Audit and it's conceptual foundations according to Aristotelian philosophy

37 Pages·2011·0.39 MB·English

by  ©, Mélanie Roussy

Understanding the concept of audit: 
Aristotelian philosophy as a methodological 

tool

©, Mélanie Roussy 
February 2011 

Mélanie Roussy, CA, MBA, Ph.D candidate at HEC Montreal
Assistant professor
School of Accountancy
Faculty of Administration Sciences, Université Laval
2325 rue de la Terrasse
Pavillon Palasis-Prince, bureau 4244
Québec (Québec)
G1V 0A6

Telephone: [phone] extension 3829
Email: [email protected]

Acknowledgements: The comments and suggestions of my thesis supervisor Danielle Morin and from
my collegues Paul-Victor Paré, Yves Gendron and Michelle Rodrigue are gratefully acknowledged, as
are comments from Rachel Papirakis and Marc Hasbani. I also appreciated helpful comments and
suggestions received from participants of the Toronto, 12th Alternative Accounts Conference and
Workshop.  Finally, special thanks to Yvan Pelletier, Ph.D, professor with the Faculty of Philosophy at
Université Laval and specialist in Aristotelian philosophy, for his generosity, time and suggestions.
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Understanding audit: Aristotelian philosophy as a 
methodological tool

