The auditor's slippery slope: An analysis of reputational incentives

The auditor's slippery slope: An analysis of reputational incentives

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Article ID: iaor20104794
Volume: 56
Issue: 6
Start Page Number: 924
End Page Number: 937
Publication Date: Jun 2010
Journal: Management Science
Authors: ,
Keywords: auditing
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.

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