Using Experimental Asset Markets to Illustrate the Value of Auditing

This article provides a description of (and guidance for implementing) a classroom exercise in which experimental asset markets are used to illustrate the economic impact that auditing can have on a market economy and its participants. In particular, the exercise entails creating two actual microeconomies in the classroom. In one microeconomy, participants produce, trade, and consume generic assets in an environment in which the underlying asset quality is not readily observable to consumers. In the second microeconomy, there is one principal difference: asset quality is verified via an independent audit, and the results are reported to the marketplace. Comparison of the two microeconomies allows students and instructors to identify, measure, and explain the impact of auditing on individual decisions, individual profits, and overall market performance. The exercise can serve as a platform for classroom discussion on a variety of topics pertaining to the value of auditing in a market economy. As such, the exercise provides a useful introduction to and motivation for a course in auditing.