The Indispensable Role of the Auditor in a Free Market Economy

The Indispensable Role of the Auditor in a Free Market Economy

To fully grasp the role of the Auditor in a Free Market Economy we must first understand what a free market is. I found two sources that have accurately described a free market economy one from an investment standpoint and one from a personal perspective. From an investment standpoint a free market economy is an “idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation” (free market economy, n.d.). From a personal standpoint, a free market economy is “a free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them. This is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities” (Moffatt, 2015). As we can see, there are similarities such as if there is a need then there is a market to be had and to trade services freely so to speak. However, if we look closer, there are some differences from an investment standpoint. The state is not allowed to intervein whereas from an individual’s perspective he thinks there is always some intervention from the state.

So, if we apply these definitions to an auditor, we quickly realize there have been many changes of the past decade or so — for instance, adjustments brought by the Security and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB), more specifically the Sarbanes Oxley Act (SOX) which arose as a result of the many corporate scandals that occurred. Trust is a massive thing for the public and investors alike making the auditors a sought-after commodity because auditors can be relied on to provide protection against financial fraud and to ensure the reliability of financial statements. In a speech from James Doty, from the PCAOB, he said that “Even in the simplest model of finance, a lender will not lend to one who would borrow, without information sufficient to persuade the lender that the capital will be returned. Interest is set, subconsciously or upon deliberation, based on the lender's view of the risk that the capital will not be returned” (Doty, 2013). In other words, a free market can be successful if the market's participants have gained trust. An auditor brings that to not only the publics eyes but the potential investors as well. Another viewpoint on this