Joint Audit, Game Theory, and Impairment-Testing Disclosures

Luc Paugam () and Jean-Francois Casta ()
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Luc Paugam: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We examine the consequences on impairment testing disclosures of auditor-pair choice made by French listed companies where two (joint) auditors are required by law. Managers are likely to manipulate impairment-testing disclosures since it relies on unverifiable fair value estimates (e.g., goodwill). From a simple game theory model, we demonstrate that a Big-4 auditor paired with a non-Big 4 auditor increase auditors' incentives to force firms to disclose more because Big 4 auditor fully bears reputation costs. Using a disclosure score for firms composing the French SBF 120 index from 2006 to 2009, we provide evidence that combination of Big 4 / non-Big 4 auditors generate higher impairment-related disclosures levels whereas the other combinations, i.e. two Big 4 or two non-Big 4, tend to decrease the level of impairment-related disclosures. These empirical results are consistent with our model predictions and robust to various controls variables (e.g., size, risk, year and firm fixed effects).

Keywords: Joint Audit; Impairment Test; Game Theory; Prisoner's Dilemma; Disclosures; IAS 36 (search for similar items in EconPapers)
Date: 2012-03-29
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00671613v2
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Published in 1er Workshop "Audit" - EM Lyon / IAE Poitiers / Université Paris-Dauphine, Mar 2012, Ecully, France

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