ACCOUNTING SELF-REGULATION AND THE ENFORCEMENT OF PROFESSIONAL CODES

This study examines the contribution of professional codes to the prod uction of trust in accounting services. Professional codes and their e nforcement are only one possible input which society has at its dispos al for the production of this trust. Other inputs include civil and cr iminal codes. If society is modeled as a multi-input firm, then it wil l tend to use less of any input as that input grows less productive or more costly. To identify factors which might impact society's future use of accounting self-regulation as a trust-producing input, the prod uctivities and costs of enforcing professional codes in accounting are modeled. The effectiveness of professional enforcement is seen to hav e its origin in the losses members face if they leave the profession. These exit costs are analyzed in detail. Other factors affecting profe ssional enforcement are also evaluated. Trends in these factors are su ggested, but empirical verification of them is not attempted. Finally, the paper offers a reduced mathematical model which formally derives some of the important results described earlier in the paper. Among th ese are the ideas that monopoly rents and specificity of skills are im portant in creating the conditions which make professional enforcement possible. As these deteriorate, society's reliance on professional en forcement will decline, and its dependence on courts will rise.