The accountancy sector needs reforms, but the recent proposals of the Dutch Authority for the Financial Markets (AFM) do not address the issue at its core, says Jeroen Suijs, Professor of Financial Accounting at Erasmus School of Economics. The market for accountancy contains a number of flaws which strongly limit the functioning of the audit.
To explain what these flaws are and the limitations they bring about, Professor Jeroen Suijs compares the market for accountancy with the technical maintenance for passenger cars.
Just as is the case with the audit, the technical maintenance for passenger cars is a credence good: as a consumer, you must entirely trust upon skills, knowledge and independence of the garage owner. The garage owner is familiar with this trust problem and proposes to you to involve an independent expert. The owner will select this expert and pay for him and the expert will investigate which maintenance your car needs. The expert has contact with the garage owner after but not with you: you will in the end only receive the final report in which it is stated whether the judgement of the garage owner about the required maintenance is correct.
You will probably not agree to this proposal. However, this is how the market for accountancy is organised. Moreover, the current regulations would even oblige the garage owner to hire the expert at the expense of the consumer. But because the expert wants to be hired by as many garage owners as possible, he has more benefit from serving the interests of the garage owners.
- Professor