Optimal Regulation of Auditing
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 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.
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- Giovanni Immordino & Marco Pagano, 2008.
"Corporate Fraud, Governance and Auditing,"
CSEF Working Papers
203, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 26 Apr 2012.
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"Legal Standards, Enforcement and Corruption,"
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0914, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2009.
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