Auditor Independence Regulation

Abstract

The need for financial regulation is often justified by the potential for market failure that can result when managers’ posses inside information while investors do not, called “information asymmetry,” as well as from inappropriate behavior of auditors, called “moral hazard.”¹³ New laws that attempt to address these issues in the United States (Sarbanes-Oxley Act 2002) and in the European Union (Proposal for a 8^th Directive of the European Commission 2004a) indicate that the predominant view among legislators is that we need more regulation, more severe penalties, and larger enforcement budgets to protect financial markets from fraud.