Auditors conflict of interest: does random selection work?

Guglielmo Barone (), Laura Conti (), Gaia Narciso and Marco Tonello
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Laura Conti: Bank of Italy

Economic Papers from Trinity College Dublin, Economics Department

Abstract: Third-party auditors are usually chosen and paid by the agent that is being audited and this may lead to a significant conflict of interest and to less strict audits. We investigate the effect of a new random allocation mechanism, according to which, starting from 2012, auditors of Italian municipalities have had to be chosen by means of a random draw from a large pool of experts. By exploiting the staggered adoption of the new allocation rule across municipalities, our difference-in-differences estimates show that the new regime implies a worsening of municipalities reported public finances, in terms of budget surpluses of the probability to be in financial distress. The effect is largely driven from municipalities endowed with lower social capital, so signalling that random allocation is somehow a substitute for the solution of the conflict of interest problem. In these municipalities, we also find that the new mechanism reduces some fraud detection indicators based on Benford s law.

Keywords: third-party auditors; random selection mechanism; public finance truthfulness (search for similar items in EconPapers)
JEL-codes: D82 H72 M42 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2020-04
New Economics Papers: this item is included in nep-acc and nep-cwa
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