic to suggest that all geographically peripheral indigenous audit firms are the ‘outliers’ in the standardization process. Schamp et al. (2004) argue, in this regard, that the social network perspective ‘can be criticized for overestimating the meaning of geographical proximity and underestimating other forms of proximity’, such as ‘professional proximity between experts who share a common understanding and frame of reference’ (p. 609). Indeed, the distinctive nature of auditing as a professional practice and the auditor–client relationship point to other possible drivers of relational proximity. In this regard, Abbott's (1988) work on the sociology of professions shows how the strategic behaviours of professional entities are determined by their actual or aspired to intraprofessional status, and also, by the demands of their target clientele (p. 117).
Abbott links status to the professionals' knowledge base, and hence, status ‘reflects degree of involvement with this organizing knowledge’. Here, ‘[t]he more one's professional work employs that knowledge … the more one enjoys high status’ (Abbott, 1988, p. 118). And so, as storage of global knowledge about best practice (Brunsson and Jacobsson, 2000), international standards may serve as an instrument for building a high intraprofessional status. In other words, the aspirations of some indigenous audit firms to gain a status enjoyed by the international audit firms may be an important driver of social relations between them. Here, stated commitment to following auditing standards may be both a sign of relational proximity to the centre developed over time as a result of dense relations and a means to demonstrate this proximity (and hence a high status). In contrast, other audit firms may lack these status aspirations, and consequently, a motivation for developing social ties with the centre, which in turn may influence their attitudes to standards.
Furthermore, common demands of the target clientele of international and local audit firms may also influence social embeddedness levels. Abbott (1988, p. 122) argues that professionals tailor their strategies in ways that better serve their clients' expectations. This involves performing the tasks, acquiring the appropriate skills, and adopting the practice norms that are believed to yield easier access to what professionals consider to be their target market niche. Therefore, a shared client base provides a strong stimulus for developing social ties, so international audit firms are likely to have denser relations with those indigenous firms that target a similar type of clients, specifically companies with international capital influence. Conversely, divergent client demands may restrict opportunities for developing social ties between some local firms and the centre, hence potentially reducing such firms' exposure to ‘the world of ISAs’. Therefore, it is important to explore the relationship between audit firms' responses to standardization and the audit needs of their clientele.
Research Methodology
Fieldwork for this study covers a 10-year period from 2003 to 2012 and was conducted in three stages; the total period spent in Russia was 21 weeks (see sources of empirical data summarized in Table 1). During the first stage (early 2003), I reviewed documentary data, including business and professional periodicals, manuscripts, reform project reports, and policy documents issued by the Russian Finance Ministry and audit professional bodies. The objective was to form a preliminary understanding of the Russian audit market, key developments with regard to audit standardization, and audit firms' general sentiment toward auditing standards. It was through the document analysis that variation in the audit firms' responses to the standards was first identified. Specifically, in addition to the majority of audit firms that became mandatory adopters of ISAs as a result of the issuance of the 2001 audit law, two other, smaller audit groupings were identified that were noticeably different from the rest. In the first grouping were audit entities referred to in Russia as ‘черные’ (‘black’) or ‘pocket auditors’ that, as a Russian audit scholar Guttseit describes, do not ‘carry out a proper audit check and issue a “clean” audit opinion on financial statements despite knowledge of their fraudulent nature’ (Guttseit, 2004, p. 63). Such audits therefore represented cases of complete disregard of auditing standards. Furthermore, document analysis showed that audit malpractice and ‘black’ audits were systematically considered more common ‘in the regions’ (a term used to refer to the country's provincial periphery). The other audit grouping identified consisted of audit firms that, in addition to audits compliant with the national auditing standards, also chose voluntarily to offer the so called ISA audits compliant with the original ISAs. The extant literature drew parallels between such firms and the local practices of international audit firms as ‘colleagues–competitors’.
| Documents | |
| ✓ Professional journals and periodicals, reports by transnational agencies (the World Bank, IMF, EU) | |
| ✓ Policy documents issued by the Finance Ministry and professional auditing associations | |
| ✓ Audit market reviews and ratings | |
| ✓ Tacis Project materials | |
| Interviews | |
| Auditors | 36 |
| Presidents of professional accounting bodies | 6 |
| Government official | 1 |
| Academics | 4 |
| 47 | |
| Observations of professional gatherings | |
| ✓ Meetings held by professional auditing associations | 2 |
| ✓ Practitioner workshops | 4 |
| ✓ Presentations at the Tacis ‘Implementation of Auditing Reform in Russia’ conference (January 2005, Moscow) | 14 |
| 20 | |
During the second stage (2003–2005), document analysis was supplemented with participant observations and active interviewing. The preliminary findings during fieldwork motivated the choice of the social network literature as a theoretical frame to explore how audit firms' commitment to following the standards is influenced by their social relations. Importantly, during data collection, the objective was to trace the effects of such relations between local and international audit firms as they drive the dissemination of knowledge of standards across an audit network. Hence, the social dynamics taking place at the level of an audit firm was left outside the scope of this study and should be subject to a separate investigation.
