• On Market Structure, Audit Quality and Attestation Value

Abstract

Agency theory is the primary methodology for studying the topics of the audit markets in USA. That theory focuses on the principal-agent relationship of enterprisers and managers. However, dealing with an enterprise, the attitudes of the enterprisers in Asia compared are different from those in the USA. This is because most of the enterprisers in Asia own a large number of shares, and generally become managers of the own companies. Therefore, the problem of examining audit quality in Asia is different from that described in relevant literature in USA. Due to this distinction among businesses, this paper develops a game model to understand the mutual relationships among audit market structures, audit quality, and attestation values by analyzing the interactions among managers, CPAs, and outside investors. This paper shows that different market structures can affect the relationship between audit quality and attestation values. The proposed game model helps explain the empirical findings regarding the inconsistency of payment-cutting competition in audit markets and the low association between audit payments and audit quality. Different market structures lead to differences in audit quality and attestation values. Facing various market structures, CPAs generally lie on the proper level of competition such that payment-cutting phenomena may not appear in audit markets. In fact, previous research shows that different audit market structures lead to various evaluations of attestation values that change audit payments. As a result, empirical research presents inconsistent findings regarding the relationship between audit payments and audit quality. Since the audit market structures in different regimes may be completely distinct, studies that blindly follow American regulations may be inappropriate.

Keywords: Audit Market Structures, Audit Fee, Audit Quality, Low Balling.