Structural Changes, Competition And Complexity : Credit Rating Agencies (CRAs) And Allocation Mechanisms For Accounting Firms

During 1990-2015, the global auditing/accounting 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 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. Clearly, auditor fees affect auditor independence which in turn affects investors, investment professionals, the investment decision processes of companies and funds, and capital allocation processes by governments. This article: i) critiques the EU's audit reform statutes; ii) analyzes banks, credit rating agencies (CRAs) and investors as joint tortfeasors and co-conspirators; iii) analyzes liability-allocation within the context of the adverse effects of oligopoly and auditor-independence in the audit/accounting industry; iv) introduces some properties of efficient Auditor-Work Allocation Mechanisms (“AAM”), Audit-Fee Allocation Mechanisms (“AFM”); Audit Liability-allocation Mechanisms (ALAM); and Audit Penalty-Allocation Mechanisms (APAM) using elements/concepts of Group Theory – these proposed models represent structural changes that can reform competition in the industry; v) compares CRAs and audit firms; vi) introduces some efficient models of Auditor-Compensation Mechanisms