Frequent audits and honest audits
Jacopo Bizzotto and
Alessandro De Chiara
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Alessandro De Chiara: Central European University (CEU) - Department of Economics; University of Barcelona; University of Barcelona - Barcelona Economic Analysis Team (BEAT)
Working Papers from Oslo Metropolitan University, Oslo Business School
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)
Date: 2022-02-17
New Economics Papers: this item is included in nep-acc and nep-law
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https://doi.org/10.2139/ssrn.4037316 (text/html)
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Working Paper: Frequent audits and honest audits (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:oml:wpaper:202202
DOI: 10.2139/ssrn.4037316
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