Am I an economist?

I have an undergraduate degree in economics from the University of Manchester. I was awarded it a long time ago, when the Phillips curve was something relatively new and the first edition of Richard Lipsey's first textbook had just appeared. After that, I became a chartered accountant, which is how I described myself until I became an academic. But perhaps I am also an economist...

My musings have been prompted by the extensive media discussion of what is being described as Corbynomics. I'm not especially interested in the substance of what is being discussed - even if Mr Corbyn were to achieve significant power, I'm sure he would discover as others have before him* that there are significant constraints to policy implementation, consigning his manifesto to oblivion.

But I am interested in how policy making happens: who do policy makers consult and how do they evaluate the advice they receive? In the areas I know best, there is sadly little use made by policy makers of independent and rigorous academic research, although ICAEW is striving to address this by basing its policy recommendations on a thought leadership programme which draws on academic research, and by establishing strong links with academics across the world through funding research studies and involvement in leading academic conferences.

So if his economic policy ideas are so newsworthy, I began to wonder who advises Mr Corbyn. That's not difficult to discover as his adviser Richard Murphy, has quite a high public profile (although he doesn't feature in this list of "top economists". To join this particular list, you can nominate yourself and the ranking is based on social media activity. With a bit of effort, I could probably get myself in there. Maybe I am an economist!)

Mr Murphy is described as an economist and has extensive experience as an advisor to a range of organisations. His campaigning stance on tax justice seems to make him a controversial figure and his frequent blog postings generate some interesting debate on the blog and on Twitter. As with many blogs, I found myself wanting to know more about the supporting arguments for opinions expressed; my personal rating system gives more credence to bloggers who cite peer-reviewed academic research - I have, after all, spent many years telling my students to follow up sources to assess the credibility and legitimacy of arguments.

Mr Murphy's posts don't seem to cite many academic sources, and neither do those of his publications accessible from his web site, which led to me wonder about his background and qualifications. I was very interested to learn that he has exactly the same qualifications that I do: an undergraduate degree in economics and accountancy, and an ICAEW qualification. I'm really beginning to think that I may be an economist!

So what gives authority to Mr Murphy's advice? His advice on accountancy and tax would presumably derive authority from his membership of a professional accountancy body but there is no equivalent for economists, other than, possibly, membership of the profession of academic economists. Interestingly, in his very full disclosure of his personal funding arrangements on his blog, Mr Murphy states that his funders "have agreed that an appropriate income benchmark for my work is that of a UK university professor." Hm. Some professors of economics and finance command pay considerably higher than the grants Mr Murphy receives. But the holder of a professorial post in a UK university is subject to an important constraint: his or her work is subject to peer review, which gives it legitimacy and authority. The system of peer review may have its flaws (this is a good discussion of these in the context of medical science) but it does expose ideas to analysis and critique by those who understand them. Mr Murphy does get called out sometimes by those who comment on his blog: today he posted an interesting article about pensions which included a very confusing statement about the status of bank deposits, implying that these are bank capital rather than liabilities to depositors, and, when challenged by a reader, agreed that this was misleading - although he hasn't apparently amended the original post. But this is not the same as the type of review to which an academic article would be subjected. But, then, Mr Murphy is not an academic. Which leaves me still wondering about how authoritative his economic advice might be.

Anyway, I look forward to reading his forthcoming book "The Joy of Tax". His publishers have cannily decided to capitalise on his current high profile and bring forward the publication date.

However, I'm still not entirely clear about what an economist is. Investigating the jobs advertised on www.econ-jobs.com suggests that for many of them I'd need a stronger quants background than that provided in my degree, although some say that the role involves the sort of information analysis and communication for which any solid accountancy qualification and experience would provide. so maybe I can conclude that I *could* be an economist, if I really wanted to...

*Most recently, for example, the Lib Dems: before the Coalition came into being, I attended a meeting at which Vince Cable set out a compelling and indeed inspiring case for the government to take the opportunity provided by the financial crisis for extensive infrastructure investment, a case which was never heard of again...

Accountancy firms wake up to widening access

I am delighted to see today that EY has followed PwC's lead and scrapped their UCAS points requirement for student applications.

Thirty years ago, when I started teaching accounting at Oxford Poly, students on our accounting degree course were typically admitted with relatively poor A level results. In those days, course managers dealt with admissions and had a great deal of latitude: we had time to interview applicants and make a judgement about how well they might cope with degree level study. And, as the majority of staff teaching accounting had professional accounting qualifications, we could also develop some idea about whether the students were suited to and likely to be successful in subsequent professional examinations. Quite often, poor A level results could be explained by situations beyond the student's control and we could take those into account.

