Evaluating Policy Interventions for Audit Quality Improvement: Market Competition versus Audit Firm Separation

Chiaki Kawabata and Tsuyoshi Takahara

MPRA Paper from University Library of Munich, Germany

Abstract: We consider an environment wherein a multidisciplinary firm providing audit (AS) and non-audit services (NAS) competes with an AS-specialty firm and a NAS-specialty firm, and show how we should intervene in the markets for AS quality improvement. We assume that the multidisciplinary firm faces the service provision restriction: it cannot provide the NAS to the clients who purchase its AS and maximize the total profit (centralized decision). We find that policies which intensify competition do not necessarily improve and may rather reduce the AS quality since such policies incentivize the multidisciplinary audit firm to earn profits in the NAS market by moving away from competing in the AS market. Moreover, the multidisciplinary firm's separation is the most effective policy for AS quality improvement, as it allows the service provider to avoid the service provision constraint and delegate their decision in audit quality.

Keywords: Separation of Multidisciplinary Firm; Hotelling Model; Audit Service Competition (search for similar items in EconPapers)
JEL-codes: G34 L51 M42 (search for similar items in EconPapers)
Date: 2024-05-10
New Economics Papers: this item is included in nep-acc, nep-com, nep-inv and nep-reg
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