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Incentives for corruptible auditors in the absence of commitment

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Listed:
  • 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.

Suggested Citation

  • Fahad Khalil & Jacques Lawarree, 2006. "Incentives for corruptible auditors in the absence of commitment," ULB Institutional Repository 2013/245733, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/245733
    Note: SCOPUS: ar.j
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    References listed on IDEAS

    as
    1. 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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