Auditing in the Public Interest: Reforming the Profession by Building on the Strengths of the Existing Accounting Firms

Abstract

Due to audit quality concerns on the part of regulators and investors, accounting firms may need to re-evaluate their business model. Rethinking the current structure is important because it is difficult to observe audit quality and to differentiate between functional and dysfunctional commercial incentives of accounting firms. Consequently, it is hard for regulators to determine, and for auditors to demonstrate, whether the profession is acting in the public interest. In this essay, we argue why the current model may be suboptimal and offer thoughts on what may be a more sustainable alternative – from a public interest perspective – to the status quo: An Audit Board. This Audit Board is conceived as a quasi-governmental organization that would conduct financial statement audits for public interest entities. We envision an organization consisting of a core permanent staff of experienced audit experts that is complemented by fellows drawn from the existing accounting firms who take a job at the Board for a certain time period. We presented our proposal to various stakeholders (19 sessions with 108 attendees) to promote debate and to refine our thinking. Our proposal is relevant for regulators in their efforts of motivating auditors to act in the public interest. It would create an entity that is expert in auditing but avoids many of the independence problems faced by for-profit accounting firms. While this proposal certainly deviates from the current model, we hope that it will spark good conversations that may lead to rethinking of the status quo.