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CONVERGENCE OF LAWS AND ITS LIMITS: A CASE STUDY OF TURKISH AND EU LAWS ON AUDITING

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Abstract

Classifications on the world's legal systems have long been the subject to studies in comparative law. The modern comparative approach however, no longer relies solely on the classic categorisation of common-civil law countries. This general classification fails to consider that legal systems can change through time and not all areas of law share the same patterns. For instance, firms (and countries) adopt international rules and standards voluntarily. This kind of convergence can mostly appear in the field of commercial law, including the field of auditing where the effect of economic integration of markets is in place. In this respect, in order to be a part of the global economy and to attract foreign direct investment, Turkey reformed its commercial law and capital markets law. In addition, there are political forces for convergence such as the EU requirement for Turkey to adopt EU laws. This paper critically investigates the forces for convergence and questions to what extent the laws on auditing are converging between EU and Turkey. It concludes that despite the formal convergence, actual convergence has not been achieved fully and differences still persist due to the institutional disparities. ÖZ Dünya'da hukuk sistemlerindeki sınıflandırmalar karşılaştırmalı hukuk alanındaki çalışmalara uzun zamandan beri konu olmuştur. Bununla birlikte, modern karşılaştırmalı yaklaşım, artık sadece Anglo-Sakson ve Kıta Avrupası Hukuk sistemleri klasik sınıflandırmasına dayanmamaktadır. Bu genel sınıflandırma, yasal sistemlerin zaman içinde değişebileceğini ve hukukun bütün alanlarının aynı kalıpları paylaşmadığını dikkate almaz. Örneğin, şirketler (ve devletler) gönüllü olarak uluslararası kural ve standartları benimseyebilirler. Bu tür bir yakınsama, piyasaların ekonomik entegrasyonunun etkisinin olduğu bağımsız denetim alanı da dahil olmak üzere çoğunlukla ticaret hukuku alanında ortaya çıkabilir. Bu bağlamda, küresel ekonominin bir parçası olmak ve doğrudan yabancı yatırımları çekmek için Türkiye ticaret kanununu ve sermaye piyasası kanununu yeniden düzenledi. Ayrıca, Türkiye'nin AB mevzuatını benimsemesi gerekliği gibi politik güçlerden de bahsedilebilir. Bu makale, yakınsama kuvvetlerini eleştirel bir şekilde incelemekte ve bağımsız denetim yasaları açısından AB ile Türkiye arasında ne derece yakınsama olduğunu sorgulamaktadır. Makalede, resmi yakınsamaya rağmen, gerçek anlamda bir yakınsamaya tam olarak ulaşılamadığı ve kurumsal uyumsuzluklar nedeniyle farklılıkların görüldüğü sonucuna varılmıştır.
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CONVERGENCE(OF(LAWS(AND(ITS(LIMITS:(A(CASE(STUDY(OF(TURKISH(
AND(EU(LAWS(ON(AUDITING((
HUKUKTA(YAKINSAMA(VE(SINIRLARI:(TÜRK(VE(AB(BAĞIMSIZ(DENETİM(
YASALARININ(ÖRNEK(OLAY(İNCELEMESİ(
Dr. Hatice Kübra KANDEMİR*
ABSTRACT
Classifications on the world’s legal systems have
long been the subject to studies in comparative law. The
modern comparative approach however, no longer
relies solely on the classic categorisation of common-
civil law countries. This general classification fails to
consider that legal systems can change through time and
not all areas of law share the same patterns. For
instance, firms (and countries) adopt international
rules and standards voluntarily. This kind of
convergence can mostly appear in the field of
commercial law, including the field of auditing where
the effect of economic integration of markets is in place.
In this respect, in order to be a part of the global
economy and to attract foreign direct investment,
Turkey reformed its commercial law and capital
markets law. In addition, there are political forces for
convergence such as the EU requirement for Turkey to
adopt EU laws. This paper critically investigates the
forces for convergence and questions to what extent the
laws on auditing are converging between EU and
Turkey. It concludes that despite the formal
convergence, actual convergence has not been achieved
fully and differences still persist due to the institutional
disparities.
Keywords: Corporate governance, External
audit, Convergence.
ÖZ
Dünya’da hukuk sistemlerindeki sınıflandırmalar
karşılaştırmalı hukuk alanındaki çalışmalara uzun
zamandan beri konu olmuştur. Bununla birlikte,
modern karşılaştırmalı yaklaşım, artık sadece Anglo-
Sakson ve Kıta Avrupası Hukuk sistemleri klasik sı-
nıflandırmasına dayanmamaktadır. Bu genel sınıflan-
dırma, yasal sistemlerin zaman içinde değişebileceğini
ve hukukun bütün alanlarının aynı kalıpları
paylaşmadığını dikkate almaz. Örneğin, şirketler (ve
devletler) gönüllü olarak uluslararası kural ve
standartları benimseyebilirler. Bu tür bir yakınsama,
piyasaların ekonomik entegrasyonunun etkisinin
olduğu bağımsız denetim alanı da dahil olmak üzere
çoğunlukla ticaret hukuku alanında ortaya çıkabilir.
Bu bağlamda, küresel ekonominin bir parçası olmak ve
doğrudan yabancı yatırımları çekmek için Türkiye
ticaret kanununu ve sermaye piyasası kanununu
yeniden düzenledi. Ayrıca, Türkiye’nin AB mevzuatını
benimsemesi gerekliği gibi politik güçlerden de
bahsedilebilir. Bu makale, yakınsama kuvvetlerini
eleştirel bir şekilde incelemekte ve bağımsız denetim
yasaları açısından AB ile Türkiye arasında ne derece
yakınsama olduğunu sorgulamaktadır. Makalede,
resmi yakınsamaya rağmen, gerçek anlamda bir
yakınsamaya tam olarak ulaşılamadığı ve kurumsal
uyumsuzluklar nedeniyle farklılıkların görüldüğü
sonucuna varılmıştır.
Anahtar Kelimeler: Kurumsal Yönetim,
Bağımsız denetim, Yakınsama.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
* Assist. Prof., Faculty of Economics and Administrative Sciences, Izmir Katip Celebi University, Merkezi Ofisler 2, Balatcik, Iz-
mir/TURKEY (e-mail: haticekubra.kandemir@ikc.edu.tr, ORCID: 0000-0001-9722-1798 )
This work is an updated and revised version of a part of the author’s doctoral thesis. I am grateful to Professor Mathias Siems
for his valuable comments. All errors and views are of my own.
(Araştırma Makalesi; Geliş Tarihi: 07.02.2019 / Kabul Tarihi: 19.05.2019).
,!
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I. INTRODUCTION
The world’s legal systems are commonly
grouped under common and civil law countries in
terms of legal history, legal thinking and positive ru-
les.1 However, this core division might also ‘ove-
remphasise’ differences (and similarities) and
hence, it can lead to misleading conclusions about a
country’s legal environment.2
This paper starts with questioning whether
there is an approximation on legal systems and how
this affects laws on auditing internationally. In this
respect, the first section looks at the debates on legal
systems differences and questions whether traditio-
nal grouping on legal systems are valid for laws on
external auditing. It will be suggested that, in the fi-
eld of auditing, the classification of legal families
matter less due to the adoption of international
standards and global integration of markets.
The second section sets the framework for a
possible convergence of auditing between Turkey
and the EU through identifying the forces for con-
vergence, and the methods and feasibility of conver-
gence. Turkey, as a candidate for the EU members-
hip, is required to align its laws with the EU acquis.3
In 2012, both commercial law and capital markets
law were reformed presenting new requirements for
the statutory audits of companies. This raises the
question to what extent, Turkey has successfully
been adopting EU laws on auditing. The theoretical
underpinnings of regarding drivers and obstacles
for auditing convergence will be based on Hans-
mann & Kraakman’s explanation of important eco-
nomic forces for convergence with respect to the
drivers of convergence, as well as Bebchuk & Roe’s
path dependency theory with respect to obstacles
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1 René, D. & Brierley, J. E. C. (1985) Major Legal Systems in
The World Today: An Introduction to The Comparative
Study of Law, London, Stevens; La Porta, R. et al. (1997) ‘Le-
gal Determinants of External Finance’ Journal of Finance
52:3, p. 1131.
2 Siems, M. (2014) Comparative Law, Cambridge University
Press, pp. 80-82. See also Örücü, E. ‘A General View of “Le-
gal Families” and of “Mixing Systems”’ in Örücü, E. & Nelken,
D. (Editors) (2007) Comparative Law: A Handbook, Hart, p.
169.