Several observations of auditor professional gatherings were carried out, including an international audit reform conference held in Moscow in 2005, which provided an opportunity to witness social interactions between audit firms in a natural setting. Also, 31 face-to-face semi-structured interviews were completed with auditors, government regulators, presidents of the professional bodies, and university academics (see Table 1). The duration of the interviews ranged from 40 minutes to two hours. Many interviewees took an active part in audit reforms, produced books and publications in practical journals, or were involved in teaching on various auditor training programs. The vast majority of the interviews were tape-recorded (unless the interviewee objected) and transcribed. The choice of the interview locations was deliberately made to trace developments in both Russia's urban centres (Moscow and St Petersburg) and outer regions (Khabarovsk city in the far eastern periphery). Perhaps unsurprisingly, none of the interviewees explicitly referred to him/herself as a ‘black’ auditor. Therefore, the portrayal of ‘black auditors’ constructed with reference to the extant literature was cross-verified through mainly third-party accounts provided by the interviewees to ensure that the findings are trustworthy.
Interviews were conducted in a way that not only captured audit firms' attitudes to standardization per se or stated commitment to following the standards (e.g., ‘Do you find standards relevant to your work?’ ‘Is there variation in the way standards are followed?’) but also the nature of social interactions to trace the sources of influence on such attitudes (e.g., ‘Who or what has the biggest influence on your firm?’ ‘What is your view of the influence that international audit firms have?’ ‘Does their presence in the audit market have any influence on your firm and how you do things?). I also asked questions to detect commonalities that could explain what drives social interaction (e.g., ‘Who needs auditing in Russia and why?’ ‘Can you describe your firm's typical client?’, etc). In the course of data analysis, I travelled back and forth between the theory and empirical data as a way to confirm, revise, or discard theoretical explanations for the emerging empirical evidence. On the basis of the interview transcripts, a list of thematic categories was developed to enable a systematic analysis of the interviewees' subjective accounts that were later developed in writing.
The last stage of fieldwork (2010–2012) involved further document analysis and 16 follow-up interviews. Three interviews were in person, and the remainder were telephone interviews. The aim was to trace recent developments, such as the effects of the 2008 financial crisis, and also to delve more into the reasons for why different audit firms are less or more socially embedded in relation to the centre (e.g., ‘Is being associated (working) with international audit firms important for you personally, for your firm?’ ‘Why is it so?’).
Thus, over the 10-year period, 47 interviews were carried out of which 33 were with practising auditors, including five with members of the international audit firms; 11 with auditors from the Russian firms providing ISA audits (one from Khabarovsk and the rest from Moscow and St Petersburg); and 17 with auditors who claim to observe the national auditing standards (10 of which were with auditors in Khabarovsk). Therefore, I believe that the study's findings are credible and representative, given the fieldwork is conducted in both Russia's urban centres and periphery, draws on multiple data sources to enable cross-checking, and covers a significant time frame.
The Effects of Social Embeddedness on Local Audit Firms' Responses to ISAs
The analysis that follows will apply the theoretical framework outlined above in order to explain the sources of variation in the indigenous auditors' responses to standardization, particularly focusing on the social ties between the local and international audit firms as ‘vehicles’ through which the knowledge of a standardized audit has disseminated across the local audit profession.7 More specifically, broad categories of ties will be discussed together with their effects on the local firms' stated commitment to following the auditing standards, including relations developing (i) as a result of staff mobility between international and local audit firms, (ii) within formal business partnerships, such as when indigenous firms join international audit firm networks, (iii) during conferences, open-access workshops and other educational events involving the international audit firms, (iv) in the framework of foreign-funded audit reform projects, and (v) in the course of joint audit engagements.
