In a functioning audit market

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A commentator on this blog made the following excellent point:

In a functioning market, if the auditors are seen as less than competent, there should be a cost to this e.g. a company goes to the bank and asks for a loan. Bank asks to see audited accounts. Then says, these were audited by (to pluck an example out of the air) PWC. We don't have confidence in their audit procedures so we'll either refuse to give you the loan or charge a premium rate.
The shareholders then say "why are we paying these cowboys?"

This doesn't seem to happen. I can suggest partly why:

1) Virtual monopoly of audit services by 4 suppliers
2) The banks don't criticise the big 4
3) Lack of transparency in the process above. Even if the banks do charge higher because of the auditor, the shareholders won't get to hear of it, at least not through official channels.

How can all this be changed?

I have three suggestions:

  1. Let’s stop assuming only the Big 4 can audit. The evidence is they can’t.
  2. Let’s stop assuming only the private sector can audit: the evidence is there is market failure requiring intervention;
  3. Let’s create a state run audit function and let’s give it the power to advise HMRC and other regulatory authorities of its findings when tax abuse and other regulatory offence is identified.

Discuss.