ToAuditOrNotToAudit - To Audit, or Not to Audit? On the use...

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1 To Audit, or Not to Audit? On the use of auditing in a Continental European setting Marleen Willekens (Tilburg University and KULeuven) Version 17 October 2007 This paper is based on my inaugural lecture at Tilburg University. I am grateful to Willem Buijink and Jere Francis for comments on earlier versions of this paper.
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2 1. I NTRODUCTION ‘To Audit, or Not to Audit?’ This is a question European policy makers are struggling with these days, as they are in the midst of deciding on whether they should change the criteria for mandatory (legally required) audits in private firms in Europe. The proposal is to increase the size criteria for private firms that are subject to mandatory auditing. An increase in the size criteria would mean that some firms that are now required to hire an auditor will no longer be required to do so in the future. This initiative is only one of several measures to simplify the business environment for EU companies. The objective of these measures is to enable European businesses to compete in today's global market by reducing unnecessary administrative burdens and costs. When deciding on the change of threshold levels, policy makers typically weigh the social and economic costs and benefits of auditing for stakeholders of private firms. In this lecture I want to address the question what the uses or benefits of auditing are in a European context. An answer to this appears to be more difficult than I had expected. Before I actually turn to the question on the use of auditing in continental Europe, I want to talk very briefly about what auditing is. 2. W HAT IS AUDITING ? Let me illustrate one of the key roles of auditing by drawing a parallel with the second hand car market (for those who are experts this is a cliché example; but it makes the point very clear). Suppose you want to buy a second hand car. Perhaps you are a trained car mechanic and you are perfectly able to assess whether the second hand car you want to buy is in good technical shape. Most of us, however, do not have such these qualities. The seller asserts that the car is in perfect shape, but why should you believe him taking into account that he knows you do not have any technical qualities when it comes to cars? Clearly you are facing a risk here. The risk that the
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3 information the seller is providing you is not reliable and you end up buying a car that has hidden deficiencies. What can you do to mitigate this risk? There are several things you could do. You could decide not to buy the car and use public transportation instead. An alternative is to ask seller of the car some warranty, and write some kind of insurance contract with him to fix the car when it breaks down. Another option is to hire somebody who is a trained car mechanic to examine the car and give his professional opinion on the technical condition of the car. If his opinion is to be credible, this person obviously needs to be independent from the person who sells the car, because lack of independence could lead to collusion between the seller of the car and the mechanic. This
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ToAuditOrNotToAudit - To Audit, or Not to Audit? On the use...

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