Abstract
The “Big-Four” accounting firms dominate the global accounting/auditing industry, and the big-seven consulting firms (Bain; McKinsey; Booz; Deloitte; PwC; KPMG and E&Y) dominate the global business/management consulting industry and stifle competition. During 1990-2017, the global auditing/accounting industry and the global management consulting industry experienced significant structural changes that have implications for Financial Stability, systemic risk and the proper functioning of capital markets. Some of the results included the collapses of stock prices and bond prices of firms suspected of earnings management; and substantial litigation against auditing firms, CRAs and board of directors. Accounting/audit firms and consulting firms have always been key elements in the fight against earnings management, securities fraud, corruption and asset quality management because of their unique position as external auditors and advisors. This chapter introduces some efficient Auditor allocation and Compensation Mechanisms. These new “Learning Business Models” and contracts can solve the conflicts of interest, Antitrust, greed, Regret, Deadweight-Losses, complexity and industrial organization problems inherent in the Auditing/consulting industry; and each such model contravenes Myerson-Satterthwaite Impossibility Theorem, Arrow's Impossibility Theorem, Sen's Impossibility Theorem, Gibbard's Theorem, the Gibbard-Satterthwaite Impossibility Theorem, and the Green-Laffont Impossibility Theorem. These issues have implications for international trade and international capital flows given the prevalence of accounting and management consulting in almost all aspects of modern business.
TopExisting Literature
There is minimal literature on the economic criteria for allocation of liability to auditing firms; and very minimal literature on the allocation of work to auditing firms; or the allocation of professional fees to auditing firms; or a mechanism-design based comparison of accounting firms and CRAs. Nwogugu (2010) developed new Work-Allocation, Liability-Allocation and Revenue-Allocation models for Auditing firms. Liu & Simunic (2005), Ballas & Fafalliou (Nov. 2008), Cox (_____), Ascher (Sept. 2008), Chen, Su & Wu (2007), DeFond, Wong & Li (2000), Lennox & Liu (2012), Gerakos & Syverson (Jan. 2014), Dunn, Kohlbeck & Mayhew (2011), Albrecht (April 2010), Bloom & Schirm (June 2005), Huang, Chang & Chiou (2016) and US GAO (U.S. Government Accounting Office) (2008) discussed oligopoly and competition in the auditing/accounting industry. Nagy (2005) and Gul, Ma & Lai (2017) analyzed audit firm/partner tenure in the industry.