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Auditing with a Chance of Whistleblowing

Author

Listed:
  • Lin Nan

    (Daniels School of Business, Purdue University, West Lafayette, Indiana 47907)

  • Chao Tang

    (School of Business and Management, The Hong Kong University of Science and Technology, Hong Kong)

  • Minlei Ye

    (University of Toronto, Mississauga, Ontario L5L1C6, Canada)

Abstract

This paper investigates the impact of promoting whistleblowing on audit quality and the efficiency of detecting misstatements. On the one hand, whistleblowing alerts the enforcer to the possibility of a misstatement and intensifies the regulatory effort, thereby incentivizing the auditor to improve audit quality. On the other hand, promoting whistleblowing reduces the enforcer’s investigative effort when there is no whistleblowing allegation, which in turn dampens the auditor’s incentive to enhance audit quality. We demonstrate that, under certain conditions, encouraging more whistleblowing can impair audit quality and reduce detection efficiency. We also examine the socially optimal whistleblowing program, and our analysis implies that the optimal whistleblowing intensity is increasing in investment cost and the quality of the whistleblower’s information.

Suggested Citation

  • Lin Nan & Chao Tang & Minlei Ye, 2025. "Auditing with a Chance of Whistleblowing," Management Science, INFORMS, vol. 71(10), pages 8549-8564, October.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:10:p:8549-8564
    DOI: 10.1287/mnsc.2024.04808
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    References listed on IDEAS

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