Standardization Dynamics within the ‘Effective’ Network: The Rise of ‘ISA Auditors’
Since they first came here, the big firms have been recruiting more and more among the Russian auditors. The big firms' influence on the Russian audit market was mainly through their work standards and their expertise in international audit methodologies. (An auditor from a firm providing ISA audits, Moscow 2012)
Before joining PwC in the early 1990s I had had some experience of working as a revision inspector. Revision was effectively a form of internal control, and we had no idea about things like sampling, materiality, or professional judgement in auditing. There was no one in Russia at the time other than international firms that I could learn these things from. (An auditor in a firm providing ISA audits, Moscow, 2012)
Our firm's strategy at that point was to create a pool of both young talent and experienced individuals from all sorts of backgrounds. Then they were put through intensive training programmes with one main objective—to erase many of the things that they had learned previously [smiling]. (An auditor in one of the Big 4 firms, Moscow, 2011)
In the beginning, their [international firms] function was something akin to missionaries who came to Africa to disseminate Christian beliefs among local tribes. (An auditor from a firm providing ISA audits, Moscow, 2004)
I had a clear idea that having work experience with the Big 4 would open up possibilities in my future career … besides, there were emerging a number of ambitious Russian firms that were eager to recruit people like me. (An auditor from a firm providing ISA audits, St Petersburg, 2005)
In addition, an important driver of social interactions between international and indigenous audit firms was the fact that, in the beginning, the rules required forms of collaboration, such as joint ventures. One example is BDO, which in 1992 entered the Russian market by partnering with the local audit firm Unicon, and has since been known as BDO Unicon. In addition, as soon as they arrived, international audit firms were eager to demonstrate their long term commitment to improving the standard of audits delivered by the local firms and raising such firms' awareness of international practice standards (such as ISAs) by, inter alia, hosting open-access professional training programs and educational events. In the first half of the 1990s, for example, Coopers and Lybrand, Deloitte and KPMG, together with the United Nations Centre on Transnational Corporations and the British Council, ran professional training programs on the Moscow and St Petersburg campuses of Russia's business schools and universities. Organized as a series of workshops, such programs were designed to develop a class of local audit firms with expertise in applying international accounting and auditing standards. Events like these presented such firms with a rare opportunity to learn from what one interviewee who took part in one such program termed ‘more senior colleagues’, referring to staff from the international audit firms.
They [international auditors] motivated us to improve ourselves. We wanted to prove we were no worse. (An auditor from a firm providing ISA audits, Moscow, 2004)
It was our managing partner … He did not choose to simply earn quick money. He went the longer way when he decided to establish a firm and develop its reputation, a firm that would eventually be able to compete with large international audit firms. (An auditor from a firm providing ISA audits, Moscow, 2004)
[In the mid-1990s] we saw more client businesses starting to go international, and their auditors had to follow suit by making sure they could offer the required expertise, including knowledge of ISAs. (A university professor and a former auditor, Moscow, 2004)
Furthermore, what the above analysis also shows is how the density of social ties between members of international and local audit firms continued to be visibly higher in Russia's cities of Moscow and St Petersburg. As noted earlier, dense social relations with central players are more likely to be established by network participants located in relative geographical proximity to the centre (Yeung, 1998). As a consequence, the impact of such ties was also greater in terms of creating opportunities for the audit firms in these locations to grow relationally closer to the centre and, as a result, to develop appreciation for ISAs (Granovetter, 1973; Nooteboom, 1999). Starting from the mid-1990s, one could see a handful of indigenous audit firms starting to market themselves as alternatives to international audit firms for their ability, like the international firms, to offer ISA audits in addition to audits in accordance with national auditing standards. As mentioned earlier, their acceptance of ISAs was voluntary and took place before the first ISA-inspired set of national auditing standards was mandated by the audit law in 2001. Among such firms interviewed during fieldwork, all were headquartered in Moscow and St Petersburg (where, as mentioned earlier, head offices of international audit firms were also located), which confirms that geographical proximity to the centre potentially could have been among the factors that contributed to the firms' stated commitment to ISAs (Yeung, 1998).
