I am planning to do my dissertation in' How microeconomics theory can be applied to auditing?'
After a thorough reading I found three microeconomics theories (moral hazard, adverse selection, signalling) also (insurance ,agency and information hypothesis) that have been applied to auditing. However, I am quite reluctant which hypothesis should I apply to carry on my research. I assume (by observing the role of external auditor in bankruptcy cases before companies went to bankruptcy and whether the companies have used one of the big four to signal high quality of financial statements to investors) I can address the research question. Also, what is the methodology that can be applied for such a research?
What do you mean by: whether the companies have used one of the big four to signal high quality of financial statements to investors
I meant some companies that went bankrupt might have chosen big four accounting firms to audit their accounts to signal high quality of financial statements to investors.
But big auditors do not always provide high quality of financial reports. Even some prior studies in auditing have established that.
But big auditors do not always provide high quality of financial reports. Even some prior studies in auditing have established that. But if you can argue well and back up with strong evince it may stand.
this is what i am trying to do to assume that the big four provide high quality services and compare them with non-big four accounting firms, to determine whether the auditor plays its role as monitoring mechanism in principle-agent relationship .
Kindly consider multidisciplinary studies- taking into consideration the risks and economic stability. My opinion, tailor it according to single country perspectives.
Md Masudul, many thanks I will conduct it from UK perspective, because it is easier for me to find the data.
Big audit firms almost always provides quality audit opinions. Yes, there are are many exceptions of them being in default but still the chances are high that a small audit firm will default on its audit opinion more likely than a big one. The reason is money. Small firms can hardly lose their lucrative clients. After Enron, the audit quality has become a big issue for the big four. Plus PCAOB in US is an extra security measure for the audit opinions to be correct.
Agency seems to be a promising theme, with the accompanying issues of misaligned interests and governance. Audits are mechanisms designed to bring behaviour into conformance to goals. When they don't. Microeconomic theory informs us that one or more of the following may be the source: goals(incentives), mechanisms(treat the firm as a small market), or information (cognitive biases).
Alternatively if it's so "systematic" that it defies rational explanation it could be the result of "power plays". I recommend the writings and works of Kenneth Galbraith on these issues.
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