Your article “US accounting watchdog says scheme to abolish it would hit global audit quality” (Report, May 3) echoes concerns that abolishing the Public Company Accounting Oversight Board would weaken oversight. But audit quality doesn’t depend on institutional labels. It depends on incentives.
Auditing is a “credence good” — its quality often becomes apparent only after the fact. That’s why procedural oversight alone can’t ensure reliability. What works is market discipline.
Audit quality rests on three mechanisms that give auditors something real to lose: legal liability (through litigation), reputational damage (through lost business) and professional licensing (through career-ending sanctions). These forces — not regulatory checklists — are what keep auditors honest.
When regulation reinforces these mechanisms, it works. When it tries to replace them with process mandates, it backfires. In 2023, PCAOB chair Erica Williams cited a 40 per cent deficiency rate as proof of declining quality. Yet as board member Christina Ho noted, that figure conflated minor and major issues — missing what matters: whether companies had to restate their financials.
More recently, a rule requiring companies to certify internal controls risks encouraging tick-box compliance at the expense of professional judgment.
But not all oversight misfires. In 2015, the PCAOB required disclosure of the lead audit partner on public company audits. Despite opposition, this rule put real names — and reputations — on the line. It directly enhanced both liability and reputational discipline. That’s what regulation should do: amplify the market forces that already drive quality.
John (Xuefeng) Jiang
Eli Broad Endowed Professor, Department of Accounting & Information Systems, Broad College of Business, Michigan State University,
East Lansing, MI, US
