Incentives for corruptible auditors in the absence of commitment

Fahad Khalil and Jacques Lawarree

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: In the absence of commitment to auditing, we study the optimal auditing contract when collusion between an agent and an auditor is possible. We show that the auditor can be totally useless if the auditor's independence can be compromised with relative ease. Even very stiff sanctions on fraud will be unable to make auditing optimal. We then derive a demand for independent external auditing. We endogenize collusion cost as the cost from the risk of future detection. We also derive a justification for the focus of the recent audit reforms on penalties on CEOs in cases of audit fraud. © Blackwell Publishing Ltd. 2006.

Date: 2006-06
Note: SCOPUS: ar.j
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Citations: View citations in EconPapers (41)

Published in: Journal of industrial economics (2006) v.54 n° 2,p.269-291

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Related works:
Journal Article: INCENTIVES FOR CORRUPTIBLE AUDITORS IN THE ABSENCE OF COMMITMENT* (2006)
Working Paper: Incentives for corruptible auditors in the absence of commitment (2006)
Working Paper: Incentives for Corruptible Auditors in the Absence of Commitment (2004)
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