Abstract 
Power (1997) argues that a veil of essential obscurity covers the audit concept, which
creates an expectation gap that coincides with the explosion of the audit practice.
Therefore, the objective of this article is to develop a conceptual model that serves as
a methodological tool to understand different types of audit. We have turned to
philosophy rather than economics, psychology and sociology to produce this
methodological tool. Philosophy was selected because it analyzes the nature of
concepts and expresses its foundations (Mautz and Sharaf, 1964). Specifically, two
Aristotelian treatises were applied to audit: Categories and On Interpretation. These
treatises were selected because they are tools Aristotle developed to facilitate the
understanding of concepts (Pelletier, 2009). The Aristotelian concept of phronesis is
also discussed. The first part of the article traces the development of a model that
depicts audit as a process of interpretation performed simultaneously by the auditor
and the auditee, which affects the auditee. Its objective is to judge the truthfulness of a
precise assertion or a set of prior assertions. Once made, this judgment becomes a
qualifying term of the assertion. Moreover, Aristotle considers examples powerful: it
is impossible to exhibit phronesis without embedding the concept studied in its
particular context. Consequently, the second part of the article demonstrates how to
use this model as a methodological tool to better understand a specific case of audit.
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Introduction 
Since the late 1980s, there has been an explosion of audit practice, translated by the
appearance of new forms of audit (Power 1997). Environmental audit and
performance audit (or value for money audit) are two examples (Power 1997). Audit
is now perceived as representing a universal solution to the problem of control
induced notably by the decentralization of management. Submission to an audit has
thus become a source of legitimacy for the auditee. Conversely, refusal to be audited
is perceived as an attempt to hide a secret, or worse, misappropriation (Power 1994,
39). Each new crisis has accentuated the demand for audit, whose presence has
intensified and spread into new areas of interest. There was thus an explosion of audit
(Power 1994, 39). Consequently, research on audit must explore broader horizons
than simple economics.
Power contends that to ensure the legitimacy of accountability in organizations, the
fact that audit takes place seems to outweigh knowing how and how rigorously the
audit was carried out. He attributes this to the fact that people ignore precisely what
audit is (Power 1994, 39). Power also affirms that the lack of performance criteria
makes it difficult to assess the quality of an audit in order to establish its success or
failure. He argues that this problem stems from the fact that what audit produces, i.e.
its objective, is unknown (Power 1997, 30). In other words, people do not know what
audit is, in what it consists, or its ultimate goal. This ignorance covers audit in a veil
of “essential obscurity” (Power 1997, 30). Power asserts that the “essential obscurity
of audit” (Power 1997, 30) is compensated by codes, rules and procedures that
constitute generally recognized audit standards (Preston et al. 1995; cited in Power
1997, 30).
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In parallel, Francis (1994) argues that the appearance of codes, rules and procedures
in audit practice are a direct consequence of the domination of objective thought and
technocratic rationality to the detriment of the hermeneutic intellectual process that
characterizes a “good” audit. According to Francis, the reign of pseudo-scientific and
scientific discourse on audit, which began in the 1960s, has relegated the subjectivity
inherent in the auditor’s professional judgment to secondary status. Historically, this
judgment is considered to issue from a hermeneutical exercise (of interpretation)
(Francis 1994, 236). Consequently, Francis maintains that “the way auditing is
understood affects the way it is practised, which in turn affects the actions of the
auditor” (Francis 1994, 236).
In line with Francis (1994), who considers that the way one understands the world
influences practice, Chua (1986, 602) contends that research is influenced by the
researcher’s concept of the world. In accounting research, the dominant paradigm is
structuralism, as defined in the typology of Burrell and Morgan (1979) (Chua 1986,
603). This paradigm is characterized by a set of philosophical assumptions that guide
researchers toward a vision of the world that emphasizes technical control,
quantitative research methods and hypothetico-deductive reasoning (Chua 1986, 601;
611). The theories put forth and the resulting conceptual framework are also directly
influenced by the paradigm that the researcher embraces.
Thus, although the interpretive and critical paradigms that (Chua 1986, 626) describes
as alternative have become important since the 1980s, audit research continues to be
dominated by structuralist researchers largely inspired by economic and psychological
theory. In contrast, interpretative or critical researchers appropriate theories
originating mostly in sociology. This openness to sociological questioning has led to
the understanding of audit other than through economics. For instance, researchers
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have investigated the empirical world in the field using qualitative research methods.
These so-called alternative studies founded in sociological theory are commendable
because they contribute to the quest for ways to study audit that depart from dominant
or recognized streams of thought. It is important to “generate new perspectives, and
always to serve as eyes and ears in our ongoing efforts at understanding the present
and deliberating about the future. We may, in sort, arrive at a social science that
matters.”(Flyvbjerg 2009, 166).
That being said, considering the explosion of audit practice since the 1980s (Power
1994), the essential (or ontological) obscurity of audit (Power 1997) and the
abandonment of hermeneutics in favour of technocratic audit procedures that emerged
in the 1960s (Francis 1994) because of the way audit is understood through research,
we may ask: how can we study audit in order to understand it in a different way? This
article proposes an explanation upstream of economics, psychology and sociology, by
adopting a philosophical1 perspective, because, as Mautz and Sharaf (1964, 8)
contend, philosophy is the search for knowledge and general understanding of
phenomena by analyzing fundamental beliefs that forge a particular domain such as
audit. Philosophy thus facilitates the systematic organization of knowledge by
adopting a holistic point of view.
This article therefore develops a conceptual framework for the understanding of audit
based on philosophy rather than sociology, psychology or economics. To this effect,
two of Aristotle’s philosophical treatises entitled Categories and On Interpretation

