The emergence of statutory auditing in France and the recurring issues of independence and competence,1867–1966

1867 Act: the lack of provisions concerning the independence and competence of statutory auditors

The 1867 Act put an end to the permission of the State that was previously required to set up limited companies, but made the appointment of one or several auditors compulsory. The main concern of the legislators was to offer a guarantee to shareholders with the appointment of auditors but not with providing a framework for ensuring auditors’ independence and competence. Hubert-Delisle, rapporteur of the senatorial committee in charge of examining the 1867 bill, argued for different reasons why abolishing the governmental authorisation was in the best interests of business: ¹

Article 21 stated that ‘in the future, limited companies could be created without the governmental authorization’. As a guarantee of ‘the good management of directors’, according to Du Miral, a French Member of Parliament, ² ‘the annual general meeting of shareholders appoints one or several auditors, whether they are partners or not’ (article 32). The auditor’s task was a temporary one. According to Article 33,

throughout the quarter preceding the period set by the statutes to convene the general meeting, the auditors are entitled, each time they judge it appropriate according to corporate interest, to have a look at the books and to examine the operations of the company.

No criterion for independence or for technical skills was mentioned in the law; anyone could be chosen to become the auditor of the company. This lack of provisions concerning independence and competence and the temporary nature of the assignment was due to the will of the government not to intervene in business life. Duvergier, President of the State Council, recalled the main principles of the 1867 Act: ³ ‘the authority does not have to interfere indiscreetly in private transactions for fear of creating illusions or difficulties with the praiseworthy desire to provide a useful support’. It was also due to the directors’ reluctance to accept external inspection. During the parliamentary debates, Matthieu, a Member of Parliament, revealed the fear of directors of too great an intrusion into management by the auditors at that time: ‘We fear that this assignment, that could be exerted every day at any time, could become an unbearable discomfort for directors; if directors have to be controlled, they also have to be free’. ⁴

In Great Britain, the 1844 Joint Stock Companies Act was similar to the French Act. ‘Section 38 of this Act provided for the appointment of “one or more auditors of the accounts of the company” but was completely silent as to who could serve in the position(s) or what his (their) qualifications should be’ (Hein, 1963: 508). As a result of the promulgation of the 1856 Companies Act, the appointment of auditors became optional. It became compulsory again with the 1900 Companies Act. The issue of independence appeared and the British Companies Act of 1900 did not allow directors to be auditors of their own companies. Indeed, Section 21 stated, ‘a director or officer shall not be capable of being appointed auditor of the company’.

In France, the lack of specific requirements in terms of independence and competence was criticised from the promulgation of the 1867 Act. Despite the establishment of several extra parliamentary committees (1875, 1883 and 1902), the attempts to reform French statutory auditing remained fruitless. The setting up of standards had to overcome the opposition of a liberal and inflexible conception of business. Many bills, almost one per year, sought to limit the choice of auditors in order to strengthen their competence and their independence. From 1883, Martin Feuillée’s bill left the choice of auditors in the hands of shareholders and forbade directors to vote for the appointment of auditors (Masson, 1936). In 1889, during the International Congress of Public Companies, ⁵ Rousseau considered the function of the auditor to be incompatible with that of either shareholders or bondholders and felt that auditors should have no connections with directors (Delattre, 1936). In 1904, Thaller’s draft suggested the creation in Paris of an association of 20 public accountants specialised in auditing. In 1905, Renoult’s bill recommended the establishment of a body of sworn-in accountants. In 1909, Bellom, engineer in chief at the Ecole des Mines, suggested the institution of State-recognised accountants’ associations and proposed that limited companies should be obliged to choose their auditors from among the members of these associations. The business press was also very critical of auditors’ competence. Indeed, the Revue Financière of 19 October 1903 noted,

these ones [‘directors’] are at a pinch more excusable than some of the auditors who have never seen an accounting book in their life. For such an involved function, the law should require a competitive exam or at least a preliminary exam. It would be the only way to restore effectiveness to an excellent system in theory, but which has proved its worthlessness in practice. (Cited in Fournès Dattin, 2012: 162)

The journal Vie Financière, 4 May 1905, added,

accountants, seldom; bald men, sometimes; decorated, often; decorative, always; such are auditors, moreover, charming people. Even too charming because, appointed by the shareholders to verify the accounts submitted by the board of directors and supposed to audit their management, they forget the mandate they have been entrusted with as soon as they are appointed.

