Realigning Auditors' Incentives

25 Pages Posted: 1 Nov 2005 Last revised: 14 Jul 2016

Date Written: January 10, 2003

Abstract

Accounting reforms for careless audits have not come to grips with the basic problem affecting the accounting industry, which is that accounting firms work for the companies they audit. A lax audit can be conceived of as a multi-period game, in which the immediate and future payoffs to the auditors from cooperating with management in questionable accounting practices exceed the discounted possibility of judgments and sanctions. To alter this payoff structure, it is necessary to reevaluate the employment tie between auditors and public companies. The Article evaluates three proposals to sever that tie: mandatory rotation of audit firms, the system of statutory auditors found in continental Europe, and a proposal to have auditors work for malpractice insurers who insure financial statements.

Keywords: auditor, accounting scandals

Suggested Citation

McCoy, Patricia Ann, Realigning Auditors' Incentives (January 10, 2003). Connecticut Law Review, Vol. 5, p. 989, Spring 2003. Available at SSRN: https://ssrn.com/abstract=828287

Patricia Ann McCoy (Contact Author)

Boston College Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States

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