The Market for Financial Report Audits: Regulation of and Competition for Auditor Independence

The independence of auditors and the quality of financial report audits generally are rarely tested except in circumstances of corporate failure when alleged sub‐optimality is present. Often auditors have good defences as to their expertise or competency, but rarely do they have equally convincing defences for the independence of their audit. A major issue for the regulation of auditor independence is that the threats to independence are often subtle and difficult to measure. This paper argues that firms undertaking financial report audits need to be transparent and competitive in respect of auditor independence. Two models that adopt this premise are proposed.