Competence and legitimacy: the concern of French professional accountants

The main concern of professional accountants was to be organised and to strengthen their competence in order to increase their legitimacy. In France, at the beginning of the twentieth century, the leading professional group was engineers. This group had established links with the State, the university environment and the business world, thanks to the prestigious and elitist grandes écoles such as the Ecole polytechnique (Ramirez, 2001). On the contrary, professional accountants were still looking for legitimacy. Accountancy was not a prestigious profession compared to doctors, lawyers, civil servants and of course engineers. According to Leautey (1886), ‘the corporation of accountants is like a downgraded refuge: it seems that we are still suitable for being an accountant when we have failed in everything’ (p. 365). There was a lack of accounting education in the most prestigious universities and in higher education institutions. As Fournès Dattin (2014: 353), quoting Maffre (1984), explains, ‘business education which had developed during the 1870s remained marginal and there were only 15 business schools in France in 1905’. The 403 graduates from a business school were in contrast to the 17,000 students in a faculty of law (Le Van-Lemesle, 2004: 357–359). At that time, in Great Britain, accountancy benefited from an excellent reputation. A quotation from a letter of Walter Scott dated 23 July 1822 illustrates the following:

if my nephew is steady, cautious, fond of a sedentary life and quiet pursuits, and at the same time a proficient in arithmetic, and with a disposition towards the prosecution of its highest branches, he cannot follow a better line than that of an accountant. It is highly respectable – and is one in which, with attention and skill, aided by such opportunities as I may be able to procure for him, he must ultimately succeed.

One of the main objectives of the French accounting profession was to reinforce their own competence. In 1881, they created the Société Académique de Comptabilité, renamed the Société de comptabilité de France (SCF) in 1916, which attempted to strengthen the knowledge base of the accounting profession by designing a comprehensive system of accounting education. Although no skills were required by law, auditors could make use of the SCF’s three specific diplomas (bookkeeper, accountant and expert in accountancy). ‘The bookkeeper sticks to the trodden path, the accountant creates the path and alters it if necessary, the expert in accountancy checks, manages, assesses, and can become an auditor’. ⁶ The SCF expert in accountancy also had a good knowledge of law and economics. This diploma, whose programme included the function of statutory auditors and of a court appointed expert, was recommended by the SCF for the practice of auditing. Faure (1908), who graduated from Ecole des Hautes Etudes Commerciales (HEC) and was also an SCF expert in accountancy, explained that the function of statutory auditor should come to professional accountants. ‘The interwar period was characterized by a significant growth in the accounting services market’ due to the establishment of heavier corporate taxation (Fournès Dattin, 2014: 354). To clarify the distinction between experts in accountancy who had graduated from the SCF and people who claimed to be experts in accountancy without any diploma, the State created in 1927 a State diploma in public accountancy (brevet d’Etat d’expert comptable). However, the SCF awarded only 21 certificates for experts in accountancy, its highest specific diploma. Moreover, the State diploma, as with the SCF certificate, was of marginal benefit and few candidates entered for the examination. Many accountants realised that they could probably benefit from the same advantages as the State-qualified public accountants without subjecting themselves to the heavy requirements of the State diploma. It should be remembered that the law required no specific skills for the practice of auditing.

In Great Britain, the accounting profession was more structured. In 1880, the Institute of Accountants (London), the Incorporated Society of Liverpool Accountants, the Society of Accountants in England (London), the Manchester Institute of Accountants and the Sheffield Institute of Accountants merged to form the Institute of Chartered Accountants in England and Wales (ICAEW). This young institute sought to define the profession of chartered accountant and specified two conditions for membership: a 10-year professional background or success in appropriate examinations (Anderson et al., 2005). Nevertheless, some professional accountants found the ICAEW requirements too restrictive, particularly the 5 years of training, and too expensive. Indeed, the trainee had to pay an allowance to his supervisor. These accountants created in 1885 the Society of Accountants and Auditors (SAA). The members of the SAA had to pass a specific examination and undertake 2 years of professional training if they were postgraduate. Statutory auditing could rely on these professional institutes that highlighted professional experience and a high level of education. In 1886, 75 per cent of British quoted companies (a sample of 950 out of 1,100 quoted companies) were audited by a professional accountant (Anderson et al., 1996). The financial position of London could also explain the role of accountancy. As Markus (1997) noticed, bank deposits reached 120,000 million pounds on December 1872 in London versus 40 million in New York in February 1873, 13 million in Paris in February 1873 and only 8 million in Germany in January 1873. During the interwar period, the title of chartered accountant was the most common on the board of directors of British companies. The State also contributed to strengthen the reputation of chartered accountants, which was not the case in France. Indeed, during the war, the British government did not hesitate to appeal to chartered accountants to calculate the cost price of food products, to regulate manufacturing businesses, to check inventories and to verify manufacturers’ and traders’ accounts. The Accountant in 1896 stated, ‘The mind of the public is beginning to get settled down in the opinion that the profession of an accountant … is not only a useful one, but one of importance and absolute necessity to the commercial world generally’ (cited in Anderson et al., 2005: 50).

