A Bargaining Model of Auditor Reporting*

Ping Zhang

Contemporary Accounting Research, 1999, vol. 16, issue 1, 167-184

Abstract: In this paper, I demonstrate that the quasi†rents earned in audits undermine an auditor's independence By considering the incentives of the auditor and the client and the interaction between them, I conclude that auditor will maintain his or her independence if the firm†specific quasi†rents are zero, but compromise his or her independence if the quasi†rents are positive. The extent of the compromise is an increasing function of the quasi†rents, since the auditor will propose that a higher value be reported in the financial statements when the quasi†rents increase. I also show that disputes between the auditor and the client increase as the scope for errors for an auditor's test increases. When the error scope is large, the client becomes more aggressive in preparing a proposal while the auditor becomes more cautious.

Date: 1999
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https://doi.org/10.1111/j.1911-3846.1999.tb00578.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:16:y:1999:i:1:p:167-184

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