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

Kawabata, Chiaki and Takahara, Tsuyoshi (2024): Evaluating Policy Interventions for Audit Quality Improvement: Market Competition versus Audit Firm Separation.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Separation of Multidisciplinary Firm, Hotelling Model, Audit Service Competition
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M42 - Auditing

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