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BFuP Nr. 4 vom Seite 416

Auditor Incentives and the Structure of the Audit Market – A Basic Model for Investigating Simultaneous Effects of Audit Market Regulations

Jun.-Prof. Dr. Christopher Bleibtreu, Universität Konstanz und BI Norwegian Business School und Prof. Dr. Ulrike Stefani, Universität Konstanz

For decades, legislators worldwide have been discussing the merits of regulating their national audit markets. In this debate, the focus has primarily been on the regulations’ effects on incentives, both those of preparers of financial statements to report truthfully and those of auditors to detect errors or even fraud and to correctly report their findings to the public. For some of the proposed measures, the empirical evidence as to whether they indeed improve such incentives remains inconclusive. In addition, there is a concern that certain regulations could negatively affect the structure of the audit market. Changes in the market structure, in turn, can either attenuate or reinforce the regulations’ effects on preparers’ and auditors’ incentives. To a large extent, this unintended side-effect has been neglected in the discussions. We adapt a spatial competition model to the audit market. This model allows simultaneously analyzing the incentive and market structure effects resulting from regulations and thus determining their overall impact.

1 Introduction

In the early 2000s, a long-standing tradition of self-regulation in the auditing profession came to an end with the establish...