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Firm corruption in the presence of an auditor

Author

Listed:
  • Michael Dietrich

    (Department of Economics, The University of Sheffield)

  • Jolian McHardy

    (Department of Economics, The University of Sheffield)

  • Abhijit Sharma

Abstract

This paper develops a framework to explore firm corruption taking account of interaction with an auditor. The basic idea is that an auditor can provide auditing and other (consultancy) services. The extent of the other services depends on firm profitability. Hence auditor profitability can increase with firm corruption that may provide an incentive to collude in corrupt practices. This basic idea is developed using a game theoretic framework. It is shown that a multiplicity of equilibria exist from stable corruption, through auditor controlled corruption, via multiple equilibria to honesty on behalf of both actors. Following the development of the model various policy options are highlighted that show the difficulty of completely removing corrupt practices.

Suggested Citation

  • Michael Dietrich & Jolian McHardy & Abhijit Sharma, 2010. "Firm corruption in the presence of an auditor," Working Papers 2010016, The University of Sheffield, Department of Economics, revised Jul 2010.
    • Handle: RePEc:shf:wpaper:2010016
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    References listed on IDEAS

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    More about this item

    Keywords

    Firm corruption; auditor corruption; perfect equilibrium;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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