The audit process needs to be standardized. There should be rules, programmes, and instructions, and you need to teach your staff to understand and follow them. That's what we did in 1996–97. As a result, we lost some very experienced staff, former chief accountants and [Soviet] revision inspectors, who did not think it was necessary to have planning, audit documentation, or quality control … Although some clients adored them, with time, we realized that methods of their work conflicted with the firm's ambitions. (An auditor from a firm providing ISA audits, Moscow, 2004)
Nonetheless, one should not assume that the grouping of audit entities that may be referred to as Russian ISA auditors represent a homogenous body of firms and professionals. Some commentators, for example, argued that larger financial gains from more ‘prestigious’ and lucrative ISA audits was the only reason behind the enthusiasm with which some (particularly second-tier) audit firms declared their commitment to following ISAs, noting low trust of such audits from the international users (see the commentary by the country's reputable business periodical Expert).10
We have standards which are close to ISAs in their provisions and our Universities and professional bodies teach us how to use them in theory. So, we have many auditors claiming they know what auditing in accordance with international standards should be. What makes our firm different is that we have practical experience of doing such an audit. (Khabarovsk, 2012)
Hence, one can see a two-way relationship between the indigenous ISA auditors' social embeddedness in relation to the audit network's centre and their attitudes toward ISAs. On one level, social ties with international audit firms created opportunities for local firms to learn about ISAs. Here, geographical proximity (Yeung, 1998) directly increased the likelihood of such social ties actually developing. Furthermore, the above analysis also shows the significance of similarities in the Russian and international audit firms' professional characteristics and strategies (Abbott, 1988). On another level, commitment to ISAs displayed by the Russian ISA auditors has in turn encouraged their denser social interaction with the international firms. Mouritsen and Thrane (2006, p. 243) describe the nature of such interactions as occurring between ‘potential competitors’ that ‘cooperate in relation to the customer information, the development of new knowledge and, not least, the development of brand assets’. In this respect, Mennicken (2008a) argues that, in order to gain international acceptance and stature, adopting ISAs apparently was not sufficient. Russian audit firms providing ISA audits also had ‘to create further linkages to the international world, through international cooperation, the achievement of external accreditation and other internationally oriented activities’ (p. 404). One vivid example of such pursued linkages is the decision made by several Russian firms providing ISA audits to become members of international audit firm networks, such as PKF, MGI, Morison International, AGN International, DFK International, and many others. Membership in such professional alliances was not just designed to extend the firms' business opportunities but was also clearly driven by their status aspirations (Abbott, 1988) and a desire to demonstrate and authenticate, in a very public fashion, their expertise in ISA. Further, Samsonova (2009) also shows how some firms, together with their colleagues from international firms, fuelled the debate unfolding in the late 1990s about the overly prescriptive nature of the first set of auditing standards and their diminishing relevance to the rapidly evolving business realities. These audit firms became later involved in the capacity of experts in the drafting of the second set of the national auditing standards more closely compliant with ISAs. Such work commenced in the early 2000s and was carried out within the EU-funded Tacis Russian Audit Reform project where Russian audit firms were full-time partners to international project participants.
The above shows that, with time, the Russian providers of ISAs audits became seen not just as experts in ISAs and alternatives to the international audit firms but also part of the audit network's centre.12 Over the past years, such firms have consistently generated revenues comparable to those of international firms,13 not least because of the gradual expansion of their target client base or, in the words of Leonid Shneidman (head of the state agency in charge of audit regulation), ‘constantly growing numbers of auditees that compile their reports in accordance with international accounting standards’.14 Nevertheless, these firms still remain a minority (200 out of 6,200 audit firms (Finance Ministry, 2011)), with most concentrated in Moscow and St Petersburg (in the top 25 firms, only one firm is headquartered elsewhere).15
Extending the Geography of Standardization or Breaking Through the ‘Extended’ Network
The amount of methodological materials that have been issued within the project is unprecedented, and I personally, together with colleagues from the big firms, have travelled pretty much all over the country, noting a great deal of interest from the regional [audit] firms. (Moscow, 2004)
The training sessions provided a good opportunity for learning [about the auditing standards] … You often saw same faces there, I knew many of the auditors as members [in this professional institute]. (Moscow, 2010)
Standards have perhaps the most significant influence on how we [the firm] approach our work. … Auditors from my firm try and attend different educational events, including those devoted to the use of the standards … they are helpful in terms of keeping up with the developments. (Moscow, 2005)
We have local offices of the professional institutes here, there are also regional conferences and workshops …
Author: Do you attend similar events held in Moscow?
Auditor: We have a vast country and the eight hours that it takes to reach Moscow by air does not really help … we need to think about cost. (Khabarovsk, 2012)
I am sceptical toward the international firms. They don't understand our private sector, and they would not change their methods of work just because they work in Russia. (Khabarovsk, 2012)
Over the course of three years [1999–2001], I interviewed 26 audit firms in depth both here in Moscow, St Petersburg and Vladivostok. It was eye opening. I found local firms that didn't understand what audit working papers were or what standard documentation should be. Some firms had very weak methodology. It was more simply a checklist versus understanding what audit methodology truly is. (A former WB officer who was involved in an initiative concerned with identifying audit firms in Russia capable of auditing WB projects, Moscow, 2004)
Things that international auditors do which are in accordance with ISAs don't work here. For example, I do not find sampling particularly helpful. I prefer to check everything. (An auditor from a firm in Khabarovsk, 2012)
My impression is that the [new] standards are simply a translation of some foreign textbook. In my opinion, the standards are insufficiently informative and, at the same time, full of useless details. I mean that they contain a lot of information of a descriptive nature and very little practical information. (An auditor from a firm based in Moscow, 2005)
Our national auditing standards are being constantly revised … now they are even vaguer than before. (An auditor from a firm based in Moscow, 2012)
On the one hand, the above interview excerpts vividly demonstrate one of the fundamental challenges of global standards such as ISAs in that local audit firms struggle ‘to become comfortable with an identity which, to a large extent, is both offered and defined by the West’ (Mennicken, 2008a, p. 386). On the other hand, they also demonstrate that, apart from geographical distance, there appear to be other rationales behind the scepticism expressed by auditors from such firms about the usefulness of auditing standards to their daily practice. Specifically, the analysis of empirical data for the study suggests that the audit firms' responses to standardization are closely linked to the accounting and audit needs of their target clientele (Abbott, 1988). In this regard, it provides some further evidence to confirm and extend prior accounts of Russia's corporate reporting culture showing that it ‘was and still is much more focused on compliance with tax regulations and government decrees’ (Mennicken, 2008a, p. 402), resulting in a lack of voluntary demand for auditing. Indeed, the majority of audits carried out in Russia are a result of a statutory audit requirement.16 To a large extent, this reality has its roots in the nature of the country's economic and business environment. Widespread insider ownership mentioned earlier in the article has contributed to the low value of corporate disclosures as a reliable source of information about business performance (Judge and Naoumova, 2004). When trust is established through informal connections and personal relationships rather than an opinion from a ‘stranger’ (i.e., auditor), the perceived need for auditing becomes greatly diminished.
