This Article examines problems (including information asymmetries, agency problems and cognitive biases) that auditors and lawyers (collectively, “gatekeepers”) confront when they evaluate and respond to risk, as well as the various ways in which gatekeeper regulation addresses these problems. Then, using the analytical framework of New Institutional Economics, this Article recognizes that “optimal” solutions to gatekeeper problems are far from certain. Better solutions are thus more likely to emerge from experimenting with different rules and observing outcomes from those rules. If auditors and lawyers are governed by different rules, a jurisdiction can simultaneously experiment with two different regulatory approaches for these two professions, and then make adjustments accordingly. Private actors also can signal which rules they prefer in a particular context by choosing whether to use, or to insist that other private actors use, auditors or lawyers for a particular task. Similarly, if rules for both professions vary among jurisdictions, jurisdictions can learn not only from their own experimentation but from the experimentation of other jurisdictions with different rules. Private actors can also signal their rule preferences by choosing the jurisdiction in which they want professional services to be performed. Improvements to gatekeeper regulation should follow from the observed results of this experimentation.

These purported benefits from regulatory competition could, however, be undermined if private actors are allowed unlimited choice among regulatory regimes (a “race to the bottom”). This article thus discusses the limits of regulatory competition, and mentions various strategies for reducing the likelihood of a race to the bottom. Finally, this article observes that, within a framework of controlled regulatory competition, market and social conditions may cause some rules governing auditors and lawyers to converge, as well as some rules governing both professions in the United States and Europe to converge. Profession-specific and jurisdiction-specific differences, however, will probably remain, unless experimentation and observation demonstrate that a particular rule is clearly superior across professional and/or jurisdictional boundaries.


Law and Economics

Date of this Version

June 2004