Anticipating crises theory

The emergence of crises is a common part of the economic world as downturns and recoveries are essential for a healthy economic cycle. But what is considered to be a crisis? There are many different views of how to define it. The most traditional one describes a crisis as a specific event that symbolizes a threat during a limited timeframe and thus requires a quick response in order to control and reduce the possible damage. A threat in turn is seen as an external force that harms an organization's products, reputation, and markets. Managers

PREPARERS AUDITORS

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should therefore implement post-crisis information publication and strategies to recover the damage. (Seeger et al., 2001)

The more current definitions of a crisis describe the event in contrast as a natural phase of an organization's life cycle. It is a holistic point of view that looks upon the two parts: crisis and daily business, as well as collapse and recovery as basis for an organization. That means that a crisis is not only a threat but can also be seen as an opportunity for future development.

Managers are thus meant to participate in that specific crisis by monitoring, assessing, communicating and planning the whole process. (Seeger at al., 2001) As a consequence, organizations do not only use post-crisis management but also ex-ante crisis prevention.

Moreover, it is important to deal with a crisis pro-actively because measures implemented make possible consequences easier to handle, and the anticipation of a potential crisis helps to prepare and analyse the environment better.

The anticipatory model argues thereby that an effective crisis management is used for prevention as it is easier for an organization to deal with a crisis for which it is prepared for.

(Olaniran and Williams, 2001) Trying to prevent a crisis from happening means thus to have preparatory practices in place that will help the management to reduce uncertainties. Olaniran and Williams (2001:489) state: "the less attention devoted to understanding the nature of a crisis, the more likely the crisis will escalate." Consequently, decision makers need to understand the circumstances of a crisis happening and deal with them through a post-crisis action plan. Another factor is the behaviour of human beings. No theoretical model can account for any human action. Thus, human errors should be considered in an effective crisis management.

As a result of these interpretations, it becomes obvious that Olaniran and Williams were looking at a model that explains how business should anticipate a crisis. I will however use the anticipatory model to analyse the regulatory system in the auditing profession. Regulators and legislators also need to anticipate critical situations, whether in form of a financial scandal or an economic crisis. It is especially important for them to understand the different expectations which are involved before developing the appropriate actions to deal with a crisis. Therefore, I have decided to use Olaniran and Williams's business model to explain the changing audit regulatory system within the EU.

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In order to fully understand the anticipatory model, illustrated by the following diagram, it is however important to firstly define the two components of expectations and enactments.

(Olaniran and Williams, 2001)

Diagram 2: Anticipatory model

Adoption of the anticipatory model from Olaniran and Williams (2001: p.491)

Expectations on the one hand describe the assumptions people make about a specific situation. Assumptions in turn identify whether an error will have a dimension of a crisis or of a catastrophe. Decision-makers then have to deal with the environment of the potential crisis and set actions in motions that correspond with their assumptions. In view of the audit regulatory system in the EU, people have different expectations of the respective legislators and regulators and that has to be taken in consideration by them when dealing with a potential crisis environment.

Enactment on the other hand can be explained in the way that anticipating a crisis will determine the actions a decision-maker will undertake to deal with that situation and these are dependent on the derived information. The reason for that lies in the fact that decision-makers have to anticipate opportunities, strengths, threats and weaknesses of the appropriate environments and then decide what measures are appropriate to preserve their interests. That means, legislators and regulators have to evaluate the audit environment before developing measures that preserves their initial goal to harmonise the audit market.

Triggering events

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In sum, expectations and enactment both constitute the crisis anticipation process in which firstly the emergence of a crisis is predicted and secondly actions taken to decrease or even eliminate the extent of the whole situation. (Olaniran and Williams, 2001)

An effective crisis management should moreover be vigilant to the relevant internal and external audit environments. Anticipating a crisis always involves looking for the triggering event that is defined by a specific place, time and agent. It represents the signal for the starting point of a catastrophic disaster. Consequently, decision-makers try to reduce the effects of the occurring crisis but will at the same time increase the stress-level. It is thus an essential part of the anticipatory model to focus on the two key elements of rigidity and control in order to facilitate a stress-free environment and enable the decision-makers to respond to the occurring crisis in the best possible way.

Rigidity can be seen as the degree of inflexibility in regard to the actions that are publicly taken to deal with a certain situation. Furthermore, the quality of these actions is determined by how the decision-maker looks at the problem. Justifications are thereby essential to clarify how and why certain steps were taken in a crisis situation and also to avoid confusion and ambiguity. (Olaniran and Williams, 2001)

Control can in contrast be seen as the influence of decision-makers to change a certain crisis situation. Ability and authority are thereby important elements that are linked to empowerment and thus facilitate a vigilant response of the decision-makers. Giving individuals or groups control enables a quicker respond to crisis-triggering events that might be caused by either internal failures or external circumstances that are of political or economic nature. It is therefore essential to establish a crisis management that considers both internal and external factors. (ibid)

Recapitulating, the anticipatory model provides a pro-active view of crisis management. The actions of decision-makers are thereby dependent on the three components: expectations, enactments and the relevant environments. Hence, the anticipatory model helps to prepare and analyse for an potential crisis, which is here a crisis in audit regulation.

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