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Maintaining Auditor Independence




In this paper, we resolve the auditor independence problem that arises in the model studied in Antle (1982, 1984). We argue that the owner-manager-auditor relationship exhibits a "separability" that facilitates the use of a particularly simple mechanism that prevents collusion. The mechanism prevents collusion as long as th e agents do not play strictly dominated strategies and assume the same to be true of the other agent; the owner's profits under this mechanism are arbitrarily close to second-best (the optimal Nash contract). The fact that a simple mechanism can be used to maintain auditor independence in a theoretical model strengthens our belief that, in practice, there exist institutions (e.g., the courts) that can maintain auditor independence with relative ease. This