3 The EU acquis includes EU legislation to date, as well as ad-
ditional standards set by the courts and practices develo-
ped by the institutions.
for convergence. Berkowitz et al.’s ‘transplant effect’
theory will also be applied to explain whether legal
families could be obstacle for auditing convergence.
In this respect, in addition to the comparison of the
multi-headed supervision mechanism, and functio-
nal dissimilarities still stand in the way of actual
convergence between EU and Turkish laws on au-
diting.
II. DIFFERENT LEGAL SYSTEMS AND
EXTERNAL AUDITING
Traditionally, the world’s legal systems are
grouped under common (Anglo-Saxon) and civil
(Romanic-German) law families.4 This broad clas-
sification is made in accordance with the core diffe-
rences in legal ideology, structural system of law,
structure of court system, sources of law, and legal
method and procedure.5 According to this broad
classification, it is said that countries belonging to
the common-law family group show the patterns of
US and English laws while countries belonging to
the civil-law family group show the typical features
of French and German laws.6
4 There are also other approaches in the taxonomy of legal
systems, such as cultural taxonomy, which distinguishes
four broad cultures: the African, the Asian, the Islamic and
the Western (Europe, America, and Oceania). See Hoecke,
M. & Warrington, M. (1998) ‘Legal Cultures and Legal Para-
digms: Towards a New Model for Comparative Law ’Inter-
national and Comparative Law Quarterly, 47, p. 495.
5 Husa, J. (2011) ‘The Method is Dead. Long Live the Met-
hods! European Polynomia and Pluralist Methodology’ Le-
gisprudence 5:3, 249 in Siems (2014) pp. 74-78.
6 Siems (2014) p. 75.
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It is believed that legal systems change thro-
ugh time and not all areas of law share the same pat-
terns within a particular legal family. To be sure,
there are differences in legal systems in different
parts of the world; these differences might be deri-
ved from geographical, social, economic, traditio-
nal, historical, or other differences that might have
affected the course of a country’s history and the
way its legal system works. This could be war, revo-
lution, colonisation, or other factors originating
from religion, ethics, or the influence of the interest
groups and parties.7 Although there might be a di-
rect impact of these factors on the characteristics of
a country’s legal system, sharing a particular histo-
rical or geographical element does not automati-
cally suggest parity between two countries’ legal sys-
tems. Some geographical taxonomy might be true in
terms of a shared cultural history. However, social,
political, and economic developments through time
might have different influences on countries that
share the same geography. Therefore, their legal
systems might remain distinct or, alternatively,
come closer over time.
In this vein, on the one hand, legal family
classifications could be a useful tool to understand
foreign laws better by identifying similarities and
differences. However, on the other hand, a general
categorization of legal systems does not always pro-
vide a fair picture. To give an example, all continen-
tal European countries classified as civil law family,
yet there is great diversity in some fundamental le-
gal areas.8 Similarly, underlying the role of culture
and customs in Eastern countries’ legal systems in
order to emphasise differences from the Western
countries could be misleading in the era where there
has been influence of legal ideas, especially in the fi-
eld of commercial law.9
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
7 Zweigert, K. & Kötz, H. (1998) An Introduction to Compa-
rative Law, 3rd edition, Oxford University Press (translated
by Tony Weir), p. 36.
8 Similarly, the Scandinavian countries are classified as Ger-
manic civil law, yet their welfare state model indicates uni-
form Nordic legal family. See ibid, p. 79.
9 ibid, p. 89.
10 Zweigert & Kötz, p. 65.
11 ibid, 230.
12 The Civil Code of 1926 from the Swiss Civil Code and the
Code of Obligations, the Penal Code of 1926 from the Ita-
lian Code of 1889, the Code of Civil Procedure of 1929 from
Moreover, a kind of taxonomy based on ge-
ographical or regional similarities does not necessa-
rily apply to different areas of law within a particu-
lar legal system. For example, Arabic countries be-
long to Islamic law tradition with respect of family
law; however there is a great influence from Euro-
pean jurisdictions, namely France and Italy, in
terms of commercial law due to their colonial his-
tory in those countries10 (i.e. Algeria; Tunisia). Al-
ternatively, although African countries stayed un-
der British rule, the rules of customary African law
in effect are especially in the areas of family and suc-
cession law.11 Apart from geographical, religious, or
colonial influences, there might be a voluntarily re-
ception of foreign law, as it is the case in Turkish
legal system. For instance, at the beginning of the
harmonising its law with the EU acquis. In this res-
pect, Turkey is in the process of modernization in
the Swiss Canton of Neuchatel, the Code of Criminal Proce-
dure of 1929 from the German Code of 1877 and others ag-
ain from Swiss and German sources. See Örücü E. (2000)
‘Turkey facing the European Union- old and new harmo-
nies’ European Law Review, 25:5, pp. 523, 524. See also;
Berkowitz D. et al, (2003a) ‘The Transplant Effect’ American
Journal of International Law, 51:1, p. 199
13 Örücü (2000) p. 525.
14 Örücü (2007) p. 181.
15 Ogus, A., ‘The Economic Approach: Competition between
Legal Systems’ in Örücü, E. & Nelken, D. (Editors) (2007)
Comparative Law: A Handbook, Hart, p. 165.
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improving its legal system. It is likely that the pro-
cess of the EU membership will also have an impact
on legal transmission in Turkey.
The above examples may suggest that one
should not rely solely on the classic ‘legal family’ ca-
tegorizations.16 Örücü sees all legal systems as
mixed and overlapping, meaning that all legal sys-
tems are combinations of various legal sources.17
Moreover, in the current conditions of the 21st cen-
tury, with worldwide globalisation of systems oc-
curring, categorising legal systems into strict groups
is not valid anymore. Although reasons and intenti-
ons can differ, the legal systems are crosses”.18 An
approximation of legal systems can be seen, especi-
ally in commercial law due to internationalisation
of economy around the world (e.g. cross-listings
and cross-border investments).19 Therefore, whet-
her similar approximations are possible in terms of
external auditing regulation will be examined.
The governance function of external audi-
ting is closely linked to the ownership structures of
firms. Before going into detail, it might be useful to
review the literature on the different legal systems
and the use of external auditing.
Based on the common-civil legal families
theory, a number of studies carried out by La Porta
et al. controversially argued that differences in legal
systems have influenced the economic development
of these countries and their governance functions.20
In short, La Porta et al. established a general distinc-
tion of family groups arguing that capital markets in
countries that belong to the civil law legal systems
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
16 Zweigert & Kötz, p. 41.
17 Örücü (2007) p. 177.
18 Örücü, E.,‘Family Trees for Legal Systems: Towards a Con-
temporary Approach’: Hoecke, M. (Editor) (2004) Epistemo-
logy and Methodology of Comparative Law, Oxford, Hart,
p. 359.
19 Siems, M. (2008) Convergence in Shareholder Law, Camb-
ridge University Press, pp. 250-296.
20 La Porta et al. (1997). See also La Porta, R. et al., (1999) ‘Cor-
porate Ownership around the World’ Journal of Finance,
54:2, p. 471.
21 La Porta et al. (1997) p. 1142.
22 La Porta, R. et al., (1998) ‘Law and Finance’ Journal of
Political Economy, 106:6, p. 1113; La Porta, R. et al., (2000)
‘Investor Protection and Corporate Governance’ Journal of
Financial Economics, 58:3; La Porta, R. et al., (2002)
‘Investor Protection and Corporate Valuation’ Journal of
Finance, 57, p. 1147.
23 La Porta et al. (1998) pp. 1141, 1146.
24 Francis J. R. et al., (2003) ‘The Role of Accounting and Au-
diting in Corporate Governance and The Development of
are less developed because of their weak legal pro-
tection of minority shareholders,21 whereas com-
mon law legal systems offer more protection of mi-
nority shareholders, and therefore the legal envi-
gued that the UK law on shareholder protection is
closer to the Continental European legal system
than it is to US law.25 Secondly, such categorization
of dispersed and concentrated ownership structures
with strong and weak legal systems is misleading,
since controlling shareholders may exist in count-
ries with good laws (e.g. Sweden).26 Thirdly, the ef-
fects of legal systems on the quality of accounting
might not be that clear. Instead of a common versus
civil law distinction, other factors (e.g. language,
ownership concentration, management powers and
incentives, auditor quality, regulation, enforce-
ment, and other institutional factors) may have a
greater effect on accounting quality.27 Moreover,
cultural factors might also have an influence on ac-
counting standards and practices.28 Fourthly, the
Financial Markets Around the World’ Asia-Pacific Journal of
Accounting and Economics, 10:1.
25 Lele, P. P. & Siems, M. M. (2007) ‘Shareholder Protection: A
Leximetric Approach’ Journal of Corporate Law Studies, 7:
17.
