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A Copayment Auditing Scheme for Financial Misreporting

Listed author(s):
  • Ho, Shirley J.
  • Mallick, Sushanta K.

This paper proposes a copayment scheme to prevent collusion in auditing contracts, offering as a solution to financial misreporting. In the copayment scheme, both the client firm and a third party, such as PCAOB, are asked to share the auditing fee. The key feature of the copayment scheme is that the third party's expenses should be funded by the client firm. We demonstrate that the participation of a third party can create an endogenous collusion cost to the client firm, to such an extent that in the equilibrium, the client firm will not make any offer of bribery. Most importantly, the total equilibrium auditing fee is the same as in the bribery-free contract. This result makes an important contribution to the literature in addressing the issues of financial frauds and collusion between the auditor and the client firm within a principal-agent model.

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File URL: http://www.sciencedirect.com/science/article/pii/S0020706314001174
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Article provided by Elsevier in its journal The International Journal of Accounting.

Volume (Year): 50 (2015)
Issue (Month): 1 ()
Pages: 53-74

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Handle: RePEc:eee:accoun:v:50:y:2015:i:1:p:53-74
DOI: 10.1016/j.intacc.2014.12.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620179

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  1. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer.
  2. Fahad Khalil & Jacques Lawarree, 2004. "Incentives for Corruptible Auditors in the Absence of Commitment," Working Papers UWEC-2003-02-FC, University of Washington, Department of Economics.
  3. Rafael Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, 02.
  4. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  5. repec:bla:joares:v:29:y:1991:i:1:p:1-18 is not listed on IDEAS
  6. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  7. Ralf Ewert & Eberhard Feess & Martin Nell, 2000. "Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 371-385.
  8. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
  9. Benston, George J. & Bromwich, Michael & Litan, Robert E. & Wagenhofer, Alfred, 2006. "Worldwide Financial Reporting: The Development and Future of Accounting Standards," OUP Catalogue, Oxford University Press, number 9780195305838.
  10. Kofman, Fred & Lawarree, Jacques, 1996. "On the optimality of allowing collusion," Journal of Public Economics, Elsevier, vol. 61(3), pages 383-407, September.
  11. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
  12. S. Ho, 2008. "Extracting the information: espionage with double crossing," Journal of Economics, Springer, vol. 93(1), pages 31-58, February.
  13. Agrawal, Anup & Chadha, Sahiba, 2005. "Corporate Governance and Accounting Scandals," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 371-406, October.
  14. 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.
  15. John C. Coates IV, 2007. "The Goals and Promise of the Sarbanes-Oxley Act," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 91-116, Winter.
  16. Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
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