Many of these students flourished during their studies and achieved excellent degrees but those who wanted to become chartered accountants faced great difficulty in securing training contracts

Around that time, someone noticed a correlation between good A level results and success in ICAEW examinations. Accountancy firms were having to deal with increasing numbers of applications for training contracts, so setting a minimum A level score was an attractive, and apparently logical, screening process. The result was that our graduating students didn't even get as far as the interview stage. We tried to help, advising them to draft covering letters which stressed the value added of their university experience and to include a photo. We drew on our personal contacts in firms, encouraging them to visit us and meet our students and persuading them to make a case for interviewing strong applicants. We steered our students to apply to smaller firms where partners were often more interested in assessing how well a student might fit in to the team and have the skills to contribute quickly in a practical way than in their out-of-date A level results. For some, we suggested that they might find it easier to train with a different professional body, although an ICAEW qualification was, usually, in their view, the best: this was especially the case with our international students.

Our students had often felt that they had been written off at 18 because of poor A level scores but they had blossomed in higher education and regained confidence: it was very sad to see them denied entry to their chosen career paths, with three years of significant achievement dismissed as irrelevant.

The advent of online application meant we were no longer able to use any of our support strategies. A further blow: subsequent analyses of ICAEW exam performance revealed a correlation between a degree in a non-accounting subject and success in ICAEW examinations.  Our students could still find training contracts with smaller firms but those who succeeded with the Big Four became rare.

I'm still in touch with quite a few of my former students: they all became qualified accountants and many of them have had very successful careers, both within the profession and outside it. Some have even offered to employ me. But I still lament the loss to the profession which resulted from enforcing that rule for so many years and I greatly welcome the widening of access. I'm also delighted that one of my former colleagues is researching in this area: her work should provide sound data for future policy decisions. 

Ethics

Saturday's "Lunch with the FT" column was about Pavel Durov, a young Russian tech entrepreneur. He described the development of his social networking site VKontakte:

-----
It was, he says a "libertarian's paradise" in the unregulated internet market that then existed in Russia. "You could do anything," he says. "Of course, there were stupid laws. You could get around them with the help of corruption, which is usually bad, but when the laws are really stupid and outdated and really limit innovation, it can be a good thing."
-----

Really?

The Great Governance Debate

A publication from the IoD today: thanks to @dinamedland for the headsup. Nice word cloud on the front cover.

But why "great"? Is there a lesser governance debate? Is there a debate at all? And what is the purpose of debates? Motions carried or defeated? Is this a sensible metaphor for corporate governance? I think that good governance happens in all the small conversations between the people involved. The Cadbury Code was all about stimulating those conversations, providing a language and a framework in which they could take place. It certainly wasn't about measurement of any sort. (Henry Mintzberg recently offered some cogent words about this.)

I did get beyond the front cover. I got as far as page 8 and realised I could do with a cup of tea and a cuddle with my cats while pondering my own inadequacies with regard to statistics and wondering whether it would be worth trying to address these at this stage of my life. It didn't take long to conclude that I could manage without knowing what "support vector machine regression" means. It certainly implies academic rigour, as does the Cass imprimatur, so I parked my anxieties and turned to the conclusions.

Ok, these are interim conclusions, but really?

"Different questions give different answers"? Really?

"Companies with higher governance scores have reputational advantage." You don't say!

"High-profile companies have reputational disadvantage

 Companies with lower scores in the predictive model (lowest tier) suffer from an average reputational disadvantage of -42. High-street banks have some of the strongest reputational disadvantages, ranging from -47 to -124."

Now that's quite interesting and might be worth exploring.

"Range of scores is relatively narrow.

We also note that the range of scores produced in the predictive model is relatively narrow. It may be that lower-scoring companies are already moving to develop and improve governance to deliver the levels seen by the higher-scoring companies."

That would also be worth investigating over time.

" Governance is a complex system. [Well, there's a surprise!]

The range of results from the instrumental factors in Section 6 above shows us that no single factor can determine how well a company delivers corporate governance. Companies that wish to improve their governance should address a wide variety of factors. Governance should be seen as the responsibility of the whole organisation."

I would certainly take issue with that final sentence. I blogged about the problems of blurring of boundaries between governance and management last August and I'll have more to say on that in a future post.

This may not seem very positive: I should probably read the report in more detail, to be fair. But it's my contribution to the debate, for now. Is anyone listening?

The truth about our norm core

Interesting article in today's FT by Tim Harford, pointing out that the classic studies of what has come to be called groupthink are too often quoted without mentioning the proportion of the subjects involved who did not follow the herd.

I'm still puzzled about the point at which consensus (considered good) becomes groupthink (considered bad). The evidence that board diversity will lead to less groupthink is very limited but this argument is frequently trotted out in support of board gender diversity.

