A Copayment Auditing Scheme for Financial Misreporting

Shirley Ho () and Sushanta Mallick ()

The International Journal of Accounting, 2015, vol. 50, issue 1, 53-74

Abstract: This paper proposes a copayment scheme to prevent collusion in auditing contracts, offering as a solution to financial misreporting. In the copayment scheme, both the client firm and a third party, such as PCAOB, are asked to share the auditing fee. The key feature of the copayment scheme is that the third party's expenses should be funded by the client firm. We demonstrate that the participation of a third party can create an endogenous collusion cost to the client firm, to such an extent that in the equilibrium, the client firm will not make any offer of bribery. Most importantly, the total equilibrium auditing fee is the same as in the bribery-free contract. This result makes an important contribution to the literature in addressing the issues of financial frauds and collusion between the auditor and the client firm within a principal-agent model.

Keywords: Financial misreport; Auditing contract; Bribery (search for similar items in EconPapers)
JEL-codes: D86 M4 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:accoun:v:50:y:2015:i:1:p:53-74

DOI: 10.1016/j.intacc.2014.12.002

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