Describe Ronen’s solution to the auditor behavior problem that involves the capture of auditors by auditees.
What will be an ideal response?
ANSWER:
Ronen suggests the creation of financial statement insurance which would be paid by the auditee to an outside insurance company. This insurance would cover both insurance payments to shareholders as a result of misrepresentation in financial statements and also auditor fees. In turn, the insurance carrier would select and pay the auditor. The amount of coverage and premium would be published, so those firms having higher coverage and relatively lower premiums would look best. The principal–agent relation is changed from firm and auditor to insurance carrier and auditor. If the insurance carrier selects a “low ball” auditor, it increases the risk of having to pay shareholders for sub-par audits.
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