Evaluating the Impact of Regulatory Reforms on Audit Practices and Financial Statement Reliability

Posted: Jun 25, 2023

• Logan Patrick
• Olive Barrett
• Gianna Alvarez

Abstract

The landscape of audit regulation has undergone significant transformation over the past two decades, driven by financial crises, corporate scandals, and evolving market expectations. Traditional approaches to evaluating regulatory impact have predominantly relied on econometric models that examine linear relationships between regulatory variables and outcome measures. However, these methods often fail to capture the complex, adaptive nature of audit ecosystems and the emergent properties that arise from interactions between regulators, audit firms, clients, and financial markets. This research introduces a novel computational framework that addresses these limitations by modeling audit regulation as a complex adaptive system. Our approach represents a paradigm shift in how we conceptualize and evaluate regulatory impact. Rather than treating audit regulation as a simple input-output mechanism, we model it as a dynamic network of interacting agents whose behaviors evolve in response to regulatory changes. This allows us to capture non-linear effects, threshold phenomena, and unexpected consequences that traditional methods might overlook. The research is motivated by the observation that seemingly similar regulatory reforms often produce dramatically different outcomes across jurisdictions, suggesting that contextual factors and system dynamics play a crucial role in determining regulatory effectiveness.