The audited company often buys consulting services from the auditors which in effect is an extra incentive on top of the moneys paid for the auditing service. The mechanism that allows this is the ‘Chinese wall’ but that is a total joke. What really need to happen is to separate out consulting from auditing. That’s not going to happen though as there is just so much money is consulting.
Audits can be very expensive and finding the optimal depth of auditing is difficult and unlikely that a public trust would be anywhere close to optimum amount. Financially savvy people should already know that the audit process is flawed and should not simply be accepted on face value. How flawed is usually stated in the audit, checks are split into controls testing and substantive testing. Usually the cheaper the audit the less substantive testing that is done. People need to trust audits less not more. If an organization is unable to pass an audit then it’s a really bad sign, if they have to hire EY to pass an audit then that is also a bad sign.
Also have you ever tried to stop something that makes a ton of money? It is damn near impossible. If governments had that much power the people who would lose their money have a very strong incentive to invest a large portion of that money into regulatory capture. So any solution that uses government must be predicated on a non-corruptable government which do not exist, at least not for very long. A variation of auditor’s prudence. A lot of our traditions and institutions that are resistant to corruption were designed and maintained that way to support wealth extraction via expansive empires, as you can’t export wealth if it all disappears into corruption. And empires must export wealth from colonies in order to compete with other burgeoning empires. Without such an empire to support the resistance to corruption erodes as the mechanism to reward those who eschew corruption disappears. It becomes increasingly difficult to acquire power without first being corrupt.
Here’s a counter example: going public. The SEC does a deep probe, one that has material teeth, and “yes” isn’t a conclusion. Surely the SEC is subject to these forces? Another example is merger approval, along antitrust and other regulations. This is a very deep process, clearly with a lot of extremely powerful money on the line. Or another, tax collection. Fact is there’s actually a lot of examples of effective controls on business, especially when financial crimes or malfeasance are the target. The laws are particularly sharp in the finance world compared to say, food safety or other regulatory areas that are clearly captured.
The laws are only sharp in the finance world because it is more profitable for it to be that way which I think prevents it from being a counter example. Take for example the Positive Accounting Theory of Watts and Zimmerman which seeks to explain actual accounting practices as opposed to academic accounting practices. One of their findings was that due to the costly signaling nature of audits some companies will do more extensive audits than would otherwise be standard or even optimal. There is value in trust and that value can be captured in the form of decreased cost of debt from lenders and an increase in stock price. Without trust the whole financial industry implodes and that would be bad for just about everyone in finance and especially bad for those making the most money from it.
Which in turn creates the issue of how to keep this trust truly independent. There have been successful long term campaigns to wrest control of supposedly independent bodies and align them with special interest groups.
Today they’re explicitly not independent, that seems specifically worse. There are also examples of highly effective regulators. Financial services is actually replete with them.