26 Sweden is a good example of controlling shareholder
structure and effective monitoring mechanisms that pre-
vent the exploitation of minority shareholders. See Gilson,
R. J. (2006) ‘Controlling Shareholders and Corporate Gover-
nance: Complicating the Comparative Taxonomy’ Harvard
Law Review, 119:6, p. 1641.
27 Lindahl, F. & Schadéwitz, H. (2013) ‘Are Legal Families Re-
lated to Financial Reporting Quality’ Abacus, 49:2, p. 242.
For empirical evidence on cultural differences on internati-
onal accounting practices see Nobes, C.W. (2011) ‘IFRS
Practices and the Persistence of Accounting System Classi-
fication’ Abacus, 47:3, p. 267283 (showing national influ-
ence on accounting practices in eight countries). See also
Hellman et al. (2015) ‘The Persistence of International Ac-
counting Differences as Measured on Transition to IFRS’ Ac-
counting and Business Research, 45:2, pp. 166-195.
28 Gray, S. J. (1988) ‘Towards a Theory of Cultural Influence on
the Development of Accounting Systems Internationally’
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distinction between common and civil law is beco-
ming less relevant after increased regulatory scru-
tiny over auditing (and securities) regulation and
harmonisation forces, in particular at EU level.
Lastly, developments in the international economy
might eventually lead to a convergence between le-
gal systems, including in auditing. This approxima-
tion is explained as ‘convergence through congru-
ence’, 29 and will be detailed in section III-A below.
Nevertheless, the role of external auditing
might still vary in different market systems, mainly
due to the different ownership structures of firms.
For instance, in market-based governance systems
(outsider systems), such as in the US and UK, high-
quality public financial disclosures and reporting
are much more developed because public disclosure
plays a more central role in these systems.30 In cont-
rast, in civil law legal regimes (insider or concentra-
ted systems), where political influences are greater,
financial reporting is much more focused on taxa-
tion.31 In market-based systems, companies are
more likely to be subject to agency costs due to
asymmetric information.32 Here, external auditing
can function as a monitoring mechanism on the
management and can help to reduce the agency cost
by mitigating information asymmetry.33 The role of
auditing in outsider systems is more to check on
managers.34 It is said that the incentives to commit
fraud are different in insider corporate governance
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Abacus, 24:1, p. 1 (explaining four dimensions of accoun-
ting values based on cultural influence). See also section III-
D below.
29 See Siems (2008) pp. 250-296.
30 Ball, R. (2001) ‘Infrastructure Requirements for an Economi-
cally Efficient System of Public Financial Reporting and
Disclosure’ Brookings-Wharton Papers on Financial Servi-
ces, p. 127.
31 ibid, 146.
32 Jensen, M. C. & Meckling, W. H. (1976) ‘Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership Struc-
ture’ Journal of Financial Economics, 3:4, p. 305.
33 Ashbaugh, H. & Watfield, T. D. (2012) ‘Audit as a Corporate
Governance Mechanism: Evidence from the German Mar-
ket’ Journal of International Accounting Research, 2, p. 1.
34 Watts, R. L. & Zimmerman, J. L. (1983) ‘Agency Problems,
Auditing, and the Theory of the Firm: Some Evidence’ Jour-
nal of Law and Economics, 26:3, p. 613.
35 Coffee J. C. Jr., (2005) ‘A Theory of Corporate Scandals: Why
the USA and Europe Differ’ Oxford Review of Economic Po-
licy, 21:2, pp. 198, 204.
36 For the Imar Bank case, see also section III-D below.
systems, where controlling shareholders have a ten-
dency to make use of the corporate assets for their
personal benefits.35 This was notably seen in the
Imar Bank36 scandal in Turkey. Large private bene-
fits of control, for example illegally transferring as-
sets to other corporations, can be seen as a proof of
weak corporate governance. Investors would be re-
luctant to invest in those companies. Thus, here -
with greater problems of private benefits of cont-
rol37 companies may have incentives to improve
their corporate governance to attract outside inves-
tors. In concentrated systems, firms tend to use
external auditing as an assurance of the credibility
of the information in the financial reports and sub-
sequently gaining public confidence to attract in-
vestors.38 It can be claimed that high-quality audits
Auditors Perform a Corporate Governance Role in Emer-
ging Markets? Evidence from East Asia’ Journal of Accoun-
ting Research, 43:1, pp. 35, 44; Copley P. et al., (1995) ‘Si-
multaneous estimation of the supply demand of differenti-
ated audits: evidence from the municipal audit market’ Jo-
urnal of Accounting Research, 33:1, p. 137; Johnson, W. B.
& Lys, T. (1990) ‘The market for audit services: evidence
from voluntary auditor changes’ Journal of Accounting and
Economics, 12:1-3, p. 281.
39 Guedhami, O. & Pittman, J. A. (2006) ‘Ownership Concent-
ration in Privatized Firms: The Role of Disclosure Standards,
Auditor Choice, and Auditing Infrastructure’ Journal of Ac-
counting Research, 44:5, pp. 889, 895.
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international developments on accounting and au-
diting are enormous because of their growing im-
portance in international markets. Public financial
reporting is crucial for global markets in terms of
ensuring trust in the markets via ensuring the accu-
racy of financial information.40 For a country that
seeks to be a part of the global investment area it is
essential to keep up with international develop-
ments and provide a secure and trustworthy invest-
ment environment for foreign investors. Regardless
of its legal origin, a country might like to voluntarily
adopt laws on auditing in line with the highest stan-
dards, as in the US and UK. How successful this
adoption will be, depends on a number of factors
related to the country’s economic adaptability, re-
ception of legal rules, and historical and cultural ele-
ments. This paper takes Turkey as a case example in
the adoption of laws in auditing with the EU acquis.
In this respect, this paper will investigate the obstac-
les for a successful adoption of these rules, and will
illustrate the limitations of and forces for conver-
gence in the law of auditing between EU and Tur-
key.
III. CONVERGENCE OF AUDITING
BETWEEN EU AND TURKISH LAWS
There are a number of justifications for the
convergence of auditing in Turkey with EU laws.
These are the EU membership aspiration, globalisa-
tion and capital market integration, and the refor-
mation of commercial and capital markets laws.
These in fact are closely linked to each other.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
40 See also Shapiro, S. P. (1987) ‘The Social Control of Imper-
sonal Trust’ American Journal of Sociology, 93:3, p. 623.
41 They also noted (i) failure of alternative models and (ii) the
rise of shareholder group as the other drivers for conver-
gence. See Hansmann, H. & Kraakman, R. (2001) ‘The End
of History for Corporate Law’ Georgetown Law Journal, 89,
pp. 443-451. The reference to this article is not meant to en-
dorse all views presented by Hansmann & Kraakman (such
as that of ‘the end of history for corporate law’).
42 ibid.
A. FORCES FOR CONVERGENCE
This section will adopt Hansmann &
Kraakman’s41 explanation of important economic
forces on convergence to auditing convergence with
particular in securities regulation and corporate go-
vernance regimes.42 In case of cross-border mergers
and acquisitions, the home country’s securities re-
gulation and governance structures can affect the
governance practices of an acquired firm or, alter-
natively, new models may be imported from other
systems and two models may co-exist. Therefore,
convergence through cross-border mergers and
acquisitions is possible.43
On the other hand, global capital markets
prompt firms and jurisdictions to adopt more effi-
cient governance mechanisms. For example, most
of advanced economies require listed firms to make
regular financial disclosure and to have audit com-
mittees.44 In global capital markets, to compete with
other jurisdictions, lawmakers may choose to de-
mand less in order to make the law easier for busi-
nesses and to attract new investors. This may lead
43 Yoshikawa T. & Rasheed, A. A. (2009) ‘Convergence of Cor-
porate Governance: Critical Review and Future Directions’
Corporate Governance: An International Review, 17:3, p.
388.
44 To give an example, the Securities and Exchange Commis-
sion (SEC) in the United States requires every public com-
pany to have an audit committee or its equivalent as part
of its board of directors and to disclose certain types of fi-
nancial and non-financial information on a regular basis.
See The Sarbanes-Oxley Act, 107th Congress, H.R. 3763
(The SOX), respectively section 301(2) and section 401.