And I'd like to see research on the relationship between consensus and diversity. In my research on audit committees, when I enquired about how contentious issues were resolved, board members told me repeatedly that dispute was minimal: many of their stories indicated that this was because consensus was achieved outside the board room through informal conversations. There have been many changes in the way boards work since I undertook that research but I doubt whether the importance of informal communication before and after meetings in achieving consensus has entirely diminished. How does that work for more diverse boards, I wonder?

Lots more interesting stuff to read:

A fascinating article by Paolo Quattrone on institutional logics: "Governing Social Orders, Unfolding Rationality, and Jesuit Accounting Practices: A Procedural Approach to Institutional Logics". A demanding read but worth getting to grips with.

Having read the sample chapter via Kindle, I was really keen to get hold of this and assumed that I would need to use the inter-library loan service, a ponderous process. The librarian who deals with ILL made my day when she told me that the Brookes library has it in ebook form!

I haven't read very far yet (and, because the author is a legal scholar, it has lengthy footnotes on every page so it's easy to lose track of citations, which I find very frustrating) but I like his initial analysis of the arguments which seems more comprehensive than anything else I've read. So far, there is almost no reference to non-US literature - I shall be ticking off citations against my lengthy bibliography on board gender diversity. I see that the empirical work was conducted in Norway: I hope he reflects on the difficulty of generalising from that special case.

Delighted with this, a freebie from OUP for reviewing a book proposal. It looks at accountability within everyday processes such as rubbish collection, traffic control and airport security, and how this relates to governance.

And a treat.










My other treat this week was listening to the wonderful Bob Monks speak at a CSFI roundtable event - always a pleasure to hear him speak, and I was able to give him a copy of the Cadbury book.

Chasing audit quality

The accountancy profession continues to struggle to demonstrate the value of audit to the wider world. Like the activities of boards of directors, audit is opaque: the title of Beattie, Fearnley and Brandt's prize-winning book on audit "Behind Closed Doors" was well chosen. If it is difficult to show what auditors actually do, it is even more difficult to assess the quality of what they do.

My recent reading has pointed up two rather different approaches to this problem, a difference which underlines the worrying gap between academic research and practice. Academics investigating the relationships which might affect audit quality use proxies for audit quality such as abnormal accruals. There is a sizeable literature dating back to de Angelo's widely cited paper published in 1981. This is a useful overview from 2004.

A practitioner reviewing some proposed research in this area recently observed: "..it has always been slightly unclear to me how you can establish an appropriate proxy for something that has itself not been clearly defined, and for which no agreed methodology of assessment has been developed."

The FRC seems to ignore all this and takes a pragmatic approach, well illustrated in the recent practice aid for audit committees, developed thus:

"The FRC organised five roundtables where an approach to assessing the effectiveness of the external audit was field tested, with a focus on audit quality and the financial statement process. The roundtables included key market participants relating to companies with a UK Premium listing – including audit committee members, investors, financial management and auditors, who gave feedback on the proposed approach, and shared some of their own experiences and expectations."

This would not pass the tests of rigorous empirical research (but is there any such thing? Paul Williams examines it here) but it has generated an analysis of the potential components of audit quality which recognises the subjectivity and judgement involved in its assessment but still offers a practical way forward.

Accounting academics are subject to all sorts of institutional constraints which militate against producing studies which could be of practical help to practitioners: they often complain that access to people is difficult, making ethnographic approaches, which could provide insights into behaviour, too problematic to undertake. But the fundamental questions which interest each group are the same. It would be in everyone's interests to bridge the gap.

The PRA on board responsibilities

The Prudential Regulation Authority is consulting on this. The paper sets out a very clear articulation of board responsibilities which would apply to any company, not just those regulated by the PRA. The paper provides a couple of neat summaries of the effective board from the PRA perspective:

"An effective board is one which understands the business, establishes a clear strategy, articulates a clear risk appetite to support that strategy, oversees an effective risk control framework, and collectively has the skills, the experience and the confidence to hold executive management rigorously to account for delivering that strategy and managing within that risk appetite."

"The desired outcome from a regulatory standpoint is an effective board, which is one that:
• establishes a sustainable business model and a clear strategy consistent with that model;
• articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
• meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management."

The focus on risk, while obviously most relevant in financial services, might also help other companies to consider business decisions more carefully: from the perspective of negative outcomes, it is not always easy to distinguish between bad corporate governance and bad business decisions.

But the system still relies heavily on NEDs. I wonder if there is any recent research on the effect of NEDs on the boards of financial services companies over the last decade.

And I'm still struggling to understand what "culture" means.