1 In this paper, philosophy is defined as: “a discipline comprising as its core logic, aesthetics, ethics,
metaphysics, and epistemology; 2 a: pursuit of wisdom b: a search for a general understanding of
values and reality by chiefly speculative rather than observational means c: an analysis of the grounds
of and concepts expressing fundamental beliefs” (Merriam-Webster online dictionary, consulted June
9, 2009).
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(Aristotle, Organon I and II) and the Aristotelian concept of phronesis2 are applied to
audit.
These two treatises were chosen mainly because Categories explains how to define
concepts while On Interpretation provides the tools to judge the truthfulness of the
propositions established based on the concepts categorized. This judgment authorizes
logical reasoning and should be anchored in a specific context with phronesis to be
“good.” Aristotle thus provides a tool that can be used to understand one or more
concepts. This philosophical tool is pertinent to the understanding of audit. Second,
the philosophical anchors of the two opposed viewpoints as to what audit is, one
based on objectivity (Mautz and Sharaf 1964) and the other on subjectivity (Francis
1994), lead directly to Aristotle. More specifically, they both pertain to the treatises
Categories and On Interpretation (Aristotle, Organon I and II), in which the
philosopher states his thoughts on logical reasoning. For Mautz and Sharaf, audit is
grounded in logic, which they define as “the science of proof” (1964, 15).
Accordingly, logic determines how to establish facts, draw conclusions and infer a
judgment of validity or invalidity based on these purportedly objective facts (Mautz
and Sharaf 1964, 15). This emphasis on objectivity and the “scientific character” is
representative of the structuralist paradigm (Burrell and Morgan 1979). The approach
of Mautz and Sharaf implies judgment based on logical reasoning; an Aristotelian
concept. In contrast, Francis (1994, 235) views audit as a hermeneutical practice, a
process of interpretation. Hermeneutics necessarily imply subjectivity, whereas
Burrell and Morgan (1979) associate subjectivity with the interpretative paradigm.
Francis (1994) was inspired mainly by Hans-Georg Gadamer (Francis 1994, 237), for

2 The term phronesis can be understood as the individual’s capacity to grasp the nuances of a given
situation (Bodéüs 1995) or by “the capacity for practical reasoning – the ethical know-how to answer
the question of what action goodness requires of me in my particular situation” (Francis 1994, 242).
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whom hermeneutics equalled “the theory of interpretation” (Gadamer 1990, 52). This
conception of hermeneutics has anchors in Aristotelian philosophy, with the concept
of interpretation.
The rest of the article is divided into two main parts. In the following two sections, the
Aristotelian treatises Categories and On Interpretation are applied to audit. A holistic
conceptual model of audit, anchored in Aristotelian philosophy, is developed. The
second part follows with the application of the model to a concrete example to
illustrate its applicability. Lastly, the conclusion describes the contributions and limits
of the model proposed.
1 Audit according to the Aristotelian doctrine of categories  
In Organon, Aristotle develops a theory of judgment based on categories (Philonenko
2002). For Aristotle, categories are notions that reveal a being or its specific
characteristics and underlie the production of logic. (Philonenko 2002). Categories
explains how to define concepts, from which propositions can be formed. On
Interpretation provides the tools to judge the truthfulness of these propositions. This
judgment, in complementarity with Categories, authorizes the logical reasoning
discussed in the Prior Analytics, the third treatise of Organon. Aristotle observed and
analysed the way his peers understood the world and acquired knowledge. In doing
so, he deduced that people understand the world by distinguishing elements (or
concepts) of their reality by going from the general to the specific and by making
links with what they already know. The ten categories stated in chapter 4 of Organon
can theoretically explain the entire world. In short, Aristotle asserts that it is possible
to know the world by interpreting reality, in keeping with these categories. Aristotle
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thus supplies a tool for anyone seeking to understand a concept (Pelletier 2009, 13).
By implication, this theory of judgment necessarily allows one to understand audit.
Below, the two treatises of Aristotle are applied to audit, beginning with Categories.
The term “catégorie” (category) is the French equivalent of the Greek word Katègoria
in Aristotle’s work. The translation of Katègorien varies between translations. It is
translated by “accuse” or “declare” if the author assumes Aristotle is being hostile.
However, one can also intuit the meaning without this hostility, in which case the
word is translated by “make visible,” “ascribe” or “affirm something from something
else” (Pellegrin and Crubellier 2007, 70-71). The second translation, which conveys
the general idea that affirming a thing belongs to a category entails “sorting” it, to
better understand it, is retained. This is the way an object is categorized. Hence the
generally accepted translation of Katègoria is category4. According to Aristotle,
categorizing a concept entails associating a new concept with another concept that is
already known, to better understand it. The particular, previously unknown, is thus
identified and better understood in light of general criteria.
To take the example of accounting, when accountants seek the nature of a newly
acquired good to recognize it, they ask whether it is an asset, a liability or an element
of equity. They want to determine the category of the accounting equation in which
the new good, which is unknown to them, belongs. Accountants use their knowledge,
which is necessarily more general, of assets, liabilities or equity to properly categorize
a specific unknown good. The good is then categorized according to its belonging to
a broader category. In this way, accountants can recognize the good because they

