15/08/2022
- (i) If , then auditor dos deal auditing services out-of top quality to subscribers and at the a fee away from . Auditor dos even offers NAS so you’re able to buyer and prices for NAS. The latest agent sets and offers NAS to help you website subscribers and you will .
- (ii) If not, if , then auditor 2 offers auditing qualities out of high quality to consumer in the a fee out of . Auditor dos also offers NAS to consumer companies and you may , and you will prices for NAS. The new consultant sets and you can sells NAS to help you customer .
Concentrating on audit services at only the fresh new large-exposure buyer form bringing higher quality audits at the a higher speed
Keep in mind away from Proposition step 1 that auditor dos confronts a beneficial tradeoff between attempting to sell auditing properties in order to you to definitely customer company from the increased price, and you can attempting to sell auditing properties so you’re able to two consumer businesses during the a diminished rates. Instead NAS constraints, auditor 2 earns no rent in the NAS sector, as the auditor 2 partcipates in Bertrand race into the agent. Yet not, that have NAS limitations, brand new representative is actually an effective monopolist seller of consulting characteristics on client enterprises audited from the auditor dos, and that charge a positive rates. In the equilibrium, auditor 2 tend to thus earn NAS rents in the customers it cannot review. With NAS limits to help you audit readers, upcoming, auditor 2’s alternatives anywhere between promoting review functions just to client and you can offering review functions so you can website subscribers and you will hinges on auditor 2’s NAS rents.
It is distinguished the increase in audit high quality try not related so you can auditor independence otherwise degree spillover points, since these is missing from our design
The addition of NAS rents for the auditor 2’s purpose, on the prohibition regarding NAS to help you review readers, explanations the newest threshold on the , portrayed because of the , so you can rely on brand new consult covariance, the difference for the chance anywhere between customers and you can , and you may , which bills the worth of NAS. Such enter into auditor 2’s audit top quality method because they simply take the relevant tradeoff encountered from the auditor 2 far beyond this new tradeoffs seized for the Suggestion step 1. That have NAS constraints to audit customers, focusing on audits on customer , via highest review high quality, allows auditor 2 to make NAS rents out of buyer , which were absent when NAS provision are unrestricted. Additionally, the purchase price one auditor dos can charge having NAS, in the event it audits only consumer , is dependent on the price tag that agent charge in order to buyer . Auditing merely client for this reason lets auditor 2 to charges a high price to the a few subscribers they brings in NAS rents of. The brand new incremental NAS charge can be seen because of the contrasting this new remaining and you will right corners of your inequality for the (15). This type of confidence , , and you can , while the do brand new dispute in order to during the Proposition 2.
Proposal dos shows exactly how a regulatory ban towards the supply away from NAS to review members produces auditor 2 and NAS opponent best off. Generally, such restrictions carry out niches where for every merchant brings in monopoly rents where up until the rents had been dissipated by Bertrand battle. Offer dos next highlights how, having confident correlation anywhere between NAS and you can review request, auditor dos is more likely to like a high audit quality and offer audits to a far more limited phase, as the . The fresh new driving force ‘s the book your NAS limit lets auditor 2 to make away from NAS, that will just be gained regarding buyer organizations exactly who brand new auditor will not provide auditing properties so you can.
- increase auditor 2’s review quality, , and you may
- raise average review high quality when the and simply in the event the .
If you don’t, if , auditor 2’s review top quality and you will mediocre audit quality with NAS restrictions in order to review customers are just like absent NAS constraints.
Restricting NAS to help you audit clients will bring auditor dos which have a supplementary benefit of promoting audit features only to customer unlike so you’re able to readers and you may , via the NAS rents which are often attained of consumer . Yet not, and also this ensures that consumer endogenously changes so you’re able to a lowered high quality review service provider. Because the shown in the Corollary dos, there’s a positive relationship between auditor 2’s review quality and you will mediocre review high quality when the and just if auditor 1’s audit top quality try well enough higher, which is, if for example the get rid of in the top quality to own consumer is not very big. Which, when the auditor 1’s audit high quality was good enough large, NAS constraints to help you review clients increase mediocre audit quality.