Centre for Economic Policy Research

3 
Accounting: Conflicts of Interest in 
Auditing and Consulting
3.1
Introduction
Information asymmetries between suppliers and users of capital create potential
conflicts of interest that can limit the efficient allocation and use of capital. If
shareholders, creditors and other stakeholders are confident that managers are
maximizing shareholder value and meeting the firms’ obligations, funding will be
available. If, however, they suspect that managers are exploiting conflicts of 
interest, the flow of capital will dry up. One way in which managers have tried to
reduce information asymmetries is to provide a set of ‘accounts’ that reflect how
they have utilized the resources under their control.
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The simple presentation of
the information in a set of reports or accounts does not, however, eliminate the
inherent agency problems. As a result there is a demand for an external monitor
to opine on the reliability of the accounts. This role is most commonly taken by
an auditor, or more recently an audit firm, that is independent of the managers
preparing the accounts, to attest to the quality of information in the financial
statements produced by the management. 
This simple description leads to several important questions to be considered
when examining the apparent audit failures that we have experienced recently.
What is the nature of the opinion that is sought and delivered? What is the source
of an auditor’s comparative advantage that leads to value creation for suppliers of
capital? What ensures that an auditor is unbiased and/or independent? This last
question is particularly pertinent to issues surrounding the conflicts of interest
that exist for auditors. Finally, what is the evidence on whether the market is able
to discern differences in the quality and services delivered by auditors? To answer
these questions, we provide some historical background to understand how 
existing institutions arose to meet the challenges faced by auditors and how the
current crisis of confidence in auditing emerged.