I think that the audits of SUEs present a fundamental problem for the Russian audit profession. These audits are very different from audits according to the international auditing standards. The profession will change dramatically when the requirement for SUE audits changes. To me, this type of audit is not necessarily about expressing an opinion [on financial statements]. There is very little room for materiality or things like subsequent events or going concern … some of these fundamental things are not part of Russian audits of SUEs. (An auditor who recently moved to Russia from North America and now works for a Moscow-based Russian audit firm that offers ISA audits, 2011)
This kind of audit is mainly performed by small audit firms. The clients there put a very different type of pressure on their auditors, and their understanding of audit quality is also very different. I would not expect them to find ISAs very helpful. (An auditor in a Big 4 audit firm, Moscow, 2010)
Our firm does not even try to participate in tenders for audits of SUEs because there the focus is on cost minimization, and what they would be willing to pay would not be enough to even cover our cost of doing an audit. (An auditor in an audit firm providing ISA audits, Moscow, 2011)
Hence, the analysis above has demonstrated marked differences between SUEs with their strong focus on tax compliance, and target clientele of audit firms providing ISA audits that rely on audited financial statements as a tool for boosting (international) investor confidence. From the social network perspective, the effect of such differences is that they have reduced the common basis upon which social ties (and potentially relational proximity) between ISA auditors and local firms that target mainly SUEs could be established and developed (Schamp et al., 2004). The interview data presented above show that, as a result of loose social ties, SUE auditors are both more relationally distant from the centre and have different expectations as to what auditing standards are supposed to provide. Specifically, they consider inference-based audit techniques that ISAs promote less relevant to their daily routines as SUE audits are not concerned with attesting fairness of accounting judgements but merely with checking the correspondence of accounting records with relevant tax laws.
Thus, any changes in the local audit firms' sentiment towards (and compliance with) the auditing standards are always going to be dependent on the respective changes in the accounting and audit needs of their clients. Recent years have seen two noteworthy developments that may have a potentially significant effect on the status quo. One is the amendments to the Russian audit law raising the statutory audit threshold17 that have already triggered further consolidation among the indigenous audit firms and pushed some smaller audit firms (that have been more often accused of poor compliance with auditing standards, see Finance Ministry, 2012b) out of the statutory audit market.18 The other development is Russia's commitment to implementing International Financial Reporting Standards (IFRS).19 The potential effect of these developments is that they are likely to increase the presence of ISA auditors in the market for statutory audit because the requirement to comply with IFRS directed at a wider range of Russian businesses will in turn boost demand for ISA audits. This, in turn, will provide further opportunities for developing and maintaining social ties between local firms and the centre.20
The Audit Underworld: Exploring the Audit Network's Periphery
While the above analysis reveals cases that highlight poor compliance with auditing standards, there is also empirical evidence pointing to the existence of non-compliance—so called ‘black auditors’, that is, local firms that completely ignore auditing standards. Over the years, concerns over their professional behaviours have been expressed in comments by audit regulators (Shneidman, 2005; Maximova, 2012), the professional and business press (Kapustin, 2001; Ivanova and Bogachova, 2003), and auditors themselves (Smirnov, 2005). The emergence of the ‘black auditors’ dates back to the start of the aforementioned post-Soviet privatization campaign in the early 1990s. During this time, some audit firms were established with the sole purpose of helping client company insiders to prepare and approve false financial accounts that undervalued company assets in order to increase insider ownership at a lower cost (Kapustin 2001; Sokolov and Terekhov, 2004). The majority of ‘black auditors’ have been set up as ‘individualniye auditory’ (individual auditors), that is, small businesses that have the legal form of sole proprietorship.
