Reputational risk and environmental performance auditing: A study in the Australian commonwealth public sector

• Author: Nacanieli Rika,Kerry Jacobs
• Date: 01 May 2019
• DOI: http://doi.org/10.1111/faam.12189
• Published date: 01 May 2019

Received: 11 November2016 Revised: 18 July 2018 Accepted:5 September 2018

DOI: 10.1111/faam.12189

ORIGINAL ARTICLE

Reputational risk and environmental performance

auditing: A study in the Australian commonwealth

public sector

Nacanieli Rika1Kerry Jacobs2

1School of Accounting and Finance, University of

the South Pacific,Suva, Fiji

2School of Business, University of New South

Wales,Canberra BC, ACT, Australia

Correspondence

NacanieliRika, School of Accounting and Finance,

Universityof the South Pacific, Suva, Fiji.

Email:nacanieli.rika@usp.ac.fj

Theauthors gratefully acknowledge valuable

commentson an earlier version of the paper pro-

videdby Professor Chris Chapman, Dr. Brendan

O'Dwyer,and participants in the Emerging Schol-

arsColloquium at the 10th Inter-disciplinary

Perspectiveson Accounting Conference 2012.

Abstract

This paper examines how reputational risk to government is gener-

ated through framing and overflows evident in environmental per-

formance auditing. It analyses two high-profile performance audits

conducted by the AustralianNational Audit Office. It is motivated by

a gap in the literature on performance auditing and environmental

auditing, which both acknowledge that audits may give rise to rep-

utational risk but have not analysed the process through which this

occurs. Using ideas of framing(Goffman, 1974) and overflow (Callon,

1983), this paper extends the work of Power (2007) by explaining

howdifferent accounts can be constructed from the same underlying

events through the application of different frames.Alternative fram-

ings generate reputational risk by highlighting contentious issues

that may otherwise have been ignored or received minimal consid-

eration. In particular, representatives of the opposition and media

can use political and public interest framesto construct performance

accounts which differ from and challenge the improvement frame

emphasised by performance auditors and favoured by government.

This paper shows that auditors’ roles are more complex than often

assumed and that auditors relate to different audiences through dif-

ferent frames.

KEYWORDS

environmental auditing, framing, overflows, performance auditing,

public sector,reputational risk

1INTRODUCTION

The expansionof audit within contemporary society has been understood as part of wider processes of control and risk

management, within which notions of reputational risk management form a keycomponent. However, audit processes

contain an inherent contradiction since they havethe potential both to enhance and to damage reputation. Therefore,

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RIKA AND JACOBS 183

this paper focuses on the politically and reputationally sensitive field of environmental performance audits to explore

how reputational risk is managed by bureaucratsand politicians. It uses ideas of framing (Goffman, 1974: 37) and over-

flow (Callon, 1998), as previously applied in the accounting literature byChristensen and Skaerbaek (2007), to exam-

ine: How environmental performance audits generate reputational risk for government and the various responses to

these risks.

The explosionof risk management in the late twentieth century (Power, 2004) characterises the emergence of a risk

society in which organisations increasingly adopt risk management systems as a benchmark of good governance and

legitimacy (Beck, 1992; Power,2007). While risk management has expanded beyond financial risk to encompass new

categories such as operationalrisk and environmental risk, modern risk societies are particularly concerned with repu-

tational risk, which is a ‘purely [hu]man-made product of social interactionand communication’ (Power, Scheytt, Soin, &

Sahlin, 2009: 301–302).1Individual organisations increasingly have their reputations challenged bystakeholders who

are able to construct alternative accounts of organisational behaviour and performance (Power,2007). Consequently,

organisations must manage the reputational risk from disasters like oil spills as wellas the underlying environmental risk

from such events (Hopkins, 2005).

Intensified concern with reputational risk reflects diminishing trust in institutions and professions (Power et al.,

2009: 301), following high-profile accidents and failures in both the private and public sector (Hood, 2002). Declin-

ing trust has also contributed to greater demand for financial assurance and the application of auditing to new fields,

notably environmental auditing and performance auditing (Power,1997, 2003). These fields of auditing were consid-

ered quite new in the 1980s and 1990s (see for example Power,2003). Although they are now more established, they

remain comparatively new and less widespread than traditional financial audits. While these new forms of audit may

be intended to provide comfort to society,the performance auditing literature indicates that audit findings can also be

used to blame government and damage its reputation. The political opposition, for example, mayselectively highlight

audit findings that indicate a program has failed to deliver value for money (Johnsen, Meklin, Oulasvirta, & Vakkuri,

2001). Similarly, the media may emphasise audit findings that indicate abuse of power and privilege by government

(Guthrie & Parker,1999). Such controversy can be problematic since governments which interpret audit findings as an

attack on their cabinet ministers or political party mayretaliate against audit offices and auditors with varying degrees

of hostility (English, 2003; Funnell, 2003). Therefore, pragmatic auditors can be expectedto be particularly mindful of

how their audit reports could reflect on, and be interpreted by,government.

Although performance audits deal with a diverse range of topics, audits of environmental programs are especially

pertinent for understanding issues of reputational risk. More specifically,the literature on environmental auditing and

assurance highlights a paradoxical association between auditing and reputation. On the one hand, organisations may

obtain external environmental auditing and assurance to improvetheir credibility and reputation (Simnett, Vanstrae-

len, & Chua, 2009). On the other hand, external environmental audits could damage an organisation's reputation if

they expose issues of non-compliance which are subsequently disclosed to the public. Therefore, organisations face a

dilemma because they cannot control the findings of an independent external audit.

Despite references to reputational risk in both the performance auditing literature and the environmental audit-

ing literature, previous studies have not analysed the process which links audits to reputational risk for audi-

tees. Several previous studies emphasise problematic consequences for controversial audit offices and auditors

general (English, 2003; Funnell, 2003; Guthrie & Parker, 1999; Jacobs, 1998), while other studies discuss rational

responses adopted by audit offices to avoid controversy (Power,1997; Radcliffe, 2008, 2011). However, few studies

have empirically examined the impact of controversial audit findings on government, given that contentious audits

present opportunities for various stakeholder groups to damage a government's reputation byblaming it for program

failures.

The remainder of this paper is organised as follows. The next section reviews relevant literature on reputational

risk, performance auditing and environmental auditing. This is followed bythe theoretical framework for the study and

an outline of the research design. The findings are then analysed and discussed before the paper concludes.