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The Good, the Bad, and the Regulator: An Experimental Test of Two Conditional Audit Schemes

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Author Info
Jeremy Clark
Lana Friesen
Andrew Muller

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Abstract

Conditional audit rules are designed to achieve regulatory compliance with fewer inspections than required by random auditing. A regulator places individuals into audit pools that differ in probability of audit or severity of fine and specifies transition rules between pools. Future pool assignment is conditional on current audit results. We conduct an experiment to compare two specific schemes--Harrington's Past-Compliance Targeting and Friesen's Optimal Targeting--against random auditing. We find a production possibility frontier between compliance and minimizing inspections. Optimal targeting generates the lowest inspection rates as predicted, but random auditing the highest compliance. Past-compliance targeting is intermediate. (JEL C91, H26, K42, L51) Copyright 2004, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ei/cbh045
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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 42 (2004)
Issue (Month): 1 (January)
Pages: 69-87
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Handle: RePEc:oup:ecinqu:v:42:y:2004:i:1:p:69-87

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Related research
Keywords:

Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

Cited by:
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  1. Timothy N. Cason & Lata Gangadharan, 2004. "An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement," Department of Economics - Working Papers Series 918, The University of Melbourne. [Downloadable!]
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