They [‘black auditors’] would prefer to be perceived by their clients as … [somebody] who would do what the client would want and keep client's secrets without asking questions and requiring high fees. (An auditor in a Moscow-based audit firm, 2004)
I am not saying that all auditors in the province are cheating … far from that … but I have travelled up and down the country enough to be able to compare. .. There are auditors that try to survive by all means, even if it means forgetting about ethics. (An auditor in Moscow, 2011)
I would agree with those who say that here [in province] there are more opportunities for this sort of behaviour. … We are far from the centre [of Russia] … and so the belief is that one can get lost easier … and some unprofessional individuals use it. (An auditor in Khabarovsk, 2011)
I know they [‘black’ auditors] continue to be a problem. I would not call them ‘audit professionals’, they are more of an isolated minority. (An auditor in a firm providing ISA audits, Moscow, 2012)
The interview excerpts above confirm earlier observations made by Russian commentators (see, for example, Guttseit, 2004) arguing that, while ‘black’ audit behaviours may be found in all parts of Russia, concentration of such auditors is highest in the country's outer regions. ‘Black auditors’ geographical distance (Yeung, 1998) from the centre seems to have significantly reduced the likelihood of them developing social relations with members of audit environments where a standardized audit is a norm (Granovetter, 1973; Davis and Greve, 1997). Furthermore, from the network perspective, ‘black auditors’ can be placed on the extreme end of the social embeddedness spectrum compared to other indigenous audit firms. In the course of the fieldwork, interviews were conducted in different years with several auditors displaying clear signs of relational detachment from the central players, although it was impossible to establish with confidence whether or not these interviewees were indeed ‘black auditors’. Some interviewees, for example, talked of ‘working with whatever clients I am able to get’ because ‘one has only oneself to rely on’ and that it is easy ‘for those guys in Moscow’ to think about standards as they are ‘spoiled for choice’ (in terms of having access to the ‘best’ audit clientele).
For some Russian businesses, an auditor is a requirement that needs to happen. They don't want related party transactions, don't want significant commitments disclosed, even the ownership fully disclosed. So, when you have something to hide, of course, the auditing is simply not needed. There are firms that simply look for auditors who give a clean opinion. (An auditor and a former World Bank officer, Moscow, 2004)
Client demands described above are highly distinct not only from those of the clients of ISA auditors but also of other Russian audit firms. Russian providers of ISA audits, for example, have emphasized their reliance on a rigid, standardized audit process as a way to access the ‘best’ (most lucrative) clients. In contrast, the interview excerpts above demonstrate that ‘black auditors’ do not view their clientele as a status symbol; nor do they see a high intraprofessional status as being central to their ability to retain clientele. It is their complaisant conduct and willingness to ignore professional ethics in exchange for an agreed fee that, in their view, best secures their survival. In this sense unethical behaviour is not just widespread but is at the core of the ‘black audit’ firms' business model and therefore systemic. Arguably it is a key factor that has contributed to such firms' social detachment and resistance to standardization (Schamp et al., 2004).
The attempts of the audit regulators have so far failed to eradicate ‘black’ audits. Since 2005, for example, the government has run an external quality control review program, which prescribed that audit firms submit annual activity reports to the Finance Ministry. But these contain mainly descriptive data (such as audit firms' staff structure, membership in the professional auditing bodies, or types of audits carried out) that are insufficient for any objective assessment of the audit firms' actual performance. Also, the audit law now requires that the professional auditing bodies subject their members to regular mandatory quality control checks. However, the rigorousness of such checks has been undermined by intense competition among the bodies for potential members. Furthermore, auditor liability rules that would make it possible to hold auditors liable for providing substandard services have been quite difficult to apply. Samsonova (2008), for example, argues that Russia's Civil and Criminal Codes, as well as audit-specific regulations, limit auditor liability to that stipulated in the contract between audit firms and their clients (company management), making it often impossible for the shareholders or third parties to file a court case against an audit firm. Also, identifying the causality between the damages suffered by the plaintiff and the audit firm's actions is problematic, and auditing standards are rarely used as a reference in Russian courts. As a result, the existing liability regime has been unable to prevent ‘black auditors’ from colluding with company management. Also, the above may be seen as yet another example of the capital market being a less significant consumer of audit services in Russia compared to the dominant roles of state institutions of tax and fiscal control.