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to a race to the bottom”.45 In terms of disclosure
and best practice (e.g. effective protection of share-
holder rights46), it seems that regulatory competi-
tion leads in the opposite direction.47 It is said that
if domestic law or domestic firms fail to sustain the
application of the best governance mechanism, in-
vestment capital can flow to other jurisdictions that
can offer better standards.48 For example, more than
one-half of the Fortune 500 firms choose to incor-
porate in Delaware, a small state in the US.49
A similar justification can also apply to audi-
ting. Investors would not invest in a company
whose external audit mechanism does not assure in-
vestors in terms of reliability of the financial state-
ments. In such case, investors would choose other
companies in an alternative country who offer bet-
ter auditing standards. As a result, public compa-
nies that seek to attract investors would voluntarily
adapt the highest auditing standards in their home
country. Alternatively, public companies may vo-
luntarily choose to bind themselves to comply with
the highest standards by listing on a foreign
exchange.50 Firms choose to list on foreign stock
exchanges because of the expectation of the so-cal-
led ‘bonding effect’: it is believed that listing abroad
increases the share value of the firm.51 The other re-
asons for listing abroad might be to reach a broader
range of investors, to easily acquire foreign firms,
and/or to increase the prestige of firms.52 Thus, pub-
lic companies that seek to be listed on foreign
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
45 Kraakman R. et al., (2009) The Anatomy of Corporate Law:
A Comparative and Functional Approach, 2nd edition,
Oxford, Oxford University Press, pp. 25-27.
46 As Armour suggested, regulatory competition will lead to
a ‘race to the top’ because businesses will choose a state
whose laws are most protective in terms of the rights of
shareholders. See Armour, J. (2005) ‘Who Should Make
Corporate Law? EC Legislation versus Regulatory Competi-
tion’ Current Legal Problems, 58, p. 369.
47 Rasheed, A. A. & Yoshikawa, T., ‘The Convergence of Cor-
porate Governance: Promise and Prospects’: Rasheed, A. A.
& Yoshikawa, T. (Editors) (2012) The Convergence of Corpo-
rate Governance, Palgrave Macmillan, p. 7.
48 Easterbrook, F. H. & Fischel, D. R. (1991) The Economic
Structure of Corporate Law, Harvard University Press, pp.
212-218.
49 Black, L. S. Jr, (2012) ‘Why Corporations Choose Delaware’
Delaware Department of State Division of Corporations.
Available at https://corpfiles.delaware.gov/ whycorporati-
ons_web.pdf accessed March 29, 2019.
50 Hansmann & Kraakman, pp. 463-464.
exchanges and seek to raise external capital have to
improve their governance and disclosure practices
to gain advantages in the global market. Similarly,
jurisdictions that seek to attract foreign direct in-
vestment would promote the best governance mec-
hanisms, including the adoption of the highest au-
diting standards.
The other force for convergence is the ad-
vantages of having a single set of standards in global
capital markets. Having a single set of standards
would reduce companies’ transactions costs and of-
fer them the advantage of comparability.53 Interna-
tional investors who seek to reduce transaction
costs and benefit from comparability advantage
might prefer to invest in countries that have adop-
ted professional standards (e.g. international stan-
rities Disclosure Rules in the Global Market’ Columbia Busi-
ness Law Review, p. 241. See also White, L. J. ‘Competition
versus Harmonization-An Overview of International Regu-
lation of Financial Services’: Barfield, C. E. (Editor) (1996) In-
ternational Financial Markets: Harmonization Versus Com-
petition, AEI Press, pp. 5-48.
54 ISAs are issued in 1992 by an international private organi-
zation; the International Federation of Accountants (IFAC).
ISA is also accepted on capital markets as a reference for
international auditing standards by the International Or-
ganization of Securities Commissions (IOSCO).
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standards and regulations. This may suggest that in-
tegrated markets facilitate the use of uniform stan-
dards that can lead to convergence in auditing.
These theoretical underpinnings can be app-
lied to auditing convergence between Turkish and
EU law, explaining the economic forces for Turkey
to adopt similar rules with EU laws in terms of au-
diting. Turkey is considered an emerging market
economy that seeks investment from other count-
ries. If Turkey wants to use its growing market ad-
vantage and to be an attractive venue for foreign di-
rect investment, it should use an international lan-
guage that anybody who is interested to invest can
understand for business in Turkey. Today, major
states in the world, including EU Member States,
have adopted ISAs.55 Uniform accounting and audi-
ting standards are advantageous for all major eco-
nomies in terms of comparability, but they are
much more crucial for emerging economies, such as
Turkey. Through the adoption of international
standards, investors in Turkey will benefit from the
same standards as are applied in other major count-
ries. Moreover, the use of improved laws on audi-
ting would be a signal for foreign direct investment,
as it will increase the reliability of financial reports.
2. Harmonisation with EU Law
Harmonisation with EU law, such as the
adoption of the Audit Directive 2014/56/EU, and
also of some recommendations (e.g. auditor inde-
pendence56 and liability limitation57) can also be a
driver for convergence. Approximation of the laws
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
55 EU law requires that audit reports shall indicate that the
statutory audit was conducted in accordance with the ISAs.
See Directive 2014/56/EU of the European Parliament and
of the Council of 16 April 2014 amending Directive
2006/43/EC on statutory audits of annual accounts and
consolidated accounts, art. 26(1).
56 Commission Recommendation of 16 May 2002 Statutory
Auditors' Independence in the EU: A Set of Fundamental
Principles 2002/590/EC OJ L 191/22.
57 Commission Recommendation of 5 June 2008 concerning
the limitation of the civil liability of statutory auditors and
audit firms 2008/473/EC OJ L 162/39.
58 See European Council, ‘Conclusions of the Presidency’
DOC/93/3, Copenhagen, 21-22 June 1993.
59 Engert, S. (2010) EU Enlargement and Socialization Turkey
and Cyprus, Routledge, New York, p. 51.
60 Turkish Commercial Code (TCC) No. 6102, Official Gazette
No. 27846 (January 13, 2011).
on auditing will help Turkey to move its law closer
to the EU acquis and may help to adopt other areas
of law more easily.
Turkey is a candidate country to the EU
law, especially in auditing and financial reporting fi-
elds.61 In short, the new Code expands the applica-
tion of external auditing, authorising public over-
sight authority of Turkey (the POAT) to oversee the
audit profession,62 requiring the use of Turkish Fi-
nancial Reporting Standards (TFRS)63 in the finan-
cial reports of public interest entities (PIEs)64 and to
have audited those reports by an independent exter-
nal auditor (SMMM or YMM)65 in accordance with
Turkish Auditing Standards (TAS).66
One could question the efficiency of a pos-
sible convergence of Turkish laws in auditing with
the EU acquis. There are a number of advantages of
approximation with EU law. First, it is believed that
harmonisation of disclosure standards would miti-
61 In fact, reforming laws and regulations came on to Turkey’s
agenda in the mid-1990s. Although one of the incentives
was to catch up with the privatization trend in Europe, the
main motivation behind reforms was joining the EU. See
Draft Turkish Commercial Code General Justification. See
also Baç, p.17.
62 Statutory Decree on the organization and duties of the
public oversight, accounting and auditing standards No.
660, Official Gazette No. 28103, (April 6, 2011).
63 In 2006, Turkish Accounting Standards Board translated
the IFRS and named as Turkish Financial Reporting Stan-
dards. Since 2011, the responsibility to issue accounting
and auditing standards is overtaken by the public over-
sight authority of Turkey: the POAT.
64 Statutory Decree No. 660, art. 23.
65 SMMMs are the Certified Public Accountants and YMMs are
the Sworn-in Certified Public Accountants in Turkey.
66 TCC No. 6102, art 397(1).
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gate transaction costs while providing a comparabi-
lity advantage. Second, an improved legal environ-
ment would provide greater protection for minority
shareholders and other investors, while the risk of
expropriation by insiders would be reduced.67 This
is particularly important for Turkey, where control-
ling shareholders are dominant and can potentially
use company assets for private benefits.68 Due to the
lack of legal protections for minority shareholders,
investors would depend on relationships, not law.
As a consequence, the governance of companies
would be based on relationships that would discou-
rage new investors.69 Therefore, advanced auditing
laws are crucial, especially for the protection of (mi-
nority) shareholders and investors.
The combination of these forces may result
in a market-driven convergence. However, it needs
to be examined whether Turkish laws on auditing
have actually converged with EU law. The evidence
of this will be detailed in Section III-D below. Before
that, the methods of convergence will be discussed
next.
B. METHODS FOR CONVERGENCE
In Turkey, harmonisation with EU laws on
auditing has been through the adoption of interna-
tional accounting and auditing standards and re-
cent law reforms issued in the field of company and
capital markets law. The Capital Markets Board of
Turkey (the CMB), the regulatory authority in capi-
tal markets, issued a regulation requiring public
companies in Turkey to prepare financial state-
ments in accordance with International Financial
Reporting Standards (IFRS) as of 2005.70 Since 2005,
public companies are required to report according
to the CMB’s IFRS-compatible accounting stan-
dards. In terms of auditing standards, for the first
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
67 Coffee (1999) p. 705.
68 Yurtoğlu, B. B. (2000) ‘Ownership, Control and Perfor-
mance of Turkish Listed Firms’ Empirica, 27, p. 193.