In France, the situation was quite different. In 1921, during the monthly dinner of the Compagnie des Experts Comptables de Paris (Association of Experts in Accountancy from Paris), Reymondin, an SCF graduate in public accountancy, felt that the role of auditors was not being fulfilled according to the 1867 legislation. He focused on conflicts of interests between auditors and directors: directors would like to show to their shareholders a healthy situation whereas auditors have to tell the truth. To avoid this conflict, directors often resorted to suggesting for the post of auditor either a willing friend or an employee of a related company. Reymondin thereby cast doubt on the independence of auditors. Julhiet (1927), an engineer from the Ecole des Mines, shared Reymondin’s opinion:

In practice, auditors are always those chosen by the board of directors, because shareholders don’t know each other before the general meeting so they cannot put heads together to choose the auditors. Actually it is absolutely opposite to the spirit of the law that auditors are men of the directors. (p. 424)

A few years later, in 1927, Reymondin administered a survey concerning auditors’ qualifications. Among auditors, 34 per cent were accountants, but there were also civil servants, architects, reporters, writers, ministerial officers or their clerks, and even clergymen (Reymondin, 1929). These figures clearly differed from the situation in Great Britain.

A weak demand for competent and independent auditors from the business world

The relationships between auditees and auditors were not devoted to independence. Despite the pressure from accounting professionals, from some parliamentary members, and from the business press that denounced the lack of independence and competence of auditors, the business environment remained hostile to any external control and preferred auditors to keep a purely formal role. Bonin (2000: 198–200) explained that ‘business secrecy still dominates’ and characterised the interwar period as follows:

A balance sheet, it is made to measure, like a three piece-suit! The perfect accountant is the one that makes the balance sheet say what his boss wants to. There were celebration balance sheets and city balance sheets, chic balance sheets and bohemian balance sheets. And you know, the more opulent looking people are not the better dressed.

In one of the major industrial French companies, ‘the company of Pont-à-Mousson’, it was obvious that the auditor, Lenglet, was the right-hand man of the director Cavallier rather than the shareholders’ proxy (Fournès Dattin, 2014). In 1904, Lenglet did not hesitate to suggest that Cavallier should fiddle with the procedures of the general meeting in order to let shareholders believe that they had been given all the information they needed:

Besides, it would not be bad to get a shareholder (Paul, ⁷ who is used to this role, or anybody else) to ask questions, decided upon in advance, that are included along with the answers in the minutes of the general meeting and that should provide the proof that everything has been mentioned to the shareholders and that we haven’t left anything out … of what they need to know. ⁸

Darmour, who was auditor at Pont-à-Mousson from 1914 to 1926, was the director’s advisor. He often answered Cavallier’s questions about business law and about provisions in the company’s statute. He supported business secrecy as requested by the director, Camille Cavallier, and Darmour disclosed to shareholders only the minimum of information. The situation was not far removed from that depicted by John Mather, a chartered accountant, in a paper presented in 1898 to the sixth provincial autumnal meeting of ICAEW members (cited in Maltby, 1999: 43):

business men and company directors usually find it to their advantage to regard their accountant or auditor more as they regard their solicitor – not as paid servant, or a shopkeeper, from whom they expect a given amount of time, labour, or goods at the lowest possible market price, but rather as a sort of ‘guide, philosopher and friend’, whose advice is always available, and whose expert knowledge they may utilize at any moment.