3 Available online at http://www.aristotle-aquinas.org/textes-dyvan-pelletier/ (2009-06-03; 5:06 p.m.).
4 Pelletier (2009) asserts that translating Katègoria by “Attributions” expresses Aristotelian thought
better than the term “Categories” does.
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know it better. This is a direct application of the Aristotelian doctrine of categories if
their interpretation process of categories is based notably on phronesis.
Evidently, the categories stated by Aristotle are more general than the elements of the
accounting equation. Aristotle defines ten categories in Organon. These categories
fall into two types, substance (or essence) and relatives. Substance refers to what is,
whereas relatives refer to specific characteristics that necessarily refer to a substance
or another relative. The nine relatives are: quantity, quality, relation (to something),
place, time, position, state, action, or affection (Aristotle, Organon I, ch. 4, 111).5 The
categories will be examined below in the order presented by Aristotle, and a
conceptual model of audit will be developed, to ascertain whether audit corresponds
to these categories.
1.1 Substance  
“Substance, in the truest and primary and most definite sense of the word, is that
which is neither predicable of a subject nor present in a subject” (Aristotle, Organon I,
ch.5, 113). The word “substance” is the usual English translation of the Greek ousia,
but the term is also sometimes translated by the term “essence” (Philonenko, 2002). A
substance is what describes the nature of a subject (what it is) most generally and
intrinsically, for example “such a person” or “such an animal.” For Aristotle, the
substance is indivisible and is present in nature, e.g. animals and plants. Substance
refers to the essence of a particular individual. One cannot divide (modify) an object
without misrepresenting it, without changing its substance. For example, if one
wishes to describe a human being, one will say that he is “such a man,” included in

5 Three of the nine relatives are not treated in this paper because they do not lend themselves to
discussion of the nature of audit. These categories are: place (reference to a geographic place), position
(reference to a position of a person’s body such as “standing” or “lying down”), and state (referring to
the fact of possessing an object independent of oneself). Interested readers can consult chapters 9 and
15 of the Organon for more information.
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the species of humans. This species is in turn included in the genus animal. Following
this reasoning, the person described is known by his belonging to the human species
and the animal genus that make up his substance (or essence).
However, Aristotle mentions that the essential property of the primary substance is
that if it did not exist, it would be impossible for anything else to exist (Aristotle,
Organon I, ch.5, 115). This is the most exclusive category because everything is
necessarily a substance or related to one. Thus, everything known must be present in
nature or be related to a so-called “natural” substance.
Is audit a substance?
First, for Aristotle, substance refers to an indivisible subject. It pertains to an
individual present in nature such as an animal or plant. Audit does not correspond to
an indivisible element present in nature because it is not found naturally. Second,
Aristotle indicates that without substance, nothing can exist. This signifies that if
something needs another thing to exist, it does not correspond to a substance, but
rather to another attribute. One must then ask whether audit can exist in isolation
from everything else. The answer is no, because audit does not exist in itself.
Notably, it needs, as will be shown in the analysis of relatives, an auditor, an auditee
and an audit object to exist. Consequently, audit is not a substance in the Aristotelian
sense. If audit is not a substance, this implies that it consists of one or more relatives.
The relatives in question are examined in the next section.
1.2 Relation to something 
Relation (to something) is a way to describe concepts related to a distinct element.
The relatives cited by Aristotle are: habit, disposition, perception, knowledge, and
attitude (Aristotle, Organon I, ch.7, 142). It is difficult or even impossible to grasp the