1st Edition

The Economics of Auditing Foundations and Unanswered Questions

By Dan A. Simunic Copyright 2025
    276 Pages 23 B/W Illustrations
    by Routledge

    The financial information provided to governments, creditors, investors etc. by businesses has been verified by auditors since ancient times. In its modern form, the independent public accounting profession has its roots in 19th century Scotland. A distinctive feature of this profession is that it consists of private for-profit businesses – operating as sole practitioners, partnerships, but mostly as large accounting firms. The question naturally arises – why should users of financial information provided by private for-profit firms place trust in the verification of that information by other private for-profit firms? This is the interesting and complex economic issue that underlies research in what has come to be called ‘the economics of auditing’. The author is one of the first researchers in this area. This book traces the development of this important stream of research that applies economic analysis to the study of financial statement audits by professional public accounting firms. It offers a narrative commentary, along with a series of previously unpublished papers that the author presented during the 1970’s, at Accounting Research workshops at the University of Chicago, as part of his dissertation research, that ultimately led to one of the bedrock papers in the field. It provides an explanation and discussion of the economic, regulatory, and research environment at that time. The book concludes with a discussion of important but currently “unanswered questions” in the field that flow from the author’s thesis research but remain unresolved. It will be of significant interest to advanced students and academics who are engaged in developing their own research programs, as well as to any researcher who is working in the area of the ‘economics of auditing’.

    Part 1

    1.       Introduction


    2.       The Beginning


    Comments on the paper


    Pre-thesis workshop paper, March 1973

    Part II

    3.       The Beginning of the Middle

    Comments on the memorandum

    1975 memorandum to Nick Dopuch

    Part III

    4.       The End of the Middle

    Comments on the paper

    1976 pre-thesis workshop paper

    Part IV

    5.       The Beginning of the End

    Comments on the paper

    1977 pre-thesis workshop paper

    Part V

    6.       The End


    a.        The Theory – comments on the theory

    Theory section of the thesis

    b.       Hypotheses and design of the tests – comments on the empirical test design

    Specification of variables and hypotheses to be tested section of thesis

    c.        Test details and empirical results – comments on the test details and empirical results

    Empirical tests: survey design, results, and analysis of the data section of thesis

    Part VI

    7.       Epilogue


    8.       Unanswered questions


    a.        Unravelling the complex web of relationships and incentives that underlie the performance of audits: The effects of capital structure and loss sharing on the audit process


    b.       The inputs into audit production


    c.        The divergence between the private costs and social costs of audit failure and the implications for the optimal organization of the auditing profession




    Dan A. Simunic is Professor Emeritus in the Accounting and Information Systems Division, Sauder School of Business, The University of British Columbia, Vancouver, BC, Canada.