Auditing with a Chance of Whistleblowing

Lin Nan (), Chao Tang () and Minlei Ye ()
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Lin Nan: Daniels School of Business, Purdue University, West Lafayette, Indiana 47907
Chao Tang: School of Business and Management, The Hong Kong University of Science and Technology, Hong Kong
Minlei Ye: University of Toronto, Mississauga, Ontario L5L1C6, Canada

Management Science, 2025, vol. 71, issue 10, 8549-8564

Abstract: This paper investigates the impact of promoting whistleblowing on audit quality and the efficiency of detecting misstatements. On the one hand, whistleblowing alerts the enforcer to the possibility of a misstatement and intensifies the regulatory effort, thereby incentivizing the auditor to improve audit quality. On the other hand, promoting whistleblowing reduces the enforcer’s investigative effort when there is no whistleblowing allegation, which in turn dampens the auditor’s incentive to enhance audit quality. We demonstrate that, under certain conditions, encouraging more whistleblowing can impair audit quality and reduce detection efficiency. We also examine the socially optimal whistleblowing program, and our analysis implies that the optimal whistleblowing intensity is increasing in investment cost and the quality of the whistleblower’s information.

Keywords: whistleblowing; audit quality; regulatory enforcement (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:10:p:8549-8564

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