Frequent audits and honest audits

Jacopo Bizzotto and Alessandro De Chiara ()
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Alessandro De Chiara: Universitat de Barcelona, BEAT

No 2022/417, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: A regulator hires an auditor to inspect a firm. Audits serve two purposes: to detect violations and to motivate the firm to invest in compliance. Auditor and firm can collude to hide violations. Honest audits require sufficient monetary incentives for the auditor, and more frequent audits call for larger incentives. We link the optimal audit frequency to the budget constraint faced by the regulator, and to the firm's bargaining power in the collusive agreement. We show that (i) the optimal audit frequency need not be monotonic in the regulator's budget size, (ii) tolerating collusion can foster ex-ante investment, and (iii) a regulator that enjoys more flexibility in designing the auditor's compensation scheme might be less willing to deter corruption.

Keywords: Auditing; corruption; information design; regulation. (search for similar items in EconPapers)
JEL-codes: D73 K42 L51 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2022
New Economics Papers: this item is included in nep-acc, nep-cta and nep-law
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