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Firm corruption in the presence of an auditor

Author

Listed:
  • Dietrich, Michael
  • McHardy, Jolian
  • Sharma, Abhijit

Abstract

This paper develops a framework to explore firm corruption taking account of interaction with an auditor. The basic idea is that an auditor can provide auditing and other (consultancy) services. The extent of the other services depends on firm profitability. Hence auditor profitability can increase with firm corruption that may provide an incentive to collude in corrupt practices. This basic idea is developed using a game theoretic framework. It is shown that a multiplicity of equilibria exist from stable corruption, through auditor controlled corruption, via multiple equilibria to honesty on behalf of both actors. Following the development of the model various policy options are highlighted that show the difficulty of completely removing corrupt practices.

Suggested Citation

  • Dietrich, Michael & McHardy, Jolian & Sharma, Abhijit, 2010. "Firm corruption in the presence of an auditor," MPRA Paper 24784, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24784
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    firm corruption; auditor corruption; perfect equilibrium;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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