Auditing is broadly defined as a logical, well-planned, and independent evaluation of an enterprise's records of data, statements of operations, and performances (Seabury, 2020). On the other hand, a free-market economy refers to an unregulated economic system where buyers and sellers trade without government control. Markedly, demand, and supply forces control a free market's prices, production level, and economic resources allocation (Bragg, 2019). This paper examines auditors' indispensable role in the free-market economy by examining why free markets always have a high demand for auditing.
Notably, free markets continually have a high demand for auditing because of the natural conflict of interest that usually arises due to the existent agency relationship between the owner and the manager. In a business, information asymmetry regularly occurs between the owner and the manager because of their different goals, positions, and expertise (Bragg, 2019). Naturally, the manager is always more conversant with the firm's management and is more aware of its "real" financial position than the owner, who is regarded as an "absentee." In the case the manager strives to act in ways that promote their best interests, the owner will be at a loss as the manager may manipulate the business' financial information ( The Editors of Encyclopaedia Britannica, 2020 ). Owing to the delicate and sensitive nature of the relationship between the manager and the owner, the manager's employment contract obligates them to agree to undergo regular monitoring through auditing.
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Additionally, since free markets are not under any regulation, except that of the demand and supply forces, its participants need to trust each other to engage in the market. Auditors are relied upon to foster trust among the free-market participants as they work to protect every participant's interests in the market ( The Editors of Encyclopaedia Britannica, 2020 ). As such, auditing tends to be the most appropriate form of monitoring that satisfies all the free market economy participants. Hence, the reason as to why the auditor's role in a free market is indispensable.
References
Seabury, C. (2020). The cost of free markets . Investopedia. https://www.investopedia.com/articles/economics/08/free-market-regulation.asp
Bragg, S. (2019). Free market economy — AccountingTools . AccountingTools. https://www.accountingtools.com/articles/2017/9/22/free-market-economy
The Editors of Encyclopaedia Britannica. (2020). Derivatives . Encyclopedia Britannica. https://www.britannica.com/topic/derivatives