69 Coffee (1999) p. 706.
70 Communiqué Series: XI, No: 25 on accounting standards in
capital markets, last amended by Communiqué II-14.1.a on
financial reporting standards in capital markets (February
03, 2017).
71 Communiqué Series: X, No: 22 regarding Independent Au-
dit Standards in Capital Markets, last amended by Commu-
niqué Series: X, No: 28 (June 28, 2013).
72 TCC No. 6102, art. 397.
time in 2006, the CMB introduced ISAs to Turkish
capital markets by the Communiqué Series: X, No:
22.71 Also, the new TCC requires audits of financial
reports to be conducted in accordance with TAS:
the Turkish translation of ISAs.72 Before the TAS
was introduced to the capital markets in 2006, there
had been no uniform standard in external auditing.
This situation was especially difficult for internatio-
nal audit firms who were not familiar with the acco-
unting system in Turkey. TAS are compatible with
ISAs, and therefore both international audit firms
and international users of the audit reports can take
advantage of that compatibility - not only the fore-
ign and/or multinational firms who aspire to invest
in Turkey, but also Turkish companies, who will be-
nefit from the use of those uniform standards. The-
73 ibid, art. 400.
74 Regulation on independent auditing, Official Gazette No.
28509 (December 26, 2012), art. 11.
75 TCC No. 6102, art. 400(2).
76 European Commission Staff Working Document Turkey
2012 Progress Report accompanying the document Com-
munication from the Commission to the European Parlia-
ment and the Council Enlargement Strategy and Main
Challenges 2012-13 Brussels October 10, 2012 SWD (2012)
336 final.
77 ibid.
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C. THE FEASIBILITY OF CONVER-
GENCE
So far it is submitted that auditing conver-
gence is necessary for Turkey especially regarding
its EU membership objective and the aim to be a
part of global financial markets. The latest law re-
forms under TCC No. 6102 and Capital Markets
Law No. 636278 are the methods using for auditing
convergence.79 Despite these reforms and formal
approximation of laws and regulations on auditing,
actual convergence may still not be possible.
This part will explain the feasibility of audi-
ting convergence between Turkish and EU law ac-
cording to the path dependency theory of Bebchuk
& Roe80 and the transplant effect theory of Ber-
kowitz et al.81 Within this context, this section will
question Turkey’s adoption of EU law on auditing
with respect to first, reasons arising from the initial
conditions with which countries started (i.e. its path
dependencies) and second, its institutional capacity
to receive the imported law (i.e. the transplant ef-
fect).
To begin with, Turkey and the countries of
the EU are at different levels of economic develop-
ment. The adoption of EU law may be hindered due
to institutional differences resulted from unequal
economic development. Less developed institutio-
nal infrastructure, such as insufficient capacity of
economic institutions, e.g. deficient budget and
expertise, can be seen in less economically develo-
ped countries. Ineffective institutional frameworks
can also be found in other countries than Turkey.
Pistor et al. found that the failure of the former So-
viet Union countries’ legal reform on the protection
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
78 Capital Markets Law (CML) No. 2499 amended with Law No.
6362, Official Gazette No. 28513 (December 6, 2012).
79 See section III-A above.
80 Bebchuk, L. A. & Roe, M. J. (1999) ‘A Theory of Path Depen-
dence in Corporate Governance and Ownership’ Stanford
Law Review, 52:127, p. 157.
81 Berkowitz, D. et al., (2003b) ‘Economic Development, Le-
gality, and the Transplant Effect’ 47 European Economic
Review, 47, p. 167.
82 Pistor, K. et al., (2000) ‘Law and Finance in Transition Eco-
nomies’ Economics of Transition, 8:2, p. 325.
83 ibid, p. 356.
84 Siems (2008) p. 235.
of shareholder and creditor rights was caused by the
absence of effective legal institutions.82 Despite the
fact that these countries have adopted advanced
laws on the protection of shareholder and creditor
king process through lobbying.86 There might also
be other influential actors, such as the EU that
might have role in the law-making process, as in the
case in Turkey.
Institutional transformation is considered as
one of the issues that challenged most the political
economy of Turkey in terms of forming the co-
untry’s institutional structure.87 Institutional re-
form in Turkey has mainly started following the cri-
sis of 2000 to 2001; only the Capital Markets Board
of Turkey (the CMB) was already established in
1981. International influence through the IMF and
World Bank has also encouraged Turkey to reform
its economic institutions.88 The main principle of
institutionalising in Turkey is isolating the regula-
tory process from political influence.89 To achieve
this, independent regulatory authorities are estab-
lished to operate in respective sectors, such as ban-
king, finance, energy, and telecommunications.90 A
85 Baldwin, R. & Cave, M. (2012) Understanding Regulation
Theory, Strategy, and Practice, 2nd edition, Oxford Univer-
sity Press, p. 41.
86 Siems (2008) p. 239.
87 Onis, Z. & Kutluay, M. (2013) ‘Rising Powers in a Changing
Global Order: The Political Economy of Turkey in the Age of
BRICS’ The Washington Quarterly, 34:8, p. 1417.
88 Atiyas, I. (2012) ‘Economic Institutions and Economic
Change in Turkey during the Neoliberal Era’ New Perspec-
tives on Turkey, 14, p. 54.
89 ibid, p. 60.
90 For the development of regulatory agencies in Turkey, see
Ozel I. & Atiyas, I. ‘Regulatory Diffusion in Turkey: A Cross-
Sectoral Assessment’: Cetin, T. & Oguz, F. (Editors) (2011)
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rule on independence ensures that these agencies
are given financial autonomy and their decisions
cannot be overturned by the ministries, but are sub-
ject to appeal mechanism undertaken by the Coun-
cil of State (Danıştay).91 There is controversy regar-
ding the level of independence and delegation of the
authority of economic institutions in Turkey. For
example, it is argued that the independence of tele-
communication regulatory institution of Turkey
has been impaired and institutional quality of the
regulatory agency in the electricity sector has been
insufficient.92
In line with the institutional independence
policy, in the field of auditing, the public oversight
authority of Turkey was established as an indepen-
dent body that is free from political pressure.
However, it has been argued that political interven-
tion on the regulatory authorities has been the case
in Turkey.93 Politicians and bureaucrats have been
involved in the control of the regulatory agencies,
for example, through the appointment of the board
members of these bodies as these agencies are ‘affi-
liated’ to the respective ministries,94 e.g. POAT, as
well as CMB are affiliated to the Ministry of Trea-
sury and Finance of Turkey. This arrangement may
suggest that operations of these institutions cannot
be separated from the incentives and politics of the
politicians and bureaucrats since there is a link
between these institutions and the political institu-
tions, i.e. ministries.
In addition to the independence issue, the
fragmented institutional structure is the other
shortcoming in auditing sector in Turkey. Before
the establishment of the POAT, the supervision of
audit firms had a multi-headed structure. The CMB
used to govern audit firms that audited firms listed
on the Borsa Istanbul95 and the Banking Regulation
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
The Political Economy of Regulation in Turkey, New York,
Springer, pp. 51-73.
91 Atiyas, p. 61.
92 Atiyas p. 65.
93 Ozel, I. (2012) ‘The Politics of De-delegation: Regulatory
(In)dependence in Turkey’ 6 Regulation and Governance, 6,
p. 122.
94 ibid, p. 124.
95 Capital Markets Law No. 6362, art. 35 (1) (c). With the enact-
ment of the Capital Markets Law No. 6362 on 30 December
2012, the Istanbul Stock Exchange was renamed as Borsa
Istanbul (BIST) and started to operate on 3 April 2013.
and Supervision Agency (BRSA), the regulatory and
supervisory body in the banking sector, used to go-
vern firms that audited banks and financial institu-
tions.96 Regarding oversight mechanisms, oversight
of those who are excluded in the list of CMB and
BRSA is the responsibility of the POAT. To put it
differently, while the CMB and the BRSA govern
audits in their subject areas (i.e. respectively finan-
cial markets, and banking sector), the POAT go-
verns the audit firms and auditors that fall outside
of the scope of CMB and BRSA (e.g. the audits of
non-listed firms). As regards the certification of au-
ditors, since 2013, auditors and audit firms are
required to be certified by the POAT initially, in or-
der to perform audits in financial markets.97 Yet, the
CMB has the right to withdraw approval of an audit
96 Banking Law No. 5411, Official Gazette No. 25983 (Decem-
ber 1, 2005), art. 15, 33, and 36.
