Now to the findings. In response to your proposals you have been told, first, that the proper scope of a firm's services should be left to market forces to decide. Second, you have been told that investor perceptions about audit credibility are not an appropriate basis for action. Analysis of the second and third features I have just highlighted shows that when audits are mandated, i.e. the market is not free to discipline auditors, both these arguments are defective. Under the current rules in the United States, there are good reasons to believe that the market, on its own, cannot fix the problem of how much and what services an auditor should provide an audit client.
Markets work well when prices reflect buyers' utilities for goods and services.
Mandating an audit weakens the link between investors' utility for the audit and the fees paid for auditing. This, in turn, creates a divergence between what investors would want auditors to do and what profit-maximizing auditors might do. In my model this shows up as auditors having incentives to produce a mix of more non-audit services than investors would prefer. But since this is a problem created by mandating the audit in the first place, short of un-mandating the audit, in my analysis, there is no real fix for this problem. The second finding of my research concerns the implications of the current litigation system for the well-functioning of audit markets.