The Demand for Audit Services
Posted: 6 Aug 1998
Date Written: April 16, 1998
We offer a model for the demand for audit services when the audit of firm?s financial statements is mandatory and when such audit is not mandatory. We show that without mandating some firms will choose not to audit and their decision largely signals the effect that an audit would have had on the firm?s value. With mandating, these firms are forced to audit and this imposes a value loss on them without apparently countervailing social benefit. We also model the effect of more than one audit quality being available in the market, with higher audit cost for higher quality. We show that there will be a demand for this differential audit quality, and that the above signaling effect is enhanced by it. These findings have some important policy implications which are also discussed in the paper.
JEL Classification: M49
Suggested Citation: Suggested Citation