The Auditor's Slippery Slope: An Analysis of Reputational Incentives

Carlos Corona () and Ramandeep S. Randhawa ()
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Carlos Corona: McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712
Ramandeep S. Randhawa: Marshall School of Business, University of Southern California, Los Angeles, California 90089

Management Science, 2010, vol. 56, issue 6, 924-937

Abstract: Reputational concerns have commonly been perceived to have a positive effect on auditing firms' execution of their monitoring and attesting functions. This paper demonstrates that this need not always be the case by studying a two-period game of repeated interaction between a manager and an auditor under the assessment of the market for audit services. Regarding reputation as the sole motivator for the auditor, we illustrate how reputational concerns induce an auditing firm to misreport. We investigate the reasons and circumstances under which such misreporting takes place. In particular, a strategic manager can induce the audit firm down a slippery slope, wherein the managerial fraud increases as the tenure of the audit firm progresses, whereas the auditor's fraud reporting probability decreases.

Keywords: reputation; auditing; game theory; sequential equilibrium (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (11)

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