AUDIT MARKET FAILURE

Benedikt Koehler

Economic Affairs, 2006, vol. 26, issue 3, 67-69

Abstract: The auditing profession has called for the current regime of unlimited liability to be replaced with liability caps. The Department of Trade and Industry has tabled proposals to reform the structure of the market for audit services. These proposals fall short of meeting the demand for liability limitation but modify the current regime inasmuch as auditor liability, though uncapped, would be proportional to the damage caused by audit failure. This step is unlikely to remedy audit market failure. This article argues the distortion of market incentives in audit markets can be traced to government intervention and the remedy lies in replacing government intervention with competition.

Date: 2006
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