Agency Problems, Auditing, and the Theory of the Firm: Some Evidence

Posted: 6 Sep 2006

See all articles by Ross L. Watts

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jerold L. Zimmerman

University of Rochester - Simon Business School

Abstract

This paper examines the history of auditing in the U.K. and the U.S. to test whether audits of companies arose as the consequence of governmental regulation or as a voluntary monitoring activity to reduce agency costs and increase firm value. The paper finds that audits existed early in the development of the modern corporation (as early as 1200) and evolved gradually into the type of audit required by the first English companies act (1844). The evidence suggests that the audit's monitoring activity is important, if not crucial, to the formation of firms. The audit's long survival suggests it is a part of the efficient technology for organizing firms.

Differences in the timing of the evolution of professional auditors in the U.K. and U.S. prior to legally required auditing appear to reflect differences in the timing of capital market development in the two countries.

Keywords: Auditing, corporate governance, capital markets, agency costs

JEL Classification: M49, M41, M47, G34, K12, K22

Suggested Citation

Watts, Ross L. and Zimmerman, Jerold L., Agency Problems, Auditing, and the Theory of the Firm: Some Evidence. Journal of Law and Economics, Vol. 26, 1983, Available at SSRN: https://ssrn.com/abstract=928710

Ross L. Watts (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States

Jerold L. Zimmerman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

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