Even if the accounting profession was better structured and recognised in Great Britain than in France, it seems that the independence of auditors was not the concern of British directors at the very beginning of the twentieth century.

In the company Saint-Gobain, as in Pont-à-Mousson, the function of auditor seemed to have been an excellent springboard for reaching the position of director. How could you be independent of directors if one of your main goals was to become one of them? Indeed, in 1924, five former auditors were among the 15 directors of the company. ⁹ The ratio was the same in 1929. Links between the post of auditor and the post of director, which were often denounced by the press or by accounting professionals, really did exist. The appointment as auditor was a kind of first stage for attaining the position of director. The competence of auditors was also challenged within Saint-Gobain. The year of 1933 was a real turning point in the operation of the company with the creation of a shareholder advocacy group. It succeeded in having two auditors selected from professional accountants registered at the Seine Court. This new rule implies that previous auditors were not professional accountants and gives cause to suspect their level of qualifications.

In other companies, the reading of the auditors’ report could also cast doubt on their independence. They praised the merits of the board of directors and asked shareholders to approve the accounts. The report on the annual accounts of 1906 of the ‘Compagnie générale des eaux minérales de Royat’ refers to ‘accounts very well kept’. The report of the ‘société des Hauts fourneaux, forges et aciéries de Denain et d’Anzin’, one of Pont-à-Mousson subsidiaries, presented to the general meeting on 5 May 1920, reminded all about the merits of the board of directors whose most urgent problem was

emerging new, modern and rational equipment from the ruins to give back to the company the situation it had conquered … Your board of directors did its utmost to do this, you can’t be sceptical about this, with competence and devotion as usual. ¹⁰

At the general meeting for Caisse d’Epargne et de Prévoyance de Paris on 1 June 1933, the report explained that ‘transactions of all other departments of the company are also carried out with zeal and intelligence, under the wise and enlightened management of the chairman and directors’. ¹¹ Or again, ‘we recognise the inspiration of the board of directors through these improvements’. Here, it can be again seen that appointment as auditor was a kind of first stage for attaining the position of director. For example, the censors’ committee of Caisse d’Epargne deplores the departure of one of its members:

It cannot do anything but regrets the departure of one of its leaders, Mr. Philippe Gaillard, a friendly, helpful and excellent accountant. But his merits don’t allow us to judge, from our selfish point of view, his admission to the board of directors. We have to be concerned about the good for the Caisse d’Epargne. ¹²

The years of 1920–1930s: the need for an independent and competent auditor

The main issue during these years was the protection of investors. In this context, many bills suggested reforming auditing by enhancing auditors’ independence and competence. Some of them aimed to set rules for recruiting auditors, either by limiting the choice to a list of sworn-in auditors or by requiring the appointment of an auditor to be made from among accounting professionals, or else by establishing incompatibilities preventing candidates from exerting this duty. Fleury-Ravarin, a member of Parliament, suggested in 1921 the appointment of two auditors at least, one of them from among the shareholders and the other from among accounting professionals. Lesaché’s 1924 bill introduced another method of appointing auditors, who were to be named by the president of the Commercial Court. In 1926, Chastanet proposed that some limited companies, such as the listed ones, should choose their auditors from among members of associations registered by the Ministry of Commerce.

In 1928, the Poincaré government took the initiative of creating a committee to study the shortcomings of the 1867 Act (Bocqueraz, 2000). The need to protect investors could explain this State intervention but its other goal was to restore public confidence and calm to the troubled political and social climate. The Great Depression was also probably a catalyst, with the State realising that a request was being made by savers to raise the moral standards of the business world. Reform of the 1867 Act was seen as a possible means of achieving this. The Stavisky scandal (Bensadon, 2007) led to extensive press coverage and accentuated discredit of boards of directors, auditing and the political world. Moreover, criticisms of the 1867 Act were no longer confined to the ministries but found a strong echo in the press and Parliament. The concern of the members of parliament was to strengthen auditing by a more precise definition of the auditor’s assignment (see, for example, the bills of Lesaché in 1924, Chastanet in 1926, Tardieu-Peret in 1930, Lesaché in 1932, Daladier-Penancier in 1933) and lengthening of tenure (Lesaché in 1924, Chastanet in 1926, Tardieu-Peret in 1930, Lesaché in 1932 and Flandin-Pernot in 1935). The governmental bills, Tardieu-Peret in 1930 and Flandin-Pernot in 1935, were the preliminary drafts of the future law. The Tardieu-Peret bill sought to balance powers between directors and auditors by protecting the independence of auditors and extending their rights to investigate. It created incompatibilities and introduced a permanent mission. However, it rejected the idea of a monopoly of graduates from the State or SCF diplomas in accountancy. It explained that the function of auditors was wide and required ‘qualities which were different to those that a professional accountant could have’. ¹³ The Flandin-Pernot bill decreed positive conditions of technical competence and challenged the free choice of auditors. Through the bills introduced from the 1920s, the government would have all the tools necessary to reform auditing. It promulgated a decree-law on 8 August 1935, which was the result of the evolution of the debate concerning the independence and competences of auditors (see Figure 1).