I think things have become worse after the crisis in terms of the quality of audit. A full adherence to the [auditing] standards requires financial resources—just look at the cost of staff training!—which many firms simply don't have … Pocket auditors have always been a problem, and the crisis certainly did not help in terms of reducing their numbers, quite the opposite—we have seen more companies concealing significant parts of their business from the taxman. (An auditor in Moscow, 2012)
In general, the specific phenomenon of what in Russia is known as ‘black audits’ will vary from one national context to the next. Indeed, substandard audit behaviours are regularly found in professional groups that are believed to observe standards. However, the underlying issues that such audit practices reveal have a general significance for our understanding of the dynamics of standardization. Specifically, they damage the international audit harmonization project by demonstrating that there appear to be issues that are problematic for the regulatory and academic discourses on international harmonization to uncover. Russia's secretive ‘black auditors’ represent the practice arenas that research struggles to enter and investigate ‘from inside’.
Discussion and Conclusions
The objective of this article has been to rationalize variation in the local adopters' responses to international standards. The article has investigated the effects of the social dynamics among audit firms in Russia on their attitudes to auditing standards. Specifically, it has presented the local audit profession as a social network where the centre marks the starting point of standardization and is represented by the international audit firms that first introduced ISAs to Russia. The article's specific focus has been on the relationship between the indigenous audit firms' commitment to following auditing standards and their social embeddedness in relation to the audit network's centre (Granovetter, 1973, 1985; Davis, 1991; Davis and Greve, 1997). In particular, it has been argued that the density of social ties with the centre determines the likelihood of audit firms developing relational proximity (Nooteboom, 1999; Schamp et al., 2004) toward the central players and hence accepting their practice norms, such as standards. The article has distinguished between different parts of the social network—the ‘effective’ network (of those local firms with whom the international firms have dense social ties) and ‘extended’ network (of remaining social ties)—in order to portray standardization as a gradual process where standards are accepted more widely by the local firms belonging to the ‘effective’ network and encounter more difficulties penetrating less socially embedded settings in the ‘extended’ network.
The article has further argued that identifying the conditions that influence the social embeddedness levels may help to explain better why audit firms show varying commitment to following the standards. One such condition is the local firms' geographical positioning (Yeung, 1998). Here, the case of Russian ISA audit providers has been used to show how geographical proximity to the centre is among the reasons for some indigenous audit firms to accept standards more quickly and with more enthusiasm (Yeung, 1998). Specifically, geographical proximity has provided opportunities for denser social relations and, consequently, for more intensive learning about ISAs. The article has shown how most local firms belonging to the ‘effective’ network are located relatively closer to the centre and how such firms constitute the majority of Russian ISA auditors. However, despite the voluntary acceptance of ISAs by the ISA auditors, the real challenge of standardization has been to penetrate fully more geographically peripheral parts of the ‘extended’ network where audit firms develop knowledge of, and commitment to, auditing standards more slowly. The resilient scepticism expressed by some peripheral audit firms towards both ISAs and the national ISA-inspired auditing standards signals that geographical distance from the players that advocate standardization may adversely influence commitment to following the standards. Furthermore, the phenomenon of ‘black’ audits has been used to show how geographical distance can also be used as a tool for disguising non-compliance with standards.
A significant influence on the stated commitment to following ISAs and auditing standards in general has been the extent to which some indigenous audit firms see the standards as a tool for building their intraprofessional status (Abbott, 1988). The indigenous providers of ISAs audits, for example, used the standards effectively to differentiate themselves from the rest of the local audit community. In this respect, the standards have been relied upon, in the words of Brunsson and Jacobsson (2000), as a means for such firms to show that they are ‘a particular kind of actor’ (p. 132) as well as to develop and demonstrate relational proximity to what they perceive as higher-status colleagues, that is,the international audit firms. However, the fact that the majority of Russian audit firms are mandatory adopters of ISAs (through the mandating of the national ISA-inspired auditing standards) may mean that some firms consider a high intraprofessional status less important (or difficult to attain), relative to other means of achieving client loyalty, such as providing their services at a lower cost. The history of ‘black’ audits shows that, in extreme cases, a lack of status aspiration may lead to unprofessional behaviours and disguised non-compliance with standards. In this regard, this article's findings echo those of Daske et al. (2008, 2011), using capital market effects as a proxy for identifying the true impact of standardization, who concludes that such effects are most pronounced for voluntary rather than mandatory adopters, and that mandatory adopters are more likely to treat standards as a ‘label’ rather than a true commitment to quality.
The article also shows that social embeddedness and hence the perceived value of standards to the adopters are significantly influenced by the demands of their target clientele (Abbott, 1988). Denser social ties with the centre developed by the Russian ISA auditors (which have facilitated their decision to voluntary adopt original ISAs) have been driven by a desire to enter the central player's market niche, that is, audits of international businesses and local companies with foreign capital influence. ISAs have been chosen not just as a means to change existing audit practice but also to demonstrate to potential clients that those changes had taken place. On the other hand, the article has also demonstrated in the case of the auditors of SUEs that the differences in audit realities experienced by such audit firms and their international colleagues have made dense social relations between them less likely, which, in turn, has deepened the gap in their understandings of the roles of an audit. Specifically, the procedural complexity of ISAs appears to be of lesser importance to SUE auditors because their clients demand what is effectively a simple test of compliance with tax rules. As a result, such auditors see significant investment in the development of audit methodology and staff training required by ISAs as well as the national auditing standards as unnecessary cost. Hence, the above empirical observations indicate that the reality of making the international auditing standards apply to a variety of contexts and environments is highly sensitive to the question of who needs an auditor and why.
