Audit contracts and reputation

Yolanda Portilla

Economics Working Papers from Universidad Carlos III, Departamento de Economía

Abstract: This paper characterizes the contractual relationship between an external auditor and a manager of a client firm when the incentives for both agents are implicit as in the career concerns framework. The main result is that the earning management and the audit effort are decreasing over time because the incentives to build a reputation also decline for both agents in spite of a managers first mover advantage. This suggests that the audit effort should be higher when the auditor is an emerging firm and the future employment opportunities for the client firm´s manager are larger.

Keywords: Contract theory; Career concerns; Reputation; Auditing (search for similar items in EconPapers)
JEL-codes: C73 G38 D82 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cta and nep-lab
Date: 2008-12

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Persistent link: http://EconPapers.repec.org/RePEc:cte:werepe:we091308

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