97 Communiqué Series: X, No: 28 amending communiqué on
independent audit standards in capital markets, Official Ga-
zette No. 28691 (June 28, 2013), s. 2, art. 3.
98 CML No. 6362, art. 62.
99 Also, the Capital Markets Law and Banking Law provisions
with respect of the regulation of external auditing and au-
dit firms are reserved. See Statutory Decree No.660, art.
23(2)-(4).
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infrastructure ill-fitting and clearly would require
new investments. Overall, the Turkish government
has chosen to avoid these costs however, in turn;
this has resulted in a fragmented supervisory fra-
mework in the field of auditing.
Furthermore, Turkey is not yet a member of
the EU. In terms of the implementation and enfor-
cement of the rules, Turkey therefore does not have
the same options and choices as current Member
States. For instance, other areas of law show that dif-
ferences and institutional infrastructure of other
institutions are not at the same level as in the EU
Member States. In addition, practices and relations
prevailing in the business environment might be
another reason for differences that still persist after
the adoption of EU law.
So far, this section argued that the insuffici-
ent institutional structure in Turkey could be the
basis for differences that still persist. One could also
question the reasons for these institutional impedi-
ments. Berkowitz et al. acknowledged that there
would be social, economic, and institutional diffe-
rences between an origin and the transplant co-
untry. To reduce the effects of these differences in
the adoption of the new law, a transplant country
has to meet with familiarity and/or adaptability. In
their explanation, they claimed that countries with
familiarity (who share a legal history or belong to
the same legal family) and/or adaptation would
have more effective institutions compared those
who do not share a common legal history with the
transplanted concepts or have not made necessary
modifications to adapt its initial conditions with the
origin country.100 If the necessary modifications
were not made to adapt the local conditions, there
would be “a substantial mismatch between pre-exis-
ting and the imported legal order causing the
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
100 Berkowitz et al. (2003b) pp. 180-181.
101 ibid, pp. 167-168.
102 ibid.
103 TCC governs civil liability rules for auditors based on fault
principle. See TCC No. 6102, art. 554. The POAT also provi-
des rules related to auditor liability under Statutory Decree
No. 660.
104 CML imposes liability on auditors (together with other issu-
ers) for misleading prospectuses and other disclosure requ-
irements. See CML No. 6362, art. 10, 32. In addition, in line
with ISA 240, CMB Communiqué Series: X, No: 22 governed
transplant effect”.101 The ‘transplant effect’ would
cause the malfunction of the imported legal order
and legal intermediaries (e.g. judges, lawyers, poli-
ticians) would also be affected negatively in terms of
these inspections, and the continuing training of the
member staff are important pillars for the efficient
functioning of such body. They are also crucial for
serving the ultimate objective to form such body, i.e.
increased audit quality and improved investor pro-
tection.
Another example is the rule on private liti-
gation in terms of auditor liability. Although, the
law on auditor liability has now been improved with
the enactment of the new TCC103 and Capital Mar-
kets Law104, private litigation in terms of auditor li-
ability in Turkey has not yet been applied as it has
been in other countries, such as the UK.105
However, it is said that for imported rules to be
functional, there should be a demand for it in the
first place and legal intermediaries (e.g. judges,
lawyers, politicians) should understand the real
meaning of the law.106 Accordingly, for the private
litigation on auditor liability to be functional in
Turkey, first, there should be a demand for it; se-
cond, investors should be informed with the new
the responsibility of auditors with respect of fraud and ma-
terial misstatement detection in financial accounts. See
Communiqué Series: X, No: 22, art. 7.
105 The UK common law rules specify the elements of civil lia-
bility action for auditors with cases dated back to 19th cen-
tury, e.g. Re London and General Bank (No. 2) [1895] 2 Ch.
673, Court of Appeal; Re Kingston Cotton Mill Co. (No. 2)
[1896] 2 Ch. 279, Court of Appeal; Caparo Industries plc v
Dickman [1990] 2 A.C.
106 Berkowitz et al. (2003b) pp. 173-174.
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rule, and third both the investors and the legal in-
termediaries should be able to understand the mea-
ning of the private litigation on auditor liability and
its relevance with the cases in capital markets. If ne-
cessary, lawyers could be trained in the application
of the private litigation. If the real meanings of the
auditor liability rules were not understood properly,
there is a risk that these rules would not be applied
at all or could be applied in a way that is against its
principal intention.107 Nevertheless, before drawing
a direct conclusion, it should also be acknowledged
that some time might be required after the enact-
ment of the new laws for the society in Turkey to
understand and to observe their meaning and to
apply them when necessary.
From another perspective, it may be also
questionable to what extent Turkey is subject to the
transplant effect. Berkowitz et al. categorised Tur-
key as an “unreceptivetransplant.108 However, they
made this categorization based on the findings from
data collected during 1980-95. This is the period
when Turkey was in the process of transmission,
and had therefore not completed its economic and
legal development. After this period, Turkey’s legal
environment developed rapidly and shifted to anot-
her era, the so-called ‘Europeanization period’ that
helped Turkey make breakthroughs in economic
and political developments. After the Customs Un-
ion agreement between Turkey and the EU in 1995,
the European Council granted Turkey EU candi-
dacy status in 1999. Since then, Turkey has issued
major reforms and adopted a number of adjustment
packages under the National Programme for the
Adoption of the EU acquis.109 The regulatory mea-
sures in the fields of business law and financial mar-
kets under the Europeanization process have helped
Turkey to move its legal system closer to EU law.
Thus, a categorization that places Turkey as ‘unre-
ceptivecannot be applied today, if one takes into
account Turkey’s on-going financial and legal deve-
lopment ever since.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
107 ibid, p. 174.
108 Berkowitz et al. (2003a) p. 195.
109 Baç, M. M. (2005) ‘Turkey’s Political Reforms and the Impact
of the European Union’ South European Society and Poli-
tics Journal, 10, p. 17.
110 European Commission Progress Report p. 50.
Furthermore, the ‘transplant effect’ might be
less valid for auditing convergence between the EU
and Turkish laws. It is because there is also a strong
effect of market-driven convergence namely thro-
ugh the integrated audit market and acceptance of
international auditing standards. It can be expected
that the audit and business society would be eager
to support and also to adapt the reforms on auditing
in the expectations of positive economic outcomes
of integration of financial markets. Yet, it should be
highlighted that necessary adaptations will still be
required for the law and institutions to be operated
effectively.
D. A CONCEPTUAL FRAMEWORK FOR
THE CONVERGENCE BETWEEN THE EU AND
gence between EU and Turkish laws on auditing.
Nevertheless, there could still be differences in
terms of legal mentalities in national preferences.
111 See section III-A(2) above.
112 Siems called convergence through international or regio-
nal organizations (i.e. here, the EU Audit Directive) as “con-
vergence from above”. See Siems (2008) p. 375.
113 See section III-A above.
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For instance, a weak legal environment, a multi-he-
aded supervision mechanism, and functional dissi-
milarities (e.g. not being an EU member country)114
may stand in the way of actual convergence. As the
Table below details, there are four dimensions of
audit convergence that need to be considered when
evaluating convergence between Turkish and EU
laws on auditing. The following will show that there
are reasons that support each of those four dimen-
sions; thus, overall, it will be concluded that the
Turkish situation is a mixed one.
Table 1: Dimensions of auditing convergence be-
tween EU and Turkish laws
On the Table above, at level one, harmonisa-
tion attempts are carried out through two general
factors: the EU membership process and the integ-
ration of markets. Turkish law is harmonising with
the EU acquis as a requirement for EU membership.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
114 See also section III-C above.
115 CML No. 6362, art. 10, 32.
116 For more information, see TOBB Arbitration website avai-
lable at http://www.tobb.org.tr/HukukMusavirligi/Sayfa-
lar/Eng/Arbitration.php accessed February 06, 2019. Istan-
bul Arbitration Centre (ISTAC) also provide arbitration and
mediation services both domestic and foreign commercial
matters. See ISTAC website at https://istac.org.tr/en/dis-
pute-resolution/arbitration/ accessed March 25, 2019.
Also, the integration of markets forced Turkey to
adopt international professional standards in acco-
unting and auditing. At this level, the influence of
EU membership and internationalization of the
that may indirectly result in differences in rules or
its application. For instance, due to institutional
and legislative differences, private litigation practice
has not developed well in Turkey. Although the law
issued liability on auditors to third parties under
CML No. 6362,115 there is currently no common
practice in redressing auditor liability.
