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Auditors conflict of interest: does random selection work?

Author

Listed:
  • Guglielmo Barone

    (University of Padua)

  • Laura Conti

    (Bank of Italy)

  • Gaia Narciso

    (Department of Economics, Trinity College Dublin)

  • Marco Tonello

    (Department of Economics, Trinity College Dublin)

Abstract

Third-party auditors are usually chosen and paid by the agent that is being audited and this may lead to a significant conflict of interest and to less strict audits. We investigate the effect of a new random allocation mechanism, according to which, starting from 2012, auditors of Italian municipalities have had to be chosen by means of a random draw from a large pool of experts. By exploiting the staggered adoption of the new allocation rule across municipalities, our difference-in-differences estimates show that the new regime implies a worsening of municipalities reported public finances, in terms of budget surpluses of the probability to be in financial distress. The effect is largely driven from municipalities endowed with lower social capital, so signalling that random allocation is somehow a substitute for the solution of the conflict of interest problem. In these municipalities, we also find that the new mechanism reduces some fraud detection indicators based on Benford s law.

Suggested Citation

  • Guglielmo Barone & Laura Conti & Gaia Narciso & Marco Tonello, 2020. "Auditors conflict of interest: does random selection work?," Trinity Economics Papers tep0820, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep0820
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    File URL: https://www.tcd.ie/Economics/TEP/2020/TEP0820.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    third-party auditors; random selection mechanism; public finance truthfulness;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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