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Figure 1.

1867–1935: Evolution of the debate concerning independence and competence.

The decree-law of 1935: insufficient provisions to promote independence and competence of auditors

Independence and competence were at the heart of the decree-law but its provisions were insufficient to really strengthen them. The reform of statutory auditing entered into a broader phase in the struggle against speculation and to defend savings. Pierre Laval, Prime Minister in 1935, presented the reinforcement of the auditing system as ‘a necessary guarantee for savers’. ¹⁴ The auditor was not only seen as a proxy of shareholders but also had an assignment to protect the public interest. The new regulation took into consideration issues of independence and competence: ‘the principle of independence rested on four provisions of the decree law’ and they related ‘to conditions of appointment and incompatibility, duration of functions, attributions and powers, and remuneration’ (Praquin, 2012: 180). The decree of 8 August 1935 introduced the principles of the auditing task in its article 32:

the general meeting of shareholders appoints one or several auditors who are empowered to check the books, the cashbox, the portfolio and the stocks of the company; to control the regularity and sincerity of inventories and balance sheets as well as the accuracy of the information given on the company accounts in the board of directors’ report. They are entitled in each period of the year to carry out the checks or controls they judge appropriate. They can always convene a general meeting in the case of emergency.

Article 33 introduced a priori and a posteriori incompatibilities in auditors’ functions in order to protect their independence. The auditor had a 3-year mandate, but the decree-law remained silent on their remuneration. With regard to auditor’s competence, it was to be guaranteed by a limited choice for listed companies. According to article 33, ‘one of the auditors has to be chosen from a list set up by a committee held in the main town of the Appeal Court’s jurisdiction in which the company’s headquarters are located’. To be registered on this list, the future auditor had to pass a technical examination. The two written tests of this examination consisted of financial accounting, cost accounting, commercial law, penal law and tax law. The committee of registration also had to judge the aspiring auditor’s objectivity and integrity.

The decree-law seemed unfortunately insufficient to reinforce auditor’s independence and competence. First of all, there were still no standards required for auditors of non-listed companies. The regulation was limited purely to one of the auditors of public companies. Each local registration committee had to assess candidates for their suitability as an auditor, but there was no accountant among the members of the committee. The first three members were lawyers and appointed by the president of the Appeal Court. The fourth member was the director of registration in charge of administrative issues and he also worked for the Appeal Court. According to Mikol (1993) and Fournès Dattin (2012), some committees had the right to allow some candidates to be exempt from the examination. The rules of registration were not very clear and the results of the examination were only a tool of assessment. Committees were free to accept or reject candidates’ applications for registration, with the social ability of the future auditors to deal with directors favoured over technical skills. According to Ramirez (2005), auditors were selected on an individual basis, their social capital being more important than their technical abilities. Moreover, there were not enough qualified professional accountants at that time in France. How could just under 700 State expert comptable graduates in France in 1936 be compared to the 12,000 members of the ICAEW and to the 6,400 members of the Society of Incorporated Accountants and Auditors? ¹⁵

Professional accountants restructured themselves and sought effective independence and competence of auditors

Following the decree of 29 June 1936,

all candidates who were acknowledged able to practise auditing and who were registered on the Appeal Court list had to establish a declared partnership, according to the provisions of the 1 July 1901 Act and whose articles of association and association rules are passed to the registration committee, when they number more than 20. (Article 7)

