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Incentives for Corruptible Auditors in the Absence of Commitment

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  • Fahad Khalil
  • Jacques Lawarree
Abstract
In the absence of commitment to auditing, we study the optimal auditing contract when collusion between an agent and an auditor is possible. We show that the auditor can be totally useless if the auditor's independence can be compromised with relative ease. Even very stiff sanctions on fraud will be unable to make auditing optimal. We then derive a demand for independent external auditing. We endogenize collusion cost as the cost from the risk of future detection. We also derive a justification for the focus of the recent audit reforms on penalties on CEOs in cases of audit fraud. © Blackwell Publishing Ltd. 2006.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Fahad Khalil & Jacques Lawarree, 2004. "Incentives for Corruptible Auditors in the Absence of Commitment," Working Papers UWEC-2003-02-FC, University of Washington, Department of Economics.
    • Handle: RePEc:udb:wpaper:uwec-2003-02-fc
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    as
    1. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer.
    2. Bester, Helmut & Strausz, Roland, 2000. "Imperfect commitment and the revelation principle: the multi-agent case," Economics Letters, Elsevier, vol. 69(2), pages 165-171, November.
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    4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
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    7. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-636, May.
    8. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    9. Roland Strausz, 1997. "Collusion and Renegotiation in a Principal–Supervisor–Agent Relationship," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 497-518, December.
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