Economic Competition between Professional Bodies: The Case of Auditing

Abstract

Building on Romano's recent analysis of the United States securities regulatory regime, we model competition between professional auditing associations. We show that such competition is an effective substitute for government regulation, providing an efficient means for auditors to signal their service quality. Competition is likely to lead to stability in the market for auditing services, with neither a "race to the top" nor a "race to the bottom." Monopoly rents are unlikely to be earned by auditors or their professional organizations, and government intervention can be limited to ensuring that the professional organization's disciplinary actions are costly enough to be effective.