Economic Policy October 1994 Printed in Great Britain Auditors

The audit industry is in a state of turmoil and there are conflicting views on what should be done. Auditors have been criticised for their role in several well publicised corporate collapses and face huge lawsuits as a result. The problems are exacerbated by pressures for harmonisation which arise partly because of political developments, and partly because of the increasing sophistication and intemationalisation of financial markets. We summarise the current situation and then discuss the policy issues from the viewpoint that auditor professional judgement plays a major role in the transmission of information. This viewpoint leads us to some provocative conclusions: taking too firm measures to ensure auditor independence may be against the interests of investors and creditors. The controversial UK Caparo decision that third party investors and creditors are not owed a duty of care by auditors might enhance information transmission. Steps to rule out creative accounting might be counterproductive: for example, in the context of bank regulation, the much criticised historic cost basis for evaluating assets may be better than marking to market. by guest on Septe