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The Role of Auditing in Buyer-Supplier Relations

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  • Chen, Hui
  • Jeter, Debra

Abstract

Supply chain management has emerged as one of the more important topics in managerial accounting. The importance of information exchange between parties involved in supply chains has also been well documented. By addressing the value of audits in this setting, this theoretical paper serves to link two strains of accounting research: the managerial topic of supply chain effectiveness and the value of the audit function, in particular audits of the suppliers conducted by the buyers. We analyze the role of supplier audits with long-term, profit sharing contracts between the buyers and suppliers. Through a stylized model, we demonstrate that when random supplier audits are conducted, the buyer can effectively leave zero informational rents to the supplier, regardless of the supplier's cost type.

Suggested Citation

  • Chen, Hui & Jeter, Debra, 2008. "The Role of Auditing in Buyer-Supplier Relations," Journal of Contemporary Accounting and Economics, Elsevier, vol. 4(1), pages 1-17.
    • Handle: RePEc:eee:jocaae:v:4:y:2008:i:1:p:1-17
    DOI: 10.1016/S1815-5669(10)70027-8
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    References listed on IDEAS

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    1. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    2. Iny Hwang & Suresh Radhakrishnan & Lixin (Nancy) Su, 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, INFORMS, vol. 52(10), pages 1472-1482, October.
    3. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    4. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 135-145.
    5. Suresh Radhakrishnan & Bin Srinidhi, 2005. "Sharing Demand Information in a Value Chain: Implications for Pricing and Profitability," Review of Quantitative Finance and Accounting, Springer, vol. 24(1), pages 23-45, January.
    6. Charles J. Corbett & Xavier de Groote, 2000. "A Supplier's Optimal Quantity Discount Policy Under Asymmetric Information," Management Science, INFORMS, vol. 46(3), pages 444-450, March.
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    Cited by:

    1. Maciej Urbaniak & Piotr Rogala & Piotr Kafel, 2023. "Expectations of manufacturing companies regarding future priorities of improvement actions taken by their suppliers," Operations Management Research, Springer, vol. 16(1), pages 296-310, March.
    2. Yuqiang Cao & Weiming Liang & Guocheng Yang & Jun Yin, 2022. "Judicial Independence and Domestic Supply Chain: Evidence from a Quasi-Natural Experiment," Sustainability, MDPI, vol. 14(24), pages 1-17, December.
    3. Hu, Zhiying & Yang, Haiyan & Zhang, Yuyu, 2022. "Shared auditors, social trust, and relationship-specific investment in the supply chain," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    4. Dong, Xiaohong & Cheng, Yan & Cheng, Chiao-Ming & Liu, Hung-Chun, 2025. "The impact of customer risk on Enterprises' strategic change: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 100(C).
    5. Daehyeon Park & Jinhyeong Jo & Doojin Ryu, 2021. "Incentive Contracts for Sustainable Growth of Small or Medium-Sized Enterprise," Sustainability, MDPI, vol. 13(9), pages 1-10, April.

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    Keywords

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    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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