Furthermore, although this article's primary focus has been on the effects of social relations on the adopters' responses to standardization, such relations nonetheless should not be viewed in isolation from broader institutional conditions. Leuz (2010), in this regard, points to ‘institutional complementarities’ as a potential impediment to standardization ‘because in order to preserve institutional fit, countries need to change (or adjust) several elements when they change one’ (p. 248). Therefore, the effect of such complementarities is that they subject the new standards ‘to the same institutional and market pressures that shaped the old standards’ (Leuz, 2010, p. 248). In this vein, this study has shown that the resilience of ‘black’ audit behaviours is directly linked to the widespread occurrence of hidden economic activities. It is likely therefore that Russia's ‘black’ audits are going to persist for as long as the country's shadow economy and multi-layered corruption.
The phenomenon of ‘black’ audits is an extreme example of Walter's (2008) concept of ‘mock compliance’, which he defines as formal compliance or even disguised non-compliance. At the opposite end of the compliance spectrum, he identifies ‘substantive’ (high quality) compliance, noting however that, in developing environments, low quality compliance (for example, when standards are formally adopted but not rigorously followed in practice) is both common and persistent. He further asserts that mock compliance strategies are viable, both at a country and firm level, when the cost of compliance is perceived by the adopters to be high and also when third-party compliance monitoring arrangements are costly and/or ineffective (p. 36). This article's findings, in this vein, show how scepticism about the relevance of auditing standards is especially characteristic of less wealthy peripheral audit firms. Limited financial resources available to such firms not only restrict opportunities for building social relations (and hence professional learning) but also lead to a wide-spread perception that full compliance with auditing standards is economically unviable, hence affecting levels of standards compliance. The problem has been made worse by the ineffectiveness of the mechanisms for sanctioning audit failure (such as auditor liability or oversight arrangements). While the analysis of the effects of enforcement on the dynamics of standardization has been left outside the scope of this study, there is a clear interdependence between the two that needs to be acknowledged (see Daske et al., 2008; Holthausen, 2009; Leuz, 2010).
Therefore, audit firms' social embeddedness and hence compliance with standards should be seen as a dynamic process. The article has documented two conflicting trends. On the one hand, a growing number of local businesses switch to IFRS, which is set to boost demand for ISA audits. Here, the changing needs of audit firms' clientele, as argued earlier, may serve as an incentive for social learning and potentially a genuine interest in, and commitment to, following the auditing standards. On the other hand, however, we are also seeing the adverse effects of the 2008 financial crisis in terms of increasing the scope of mock compliance as economic crises tend to raise the perceived cost of full adherence to the standards (see Walter, 2008, p. 170, for a similar view).
In conclusion, it is clear that the expansion of global standards, such as ISAs, into areas previously controlled by nation states has raised issues regarding standards compliance. The history of ISAs in Russia points to a limited analytical value in viewing standards compliance merely as a ‘either/or’, ‘compliance/non-compliance’ category. In this regard, this study has sought to contribute to the prior literature on accounting and audit standardization that portrays such a process as a project potentially leading to a variety of outcomes (Walter, 2008; Daske et al., 2008, 2011; Leuz, 2010). One implication of the study's findings is that there may be value in tailoring standards implementation strategies in ways which would respond more to the specificities of what it is that the adopters do (i.e., the nature of their work tasks, the type of services provided, or the sort of clients they target). Applied to the Russian case, the underlying issue is about whether an audit of, for instance, Russia's SUEs mainly consumed by government agencies should be performed in the same manner as an audit of a large multinational with dispersed (international) capital influence; and consequently, whether these two audits should be drawing on the same set of standards. The aim of this article has not been necessarily to provide a straightforward answer to these questions. Rather, it has been to highlight the importance of understanding the differences in audit objectives within and across national standardization locales in terms of their bearing on the adopters' perceptions and use of standards. Walker (2010), in this regard, points to the value of developing competing perspectives and standards that would be tailored to the specific demands of the world's variety of national socio-economic models. Arguably, it is the failure to respond adequately to the adopters' conditions and contextual constraints that is a major reason for why international harmonization efforts have often struggled to produce a desired impact locally (Leuz, 2010; Walker, 2010).
