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Optimal Regulation of Auditing

Author

Listed:
  • Marco Pagano
  • Giovanni Immordino

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 it 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. (JEL Classification: G28, K22, M42). Copyright , Oxford University Press.

Suggested Citation

  • Marco Pagano & Giovanni Immordino, 2007. "Optimal Regulation of Auditing," CESifo Economic Studies, CESifo Group, vol. 53(3), pages 363-388, September.
    • Handle: RePEc:oup:cesifo:v:53:y:2007:i:3:p:363-388
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifm016
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    Cited by:

    1. Amegashie, J. Atsu & Ouattara, Bazoumanna & Strobl, Eric, 2007. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," MPRA Paper 3158, University Library of Munich, Germany, revised 06 May 2007.
    2. Marco Pagano & Giovanni Immordino, 2012. "Corporate Fraud, Governance, and Auditing," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 1(1), pages 109-133.
    3. Michael Dietrich & Jolian McHardy & Abhijit Sharma, 2016. "Firm Corruption in the Presence of an Auditor," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 8(2), pages 97-124, December.
    4. Sergey Stepanov, 2010. "Shareholder access to manager‐biased courts and the monitoring/litigation trade‐off," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 270-300, June.
    5. Forster, Josef, 2008. "The Optimal Regulation of Credit Rating Agencies," Discussion Papers in Economics 5169, University of Munich, Department of Economics.

    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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