The presidents of these local partnerships decided to set up in 1938 a National Federation of Registered Auditors which united all registered auditors and only them. The power of the Federation was very limited and it did not come from a legislative text. Moreover, lots of auditors did not belong to the Federation because most of them were not registered. This requirement was only for one of the auditors of listed companies. In parallel, the Ordre des Experts Comptables et des Comptables Agréés (OECCA) was created in 1942 during the German occupation and rebuilt in 1945. This institution was a professional body with its own rules and its members had a monopoly in the practice of accounting services. According to the Ordinance of 19 September 1945, no one excepting the members of OECCA could keep accounts or review them as their usual occupation. The Order included ‘a minority of experts comptables (chartered accountants) members who undertook engagements involving monitoring and organizing accounts, and a majority of comptables agréés members working as bookkeepers’ (Ramirez, 2009: 131). They were independent because they were not employed by the company that they kept accounts for and the title of ‘expert comptable’ (Chartered Accountant) was protected. The members of OECCA who were experts comptables had to pass the State Chartered Accountancy examination after a preliminary examination and a 3-year professional training course.

From 1943, the reform of company law was the concern of Maurice Polti, president of the Association Nationale des Sociétés par Actions ¹⁶ and other experts who wrote a new company code. Several committees studied and amended this code, ¹⁷ and in March 1961, the Pleven committee was created. This committee had to invite comments from interested parties and report to the government. The two French accounting organisations became strongly involved in the process and the independence and competence of future auditors were the focus of their debates.

The experts comptables wanted to obtain a monopoly over statutory auditing but this faced strong opposition from the National Federation of Registered Auditors, which wanted to create a new professional entity. During the first 10 years of its establishment, the OECCA neglected the issue of auditing. The new institute was fully occupied with its own organisation and the reinforcement of the French accounting profession. At the end of the 1950s, the OECCA took an interest in this function and three of its annual congresses (1957, 1962 and 1965) dealt with auditing. The OECCA felt that auditing was one mission among others which had to be given to experts comptables. In 1962, a special committee was set up in the institute to write an auditing doctrine. This committee felt that the incompatibility between the function of auditor and the function of expert comptable for the same company, which was instituted by the 1935 decree, was a major impediment to the efficacy of the auditors’ work. As a reminder, article 33 stated that

the following may not be chosen as auditors … : 2. People who receive, through any means and through functions other than that of auditor, wages or remuneration from directors or from the company or anyone who owns one tenth of the capital of the company or whose company owns one tenth of the capital.

Consequently, it was forbidden to receive remuneration for practising accounting for a company as an expert comptable and to be appointed auditor for this same company. The OECCA committee would have liked to follow the English example where the chartered accountant could provide accounting services as well as being appointed as auditor. The 1965 congress insisted on the following qualities for auditors: competence, independence, honesty and integrity. Competence was to be guaranteed by the State Chartered Accountancy examination, while the other qualities were peculiar to the members of a professional body such as the OECCA. Gaston Thibaut, president of the OECCA from 1964 to 1967, wanted to create two specialist boards within the institute – one for accounting and one for auditing – and was opposed to the establishment of another professional organisation.

The National Federation of Registered Auditors was completely opposed to this view of a unified accounting profession. First of all, more than one-third of registered auditors were not experts comptables; they did not belong to the OECCA. Moreover, the choice of auditors was free for all limited companies except listed companies. These non-registered auditors had different backgrounds: they could be accountants or lawyers, engineers, ex-civil servants, ex-employees or directors (Ramirez, 2005). Why should they belong to the same institute as the experts comptables? Following this, the National Federation suggested some modifications to the Pleven committee’s bill, strengthening auditor independence and competence. With regard to independence, the auditors’ mandate was to be 6 years, as long as the directors’ mandate. Auditors’ fees were to be set by decree and not by a free debate between directors and auditors. The Federation also wished for auditors to pass either the State expert comptable diploma or the certificate of ability to practise auditing, which was introduced in 1935.

