Auditors choice is an important choice to make sure that corporations are accountable and behave responsibly. Mechanism design theory tries to match supply and demand efficiently. The question is that if we can design an efficient mechanism to match auditors and corporations to enhance corporate governance.
The mechanism used to achieve corporate governance is consensus between auditors and those responsible for governance
The question is too simplistic.
1) Companies (or better their management) can behave responsibly even without any external control, just because of their internal incentives. By incurring bonding costs by management, monitoring costs may be reduced and thus residual loss can be lowered, which in turn increases joint surplus of management and owners and other stakeholders.
2) On the other hand, even strict enforcement regime is not 100% guarantee to eliminate misconduct.
3) Regarding auditor choice, company stakeholders, not management shall be primary involved. Secondly, auditors shall behave honestly.
4) In many case, the auditor choice is not utterly free. E.g. an auditor of PIE is to be approved by regulatory body, which reduces the number of available auditing firms.
5) From my point of view, an efficient mechanism is such one that would emerge if assurance of financial statements is not compulsory (regulated). However, it is inconceivable under current status quo.
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