The Gresham's law of measurement and audit quality indicators: Implications for policy making and standard-setting

The relevance-measurability tradeoff is at the very heart of accounting and auditing; typically, what is most relevant to practitioners is also notoriously difficult to measure. When it comes to auditing, the measurement of the audit quality of an auditing firm or the quality of a specific audit is subject to similar challenges.

In general, many of the most relevant and useful assessments are challenging because there appears to be “multiple determinism” involved, that is, a plethora of factors would seem to influence the assessment, many of which defy meaningful quantitative expression and measurement. We formulate the “Gresham's Law of Measurement” (similar to the so-called “streetlight effect” or “the principle of the drunkard's search”) as follows: “Easy-to-calculate quantitative metrics tend to crowd out more relevant but difficult-to-measure assessments.” Thus, succumbing to the Gresham's Law of Measurement means allowing measurability to trump meaningfulness. In other words, easily calculated quantitative metrics may provide the illusion of measurability while in actuality not being meaningful.

We use a philosophy of science approach, including concepts such as information integrity, feedback vs. measurement, static vs. dynamic measures, and look back and look-forward dimensions to evaluate and critique the 2015 Public Company Accounting Oversight Board (PCAOB) Concept Release on Audit Quality Indicators. Toward the end, we also provide a list of potential topics worthy of further examination.