The appointment of more competent auditors

The business world gradually became less hostile to external auditing and asked for more competent auditors. Returning to the example of Saint-Gobain, while some doubt still remained regarding the independence of the company’s auditors, their competence improved. From 1935 to 1951, there were four auditors each year: Fouques Duparc, De la Frémoire, Groussot and Hibon. Only Groussot was a professional accountant. In 1951, the number of auditors dropped to two: Fouques Duparc was retained and a new auditor, Carlos Mulquin, who was an eminent professional accountant, was appointed. Mulquin was a member of the high council of the OECCA. In 1962, Masson, who was also a professional accountant and a member of OECCA, succeeded Fouques Duparc. This second period was characterised by a progressive recruitment of auditors from among experts comptables who were members of the OECCA. Technical competence appeared to have been achieved. But the two main auditors of this period, Fouques Duparc and Mulquin, were very close to the board of directors. Indeed, the Fouques Duparc’s family had a very old relationship with the Saint-Gobain company. In 1858, Saint-Gobain merged with its main domestic rival, Saint Quirin. Louis Charles Fouques Duparc, the grandfather of Xavier Fouques Duparc, was a shareholder of the Saint Quirin company. After the merger, he became delegate shareholder of the new company and member of its extraordinary council. Many years later, his grandson, Xavier, held the position of auditor of the Saint-Gobain company from 1929 for almost 35 years. Such a long mandate, in addition to family links, could sow seeds of doubt as to the real independence of Xavier Fouques Duparc. Was he able to maintain a critical judgement of the corporate situation? With regard to Mulquin, he had known the company and its directors since the Second World War. He was given all mandates which needed the appointment of a specific auditor (statutory auditing in addition to control of contributions during an increase of capital or mergers, giving out of free shares, etc.). The payment for the extended assignments he had to fulfil for Saint-Gobain was definitely substantial for him. Could he be independent?

In Great Britain, the main Act about statutory auditing was at that time the 1948 Act that restricted the choice of auditor to members of specified bodies, of which the four largest were the ICAEW, The Institute of Chartered Accountants of Scotland, The Institute of Chartered Accountants in Ireland and the Association of Certified and Corporate Accountants. According to Duncan (1962), the ICAEW had a great influence on the evolution of accounting and auditing and published many accounting recommendations and presentations about auditing. In contrast to France, there was no split between accountants and auditors. Conforming to OECCA (1962), the difference between French and British auditors was not their competence but the attitude of auditees and the amount of their remuneration, 10 or 20 times higher in Great Britain than in France.

A context in favour of reforming auditing

In the 1960s, the context was favourable for the reform of statutory auditing and business law. There was strong growth and increased dissociation between management and ownership in limited companies. Europe was building up and trade was growing. From 1958 to 1973, the growth rate was the fastest in French economic history. This rise was based on self-financing, short- and long-term debts and, a real novelty in France, financial markets. France had to put business law in order and modernise the system of auditing in order to guarantee the protection of investors. At the same time, the traditional attitude of business secrecy seemed to diminish as can be seen from the judgement of the Appeal Court of Paris on 24 February 1954. Rousseau, director of the Galeries Barbès, received authorisation to prepare the advertising campaign of the Galeries. The auditor reported to the general meeting that there were commercial transactions between the company and one of its directors. He explained these transactions were usual and shareholders could approve them. The court judged that the information was insufficient because the auditor’s opinion was not justified and the amount of the transaction was more than 100 million Francs. Ripert (1954) asserted that this judgement was evidence of a spirit of hostility against business secrecy.

The evolution of the debate concerning independence and competence helps to explain the promulgation of the 1966 Company Act (see Figure 2).

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Figure 2.

1935–1966: Evolution of the debate concerning independence and competence.

The Company Act of 1966 modernised auditing following the Federation’s suggestions: auditors had a new assignment, the certification of financial statements, and it put an end to the dual system of registered and non-registered auditors. Each auditor had to be registered on the list of the local Appeal Court and pass either the State expert comptable diploma or the statutory auditing certificate examinations. A new institute was set up – the Compagnie Nationale des Commissaires aux Comptes ¹⁸ (CNCC) – under the supervision of the Ministry of Justice, whereas the OECCA was under the supervision of the Economic and Finance Ministry. The French accounting profession was made up of two separate professional bodies. Members of OECCA had a specific monopoly: doing companies’ accounts and procuring accounting services. Members of CNCC had a different duty: certifying the accounts. There was a clear dissociation between a function of doing and a function of checking – between the work of an accountant and of an auditor – even if you could be both a member of OECCA and a member of CNCC. The CNCC had to organise the new profession of auditors, that is to say, the good practice of auditing, the defence of honour and the independence of its members.