Auditor independence, incomplete contracts and the role of legal liability
AbstractWe develop a model in which there is conflict of interest between the management and the shareholders of an organization. Incompleteness of contracts prevents a simple contracting solution to this problem. We suggest that auditors can play a role in aligning the conflicting interests. However, this result is dependent on auditors maintaining independence from management. Again however, incompletenesses in contracting causes difficulties because it may be hard to ensure that auditors maintain this required independence. In this context, the imposition of potential legal liability (punishment) on the auditor, may be an important commitment mechanism for the auditors, making it credible that they will not collude with the management. In order to give our model institutional structure we study how this collusion may take place through the reappointment concerns of the auditor. In the reappointment game, we consider how legal liability levels could be chosen so that it becomes credible to expect that auditors will not implicitly collude with management and provide a low duty of care.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal European Accounting Review.
Volume (Year): 6 (1998)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.tandfonline.com/REAR20
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
- Daron Acemoglu, 1995.
"Corporate Control and Balance of Powers,"
CEP Discussion Papers
dp0239, Centre for Economic Performance, LSE.
- Milgrom, Paul R, 1988.
"Employment Contracts, Influence Activities, and Efficient Organization Design,"
Journal of Political Economy,
University of Chicago Press, vol. 96(1), pages 42-60, February.
- Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
- Milgrom, Paul R., 1987. "employment contracts, influence activities and efficient organization design," Department of Economics, Working Paper Series qt6pf6c5j6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Acemoglu, Daron, 1994. "A Dynamic Model of Collusion," CEPR Discussion Papers 1027, C.E.P.R. Discussion Papers.
- Allen, Franklin & Gale, Douglas, 1992.
"Measurement Distortion and Missing Contingencies in Optimal Contracts,"
Springer, vol. 2(1), pages 1-26, January.
- Allen, F. & Gale, D., 1990. "Measurement Distortion And Missing Contingencies In Optimal Contracts," Weiss Center Working Papers 26-90, Wharton School - Weiss Center for International Financial Research.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Dye, Ronald A., 1991. "Informationally motivated auditor replacement," Journal of Accounting and Economics, Elsevier, vol. 14(4), pages 347-374, December.
- Oliver Hart & John Moore, 1990.
"A Theory of Corporate Financial Structure Based on the Seniority of Claims,"
STICERD - Theoretical Economics Paper Series
/1990/217, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Hart, O. & Moore, J., 1990. "A Theory Of Corporate Financial Structure Based On The Seniority Of Claims," Working papers 560, Massachusetts Institute of Technology (MIT), Department of Economics.
- Oliver Hart & John Moore, 1990. "A Theory of Corporate Financial Structure Based on the Seniority of Claims," NBER Working Papers 3431, National Bureau of Economic Research, Inc.
- Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
- Stefan Sundgren, 1998. "Auditor choices and auditor reporting practices: evidence from Finnish small firms," European Accounting Review, Taylor & Francis Journals, vol. 7(3), pages 441-465.
- Steven Maijoor & Roger Meuwissen & Luc Quadackers, 2000. "The effects of national institutions on audit research: evidence from Europe and North America," European Accounting Review, Taylor & Francis Journals, vol. 9(4), pages 569-587.
- Clive Lennox, 1999. "Non-audit fees, disclosure and audit quality," European Accounting Review, Taylor & Francis Journals, vol. 8(2), pages 239-252.
- Ann Vanstraelen, 2000. "Impact of renewable long-term audit mandates on audit quality," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 419-442.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.