AUDIT MARKET FAILURE
Benedikt Koehler唐服
The auditing profession has called for the current regime of unlimited liability to be replaced with liability caps. The Department of Trade and Industry has tabled proposals to reform the structure of the market for audit rvices. The proposals fall short of meeting the demand for liability limitation but modify he current regime inasmuch as auditor liability, though uncapped, would be proportional to the damage caud by audit failure. This step is unlikely to remedy audit market failure. This article argues the distortion of market ncentives in audit markets can be traced to government intervention and the remedy lies in replacing government intervention with competition.
Introduction
捕捉幸福Proponents of audit liability reform argue that the current weight of obligations is untenable. A regime of unlimited liability, coupled with the doctrine of joint and veral liability, implies t
中国茗茶hat every corporate insolvency can trigger litigation by plaintiffs arguing that auditors are culpable for not spotting trouble in time. Wor, auditors can not only be held to account by a company’s management, but by third parties as well. Auditors feel that providing an audit opinion in effect is tantamount to underwriting the solvency of their clients.
The General Accounting Office (GAO) finds in a survey of corporate failures that auditors had qualified their opinion in only half of all cas. Therein lies the crux. Auditors attest whether a company’s accounts are drawn up in accordance with auditing standards. That is not the same thing as to vouch for a company’s solvency. Auditors
argue it is wrong to conflate audit failure and corporate failure.
纪念日英文 In 1992 the Big Six US auditors stated that without checks to third-party litigation, it would only be a question of time until their number dwindled (Arthur Andern et al., 1992). US legislation pasd in 1995 t hurdles for filing claims and for a while emed to stem the tide of litigation. Yet the demi of Arthur Andern gave urgency to the calls for audit market reform. Auditors aver that insolvencies are a fact of life and the next majo
r corporate collap is likely to start another round of musical chairs in the audit ctor. Another reduction in the number of auditors with global reach would contravene the public interest in stable financial markets.
Not everyone is convinced of the need to cap auditor liability. EU Commissioner Frits Bolkestein, for example, has little sympathy for the auditing profession’s pleas. First, urs of financial accounts are reassured by knowing auditors back their attest with unlimited liability. Unlimited liability concentrates the mind. Secondly, argues Bolkestein, the threat to audit market structure is entirely lf-inflicted. Auditors pursued a strategy of global growth by leveraging the reputation earned in national markets. They could hardly complain that the threat of contagion from particular markets might affect the entire operation. Bolkestein is but one of tho who believe that capping claims against auditors is a cure wor than the dia (Bolkestein, 2003). Bolkestein tables two issues: one is market structure, the other is unlimited third-party liability.
Market structure
In almost every country, the Big Four auditors enjoy a virtual monopoly in auditing the large company ctor. The gap parating the Big Four and the vast majority of audit rvice providers is enormous. The auditing ctor is marked by a stark contrast between four global firms accounting for the bulk of industry revenue, and small firms with up to four partners accounting for the bulk of industry numbers. The gap ems unbridgeable.
快乐的反义词是什么The question of ideal company size in auditing, and why there is little migration between gments, is unttled. George Stigler (1958) suggested gmenting an industry into layers of companies of similar size and comparing their returns on capital. Over time, firms will gravitate towards a size that maximis returns. Stigler成长记录册模板>水稻怎么画’s analytical tools do not explain the peculiar structure of the audit ctor.
We cannot be sure whether, in the audit ctor, firm size can be divided into a continuous or stepped continuum. The firm-size dichotomy in auditing rais the question of whether large and small firms are in the same market at all.
Within the large-firm gment, however, George Stigler’s forecast that companies gravitat
e towards ideal company size holds true. Sullivan (2002) examines the pricing structure of the Big Eight firms before and after mergers and discovers price declines for large clients. Banker et al. (2003) find tangible productivity gains after audit firm mergers. At one end of the audit market spectrum, scale economies are real.
Some proffer the working hypothesis that auditing’s unlimited liability regime deters market entry. Thus, ending unlimited liability would foster conditions allowing smaller firms to scale-up operations. Once auditor liability is capped, according to this line of thinking, smaller firms would compete against industry leaders and in due cour break up the incumbent oligopoly.
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