An Austrian Approach to Accounting Regulation: How Policy Intervention Distorts the Market for Assurance Services

Abstract

This thesis applies the causal-realist method of the Austrian School of Economics to the market for assurance services in the United States. The central argument is that post-crisis accounting regulation has systematically distorted the incentive structures of independent public accounting firms in ways regulators do not predict and cannot fully control. Financial crises, properly understood through Austrian Business Cycle Theory, originate in monetary distortions rather than market failure. Post-crisis regulatory responses nonetheless target the profession rather than the underlying distortion, introducing rules that alter the institutional constraints within which auditors exercise professional judgment. The thesis develops a judgment-based equation of the firm, drawing on the ownership theory of Foss and Klein, to formalize how the introduction of an external regulatory claimant, specifically the PCAOB, reallocates decision rights, expands stakeholder claims on firm assets, and displaces the residual control exercised by firm owners. The Hayek-Lavoie power problem supplies the epistemological dimension: centralized oversight of dispersed professional judgment generates a structural knowledge gap between rulemaker and practitioner that personnel reform cannot resolve. Historical analysis of the U.S. accounting profession demonstrates that the standard narrative attributing the PCAOB’s creation to audit failure at Enron and WorldCom obscures a longer political trajectory. The pre-1933 model, in which exchange listing requirements, civil liability, and voluntary professional association standards produced independent audit as an endogenous market outcome, constitutes the appropriate counterfactual against which post-SOX regulation should be evaluated. The 1977-2002 peer review episode is recharacterized not as genuine self-governance but as delegated regulation operating under implicit threat of nationalization–a distinction with significant consequences for how the profession’s accommodating posture toward its regulators should be interpreted. Legal analysis of Free Enterprise Fund, Lucia, Cochran, and Loper Bright identifies the constitutional fault lines along which the SEC and PCAOB’s authority becomes structurally vulnerable in a post-Chevron environment. The thesis concludes by examining private equity’s entry into the profession through the alternative practice structure model. PE investment is partly an artifact of the regulatory environment the PCAOB has produced, as compliance costs and barriers to entry have increased the capital requirements necessary to compete in the public company audit market. Assessed through the JBEF and the profit-and-loss mechanism, however, PE investment is not inherently destabilizing. If it improves human capital investment and technology, the Austrian School would regard this as an efficient reallocation of resources, subject to the discipline of professional services markets