Optimal Regulation of Auditing

Marco Pagano and Giovanni Immordino

No 1980, CESifo Working Paper Series from CESifo

Abstract: We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.

Keywords: auditing; regulation; enforcement; collusion (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (7)

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Journal Article: Optimal Regulation of Auditing (2007)
Working Paper: Optimal Regulation of Auditing (2007)
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