Auditing: Perspectives from Multi-Person Decision Theory.

Abstract The market for auditing services is viewed here in terms of the strategic choices made by auditors, owners (clients), and investors. Owners win the confidence of investors by renting the reputations of auditors for accuracy and fairness. Auditors earn a market rate of return on their investment, via the costs of quality audits, in building a reputation among investors. Suggested research topics on the market structure include a study of the auditor's choices between enhancing its reputation among investors and catering to clients. The auditor is also a party to the strategic interaction between an owner and an investor, since the auditor has access to privileged information useful to the investor. Suggested research topics include a study of the optimal fineness of the information reflected in financial reports. Also mentioned briefly is the role of network externalities in the adoption of accounting conventions.