Audits of Public Companies

33 Pages Posted: 13 Jul 2004

See all articles by John Hepp

John Hepp

Suffolk University - Department of Accounting

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: June 29, 2004

Abstract

This paper develops a theory that explains why the government, on behalf of the public it serves, demands audits of public companies. Our theory argues that the government demands audits as a way to minimize private and public transaction costs defined as "the cost of measuring the valuable attributes of what is being exchanged and the costs of protecting rights and policing and enforcing agreements" (Dahlman 1979). The reduction of both types of transaction costs is a logical purpose of government as it maximizes the overall wealth of its citizens. The two different types of transaction costs, in turn, lead to two types of audits: private stewardship audits and public transparency audits. While stewardship audits employ contractual standards and fiduciary obligations to resolve agency problems, public audits employ generally promulgated standards for recognition, measurement and public disclosures that facilitate contracting among many constituents. Public audits also generally require auditor independence to objectively resolve broader economic, measurement, and communication issues. Our paper extends the theories of Jensen and Meckling (1976) and Watts and Zimmerman (1983, 1986) to incorporate public transaction costs and the effects of public disclosure and standards on independence. Our theory suggests a public policy emphasis on reducing transaction costs through independence, objective standards, and public accountability.

Keywords: Stewardship audits, transparency audits, transaction costs

JEL Classification: L50, M41, M49, G34, G38

Suggested Citation

Hepp, John and Mayhew, Brian W., Audits of Public Companies (June 29, 2004). Available at SSRN: https://ssrn.com/abstract=564266 or http://dx.doi.org/10.2139/ssrn.564266

John Hepp

Suffolk University - Department of Accounting ( email )

Sawyer School of Management
Boston, MA 02108
United States

Brian W. Mayhew (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
715
Abstract Views
5,406
Rank
66,393
PlumX Metrics