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Optimal Regulation of Auditing

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Author Info
Giovanni Immordino () (Università di Salerno and CSEF)
Marco Pagano () (Università di Napoli "Federico II", CSEF and CEPR)

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Abstract

We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 133.

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Date of creation: 01 Mar 2005
Date of revision: 01 May 2007
Publication status: Published in CESifo Economic Studies, Vol. 53, No. 3, September 2007, pages 363–388
Handle: RePEc:sef:csefwp:133

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Related research
Keywords: auditing; regulation; enforcement; collusion.;

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Find related papers by JEL classification:
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
M42 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Auditing

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References listed on IDEAS
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.:
  1. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer. [Downloadable!] (restricted)
  2. A. Mitchell Polinsky & Steven Shavell, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March. [Downloadable!] (restricted)
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  3. Giovanni Immordino & Marco Pagano, 2003. "Legal Standards, Enforcement and Corruption," CSEF Working Papers 98, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Oct 2009. [Downloadable!]
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  4. Paul K. Chaney, 2002. "Shredded Reputation: The Cost of Audit Failure," Journal of Accounting Research, Blackwell Publishing, vol. 40(4), pages 1221-1245, 09. [Downloadable!] (restricted)
  5. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August. [Downloadable!] (restricted)
  6. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169. [Downloadable!] (restricted)
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  7. Edward L. Glaeser & Andrei Shleifer, 2003. "The Rise of the Regulatory State," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 401-425, June.
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  8. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October. [Downloadable!] (restricted)
  9. Agrawal, Anup & Chadha, Sahiba, 2005. "Corporate Governance and Accounting Scandals," Journal of Law & Economics, University of Chicago Press, vol. 48(2), pages 371-406, October.
  10. Giovanni Immordino & Marco Pagano, 2008. "Corporate Fraud, Governance and Auditing," CSEF Working Papers 203, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 16 Sep 2009. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Immordino, Giovanni & Pagano, Marco, 2008. "Corporate Fraud, Governance and Auditing," CEPR Discussion Papers 7104, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Sergey Stepanov, 2007. "Shareholder Access to Manager-Biased Courts and the Monitoring/Litigation Tradeoff," Working Papers w0106, Center for Economic and Financial Research (CEFIR). [Downloadable!]
  3. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics. [Downloadable!]
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