Some Economics of Audit Market Reform

Australian Accounting Review, Vol. 26(3): 271-283, 2016

32 Pages Posted: 5 May 2015 Last revised: 11 Nov 2016

See all articles by Boon Seng Tan

Boon Seng Tan

Nanyang Technological University - Nanyang Centre for Public Administration

Yew Kee Ho

National University of Singapore (NUS) - Department of Accounting

Date Written: May 4, 2015

Abstract

The purpose of audit market reforms since 2001 is to restore public confidence in the institution of auditing based on two considerations: (1) ensuring audit quality, and (2) controlling the “adverse effect of competition” in audit supply. Market reforms for audit quality are delivered through a package of prescribed actions motivated by an analytical relationship between audit quality and its possible determinants: (1) limiting audit tenure through a combination of mandatory firm rotation, partner rotation and re-tendering; (2) limiting provision of non-audit services (NAS) by incumbent auditor; and (3) joint auditing and empowering the audit committee to enhance audit quality. This paper examines the competing independence hypothesis and expertise hypothesis that produce ambiguous theoretical relationships for audit quality-audit tenure, and independence-provision of NAS. We then review whether empirical literature resolves these conundrums. We also review the usefulness of joint auditing and empowering the audit committee to improve audit quality in the context of audit market reform.

Keywords: Audit Reform, Audit Quality, Audit Tenure, Non-Audit Services, Joint Audit, Audit Committee

JEL Classification: M4, L5

Suggested Citation

Tan, Boon Seng and Ho, Yew-Kee, Some Economics of Audit Market Reform (May 4, 2015). Australian Accounting Review, Vol. 26(3): 271-283, 2016, Available at SSRN: https://ssrn.com/abstract=2602605 or http://dx.doi.org/10.2139/ssrn.2602605

Boon Seng Tan (Contact Author)

Nanyang Technological University - Nanyang Centre for Public Administration ( email )

S3.2-B4
50 Nanyang Avenue
Singapore, 639798
Singapore

Yew-Kee Ho

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore

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