As in other countries, in Turkey courts deal
with commercial disputes. Even though their appli-
cation is rare, alternative dispute resolution met-
hods, such as arbitration and mediation are also
available in Turkey. For instance, the Union of
Chambers and Commodity Exchanges of Turkey
offers arbitration services under the Arbitration Co-
uncil (TOBB Tahkim Kurulu) to ensure the settle-
ment of economic, commercial and industrial dis-
putes among the firms.116 Mediation is another al-
ternative method.117 The number of commercial
disputes settled with mediation has increased in the
past few years since the mediation process becomes
117 In order to make the application more effective Turkey has
initiated recent legislative changes with the enactment of
Convergence in law
Yes
No
Convergence in practice
Yes
Level 1
Harmonisation with
the EU acquis, e.g.
adoption of ISAs, and
aim to integrate mar-
kets
Level 2
Path dependencies
of law (including case
law), e.g. reflecting dif-
ferences in the role of
courts
No
Level 3
Differences in prac-
tice, e.g. due to ’multi-
headed supervision’,
ineffective monitoring
mechanisms and cul-
tural factors
Level 4
Functional dissimi-
larities: Turkey being a
candidate country and
having a less developed
capital market, as well
as costs of harmonisa-
tion
Hatice Kübra KANDEMİR TFM 2019; 5(1)
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mandatory before initiating a lawsuit for commer-
cial disputes regarding payment of a certain amount
of money and compensation claims as of December
2018.118 Besides, the new TCC assigns commercial
courts, e.g. Commercial Courts of general jurisdic-
tion (Asliye Ticaret Mahkemeleri) to deal with audi-
tor liability claims. However, it is said that the capa-
city of these courts is not sufficient to handle this
task.119 For instance, the average number of judges
per 100.000 persons is below to the average rates in
European countries.120 in terms of efficiency of the
courts, it was reported that the clearance rates 121 of
civil and commercial litigious cases in 2016, was be-
low of the European average indicating that the co-
urts handle fewer cases than they receive.122 The
workload of the courts results in long trials and
lengthy procedures in the courts and subsequently
creates a cumbersome judicial system in Turkey.123
In addition to the capacity of the courts, co-
urt fees and the duration of the trials are the main
obstacles that might hinder the wide application of
private litigation in Turkey. A claimant has to pay
44,40 Turkish Liras (TL) (approximately 7,48) for
filling an action in Commercial Courts of general
jurisdiction (Asliye Ticaret Mahkemeleri) and 6.831
TL per cent relative fee of the dispute value for writ-
ten judicial decree. Another 218,50 TL (approxima-
tely 36,84) has to be paid to file an appeal in Court
of Cassation (Yargıtay).124 There will be attorney
fees and other expenses during the court procee-
dings as well, such as expert fees and other charges
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
118 TCC No. 6102, art. 5/A.
119 Communication from the Commission to the European
Parliament and the Council Enlargement Strategy and
Main Challenges 2012 -13 Brussels, October 10, 2012 COM
(2012) 600 final, 69.
120 In 2016, the number of professional judges that fall into
100.000 people was 14.1 in Turkey; while it was 24,2 in Ger-
many; 10,4 in Italy; and 25,8 in Greece. See High Council of
Judges and Prosecutors (HCJP), Annual Report 2018 edi-
tion (2016 data), October 2018, p. 16.
121 Clearance rate is a ratio, obtained by dividing the number
of resolved cases with the number of incoming cases that
shows how a judicial system cope with the flow of cases,
ibid, p. 48.
122 ibid, p. 50.
123 Imar Bank case can be given as an example of the slow jud icial
system of Turkey. In this case, the lawsuit against auditors is
time-barred since no conclusion can be reached after seven ye-
ars and six months of that the scandal was revealed to the mar-
kets between the years 2000-2003.
that the claimant needs to pay.125 This can create a
burden on investors who seeks justice. As a result,
they may choose not to sue. To conclude, inadequ-
acies in institutional setting of Turkish judiciary
system, for example the number of judges, the
structure of courts, the cost of litigation, and long
trials and lengthy procedures could be the factors
that affect the low litigation rates in Turkey. In ad-
dition, the reason for the non-application of auditor
liability rules in Turkey could be the lack of unders-
tanding of the law by the lawyers and investors.126
On the Table above, differences in practice
are seen at level three. Some of these differences are
related to the failure of the Turkish law-maker to
consider the practicality of new laws. For instance,
prior to the adoption of the new TCC no regulatory
sate the costs that the claimant was subject to during the
litigation proceedings.
126 See also section III-C above.
127 An impact analysis was carried out at EU level regarding the
proposals for amending Directive 2006/43/EC and Regula-
tion for the audits of PIEs. See Commission Staff Working
Paper Impact Assessment Accompanying the document
Proposal for a Directive of the European Parliament and of
the Council amending Directive 2006/43/EC on statutory
audits of annual accounts and consolidated accounts and
a Proposal for a Regulation of the European Parliament and
of the Council on specific requirements regarding statutory
audit of public-interest entities [COM (2011) 778 COM
(2011) 779 SEC (2011) 1385] SEC (2011) 1384.
TFM 2019; 5(1) Hatice Kübra KANDEMİR
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institutions (e.g. increasing the capacity and adequ-
acy of commercial courts) With regard to differen-
ces in practice (i.e. level 3 on the Table), one should
also consider the enforcement efficiency. The enfor-
cement mechanism in Turkey is already weak and
unwieldy. For instance, CMB monitoring over audit
firms seems to be ineffective in terms of the number
of investigations issued to audit firms.128 To give an
example, as the annual activity reports revealed,
only a small number of audit firms investigated each
year. For example, the number of investigations car-
ried out by the CMB into the audit firms in 2017 was
only 18, and 24 in 2016.129 As a result of these inves-
tigations, the total number of sanctions was 7 in
2017 (8 in 2016) composed of audit activity sancti-
ons and administrative fines.130 These reports indi-
cate that only a small number of audit activities are
investigated by the CMB. This situation is a
drawback for the law in action. In such circumstan-
ces, the function of the law would be hindered by an
inefficient enforcement mechanism. Therefore, at
level two, differences in practice are likely to obst-
ruct an actual convergence.
Last but not least, cultural differences may
stand in the way of convergence in practice. Coffee
remarked that cultural norms might help managers
to refrain from the expropriation of minority share-
holders’ interests.131 This influence is said to be
more relevant where the legal rules on minority sha-
reholder protection are weaker.132 As Coffee claims,
in civil law regimes where the law is weaker, the inf-
luence of cultural norms can be more relevant than
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
128 The CMB can launch inspections of audit firms as a form of
regular routine or as a result of a complaint or a denounce-
ment. The CMB shall report to the POAT about these ins-
pections. See CML No. 6362, art. 62(1), (2).
129 According to the CMB’s annual activity reports, the num-
ber of audit firms investigated by the CMB was 2 in 2017,
and it was 6 in 2016.
130 CMB’s Annual Activity Reports are available online at
http://www.spk.gov.tr/indexcont.aspx?ac-
tion=showpage&menuid=7&pid=5 accessed February 06,
2019.
131 Coffee, J. C. Jr., (2000) ‘Do Norms Matter? A Cross-Country
Evaluation’ University of Pennsylvania Law Review, 149:6,
p. 2155.
132 ibid, p. 2175.
133 Coffee noted that differences in corporate behavior could
be explained by the existence of compliance of strong so-
cial norms in a society. See ibid, pp. 2156-2165.
legal rules on the business.133 It is because in com-
mon law countries where legal rules provide more
protection for minority shareholders134 cultural
norms become less important.135 Similarly,
had no incentives to disclose business information
to the public or government’s officials, including
the BRSA auditors. It seems clear that the cultural
values that play a role in business relations could
influence managers’ behaviours. One could also
question the relation between cultural values and
auditors’ behaviours. To put as a question, did cul-
tural factors affect the work of the auditors,139 for
instance in Imar Bank case?
Societal factors might explain differences in
accounting values in different countries. The acco-
unting system of a country is shaped by its econo-
mic, historical and technological development as
well as its legal system, capital market development
and education. The list is not exhaustive. It has
shown that cultural values also have a say on the de-
velopment of accounting profession in a country.
Thus, even if the law is formally converged, cultural
134 La Porta et al (2000) p. 8.
135 Coffee (2000) p. 2175.
136 Hofstede identified four societal value dimensions when
explaining cultural differences: power distance, uncerta-
inty avoidance, individualism, and masculinity. See
Hofstede, G. (1980) Culture’s Consequences, Sage, p. 11.
137 Omurgonulsen, M. & Omurgonulsen, U. (2009) ‘Critical
thinking about creative accounting in the face of a recent
scandal in the Turkish banking sector’ Critical Perspectives
on Accounting, 20, p. 659.
138 ibid.
