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Some Economics of Audit Market Reform

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  • Boon Seng Tan
  • Yew Kee Ho

Abstract

type="main"> 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 the 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 the independence-provision of NAS. We then review whether the 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.

Suggested Citation

  • Boon Seng Tan & Yew Kee Ho, 2016. "Some Economics of Audit Market Reform," Australian Accounting Review, CPA Australia, vol. 26(3), pages 271-283, September.
    • Handle: RePEc:bla:ausact:v:26:y:2016:i:3:p:271-283
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    File URL: http://hdl.handle.net/10.1111/auar.12114
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    References listed on IDEAS

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    1. Markus Widmann & Florian Follert & Matthias Wolz, 2021. "On the Political Decision of Audit Market Regulation: Empirical Evidence of Audit Firm Tenure and Maximum Durations within the European Union," Economies, MDPI, vol. 9(2), pages 1-24, May.

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