Audit mandates, audit firms, and auditors

Matthias Breuer, Anthony Le and Felix Vetter

No 333, Working Papers from The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State

Abstract: Audits by private, third-party auditors are frequently mandated to ensure compliance with regulations (e.g., accounting or environmental standards). We examine how such mandates shape the market for audits. In our empirical examination, we focus on one of the oldest and most prominent audit markets, the market for audits of firms' financial accounting. Using novel data on firms, audit firms, and auditors-the key players in the market-, we find that audit mandates increase the number of audits, audit firms, and auditors, but decrease average auditor wages. These findings are consistent with mandates creating demand for low-quality audits, originating from involuntarily audited firms, in a market with differentiated audit qualities. In line with this interpretation, we find that the regulatory audit demand emanates from smaller firms with limited incentives to obtain audits voluntarily; and is served by smaller audit firms and less experienced auditors. Collectively, our findings suggest that the promise of audit mandates as a means to ensure regulatory compliance may be limited by the emergence of low-quality audits.

Keywords: Auditing; Mandates; Employees; Wages; Quality; Market Structure (search for similar items in EconPapers)
JEL-codes: G18 G38 J23 J24 J31 J42 K22 L10 L51 L84 M42 M48 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-acc and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cbscwp:333

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