The Value of Audit and the Economic History of Market
International Journal of Economics and Accounting, Vol. 6 (4) 346-351, 2015
6 Pages Posted: 20 Mar 2015 Last revised: 14 Nov 2016
Date Written: March 16, 2015
Abstract
We argue that the value of audit consists of three components whose relative importance shifted over time due to the changing economics of business. The three components are: (1) detecting fraud, (2) as an element of corporate governance, and (3) facilitating the smooth functioning of capital market. Fraud detection is important in the early history of audit, but the rise of risk-based auditing and increased complexity of business diminish that role. The development of capital markets increases the importance of audit’s role in enhancing corporate governance and its contribution to the efficiency of capital market. However, historical legacy give rise to expectation gap – between the public and the professional – of the value of audit. Professional accounting body and audit firms should educate the public of the value of audit. This paper contributes to this education.
Keywords: Value of Audit, Fraud, Companies Act, Joint Stock Companies, Adverse Selection
JEL Classification: M42, M48
Suggested Citation: Suggested Citation