The Demand for Audit Services

Posted: 6 Aug 1998

See all articles by Haim Falk

Haim Falk

The Technion, Israel Institute of Technology

Martin Lally

Victoria University of Wellington

Date Written: April 16, 1998

Abstract

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

Falk, Haim and Lally, Martin, The Demand for Audit Services (April 16, 1998). Available at SSRN: https://ssrn.com/abstract=112768

Haim Falk

The Technion, Israel Institute of Technology ( email )

Faculty of Industrial Engineering & Management
Haifa 32000
ISRAEL
+972 4 829 4419 (Phone)

Martin Lally (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington 6001
New Zealand
64 4 471 5365 (Phone)
64 4 495 5076 (Fax)

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