Incorporation and the audit market

Ronald A. Dye*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

60 Scopus citations

Abstract

This paper evaluates the effects of allowing auditors to limit their liability by incorporating. Using a model that integrates the audit market with the market for the firms being audited, it predicts that, once incorporation becomes an option, the least wealthy employed auditors under unlimited liability either exit the audit market or earn lower profits from auditing than before. The most wealthy employed auditors earn higher profits; they incorporate and remove wealth from their corporations. The model also explains the recent shift in auditors' attitudes toward incorporation, and why insurance and other wealth-sheltering devices imperfectly substitute for incorporation.

Original languageEnglish (US)
Pages (from-to)75-114
Number of pages40
JournalJournal of Accounting and Economics
Volume19
Issue number1
DOIs
StatePublished - Feb 1995

Keywords

  • Audit fees
  • Audit quality
  • Auditing standards
  • Auditors' liability

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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