139 The intention of asking this question is not to start a discus-
sion on behavioral analysis of auditors. The aim here is to
point out how can cultural factors in business relations
other than law affect the work of the auditor.
Hatice Kübra KANDEMİR TFM 2019; 5(1)
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values may still be effective on the business relations
and practices, and thus might result in differences
in practice.
The quality of the audit work highly depends
on auditors’ professional judgement that should be
exercised with a questioning mind. As important as
the professional expertise, it is important that audi-
tors adopt an independent attitude when perfor-
ming the audit work. Auditors’ ability to exercise
their individual and independent professional jud-
gement depends on the development of the accoun-
ting profession in a country.140 In societies with high
professionalism there is more emphasis on inde-
pendence in individual decisions.141 For instance,
countries such as the UK, adopt a principle-based
accounting regulation and the concept of ‘a true and
fair view’ heavily depends on auditors’ judgement
on the financial accounts.142 In addition, the role of
the professional associations in standard setting
also helped the development of accountancy as a
profession in the UK. As far as the period of the
Imar Bank case in Turkey is considered, contrary to
the UK standards, neither professional associations
nor accountancy as a profession were highly deve-
loped. Instead, audit work used to be concerned pri-
marily with the implementation of prescriptive legal
requirements in terms of, for example tax compli-
ance.143 This audit work definition did not allow au-
ditors to use freely their professional judgement in
any case.
Furthermore, as suggested, secrecy (or con-
fidentiality) in business relations also influences the
accounting values.144 According to Gray,145 mana-
gers in less secretive societies (i.e. more transparent
ones) tend to disclose information whereas they
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
140 Gray identified that accounting values in a country can be
related to the professionalism dimension of the society in
question. Gray’s accounting sub-culture values are profes-
sionalism, uniformity, conservatism, and secrecy. See Gray,
p. 8.
141 ibid, p. 9.
142 ibid, p. 8.
143 See Uzay, S. et al., ‘Financial Auditing in Turkey: Historical
Context and Expectations’, 12th World Congress of Accoun-
ting Historians, July 20-24, 2008.
144 Gray, p. 11.
145 ibid, p. 8.
146 It was also found that managers with a tendency to be sec-
retive would have less incentive to choose higher quality
tend to be more confidential in secretive environ-
ments and share business information only to those
who are closely linked to the management.146 For
instance, in the Imar Bank case, as required by law,
auditors checked the company’s financial accounts
whether they were prepared and presented in accor-
dance to the law. Auditors however, did not criti-
cally question the accuracy of the financial acco-
unts. Instead they completely relied on the informa-
tion presented by the management who in fact de-
signed the internal control system to ensure that the
bank was run in accordance to the major sharehol-
ders’ interests. The auditors’ verification of the fi-
nancial reports without critically questioning their
accuracy may be related to lack of professionalism
in the auditing society in Turkey at that time. Pro-
‘Culture and Auditor Choice: a test of the secrecy hypothe-
sis’ Journal of Accounting and Public Policy, 27, pp. 358-
360.
147 See Uzay et al. (2008).
148 After the Imar Bank scandal, the BRSA took measures to
strengthen Banking Law No. 5411, including measures on
the audit of banks, internal audit, internal control, and
transparency. CMB also issued specific regulations on the
subject of corporate governance, independence of audi-
ting, and ethical codes of accounting.
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cade, there has been significant development on ru-
les and regulations on auditing also since then audi-
ting as a profession has developed with the adoption
of international auditing standards.149 Furthermore,
the influence of national cultural factors is likely to
be less relevant for the adoption of company and
commercial law because they are linked to econo-
mic interests rather than national customs or senti-
ments”.150 As Turkey keeps following an internatio-
nal route in audit regulation including the adop-
tion of international standards and EU law on audi-
ting and promoting the interaction between its ca-
pital markets and international markets, it is sug-
gested that the influence of national cultural values
on auditing is likely to decrease.
On the Table above, at level four, the degree
of functional dissimilarities is high. At this level, the
costs of harmonisation should be considered. With
the enactment of new laws, the number of regulati-
ons on auditing has expanded gradually in Turkey.
For the following reasons compliance costs are li-
kely to be substantial: first, Turkey is not currently
a member country of the EU. Its laws and rules may
differ in certain areas. Moreover, currently, there is
no cooperation with the European Council in terms
of law making.151 This may create a disadvantage for
Turkey compared to the EU Member State count-
ries, both in terms of law making and in the appli-
cation processes. Second, an effective system of ca-
pital markets is necessary for the successful adop-
tion of laws in the audit practice. Yet, the Turkish
capital market is less developed and the economy is
relatively fragile when compared with European co-
untries. To reduce the negative effects of functional
dissimilarities in convergence, it might be necessary
to issue new laws in other areas as well. However,
this is likely to increase compliance costs. Thus,
functional dissimilarities can be seen to be a major
impediment to convergence between EU and Tur-
kish laws on auditing.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
149 See also section III-A above.
150 Cabrelli, D. & Siems, M. (2015) ‘Convergence, Legal Ori-
gins, and Transplants in Comparative Corporate Law: A
Case-Based and Quantitative Analysis’ American Journal of
Comparative Law, 63, p. 124.
IV. CONCLUSION
Financial markets become more integrated
every day. This integration has increased the num-
ber of cross-listed firms and international (and mul-
panies, but also in ensuring trust and confidence in
financial markets.
The global need for auditing services has led
to the creation of international professional stan-
dards in auditing. Ultimately, countries, such as
Turkey, that aspire to benefit from a comparability
advantage and to attract foreign investment have
adopted this uniformity. As this paper has submit-
ted, this kind of approximation is a kind of conver-
gence through ‘congruence’.152 In addition to this
natural convergence, there is also convergence of
form through the adoption of EU laws on auditing
that can be seen as convergence through ‘pres-
sure’.153
This paper has submitted that a current glo-
balised world makes it difficult, if not impossible, to
categorise systems into legal families. As worldwide
globalisation and market integration increases, the
trend will be for a convergence of laws on auditing
between EU and Turkish laws. In Turkey, the effects
of globalisation (i.e. adoption of ISAs) and EU
membership process (i.e. harmonisation with EU
law) have had a direct impact on the laws on audi-
151 Throughout negotiations, the Commission monitors Tur-
key with regards its alignment with the EU acquis.
However, the European Council only gives explanatory in-
formation regarding the law in context.
152 The terms ‘convergence through congruence’ is borrowed
from Siems. See Siems (2008) pp. 250-296.
153 For ‘convergence through pressure’, see ibid, pp. 314-317.
Hatice Kübra KANDEMİR TFM 2019; 5(1)
- 65 -
ting and will continue to do so. However, the app-
roximation of laws in this form does not necessarily
result in actual convergence, suggesting that diffe-
rences may still persist.
The main conclusions of this paper are as
follows: If external auditing does not play a central
and critical role in concentrated ownership structu-
res, the enactment of audit reforms in Turkey can
be read as the pressure of globalisation and
worldwide integration of financial markets and the
political and economic pressure of the EU mem-
bership process. This means that Turkey has succe-
eded in reforming its company and capital markets
law in compliance with the EU Directive
2014/56/EU. Also, the positive effects of globalisa-
tion are likely to prompt the application of interna-
tional auditing standards in businesses in Turkey.
Nevertheless, despite harmonisation attempts,
there are a number of impediments to the conver-
gence of auditing between EU and Turkish laws. It
is due to the institutional and legislative differences
in the audit market in Turkey. As a result, actual
convergence may not be easily achieved, although
there seems to be convergence in form as a result of
the adoption of EU acquis.
This paper noted the appearance of an inef-
fective institutional framework in the auditing in-
dustry in Turkey as an impediment to auditing con-
vergence in practice. In particular, it proposed that
the multi-headed structure of the audit oversight
mechanism in Turkey should be terminated. In or-
der to achieve this, the independence and instituti-
onal capacity of the POAT needs to be strengthened
in the field of auditing both in terms of supervision
and rulemaking. In addition, the cooperation and
coordination with the other regulatory bodies ope-
rate in the auditing field need further enhancement.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
154 Berkowitz et al. (2003b) pp. 180-181.
Actual convergence cannot be achieved by
approximation of laws alone, but requires instituti-
onal transformation as well. Institutional modifica-
tion would make the adoption of imported law
more successful.154 There is a strong correlation
between institutional structure in a country and the
successful application of imported rules. In other
words, the effectiveness of law is linked to the insti-
tutional set-up of economic institutions through,
for example the enforcement force of these institu-
tions. Without sufficient institutional set-up, the
approximation of law alone is less likely to bring
successful implementation. Institutions must ope-
rate efficiently for the law to make sense to the soci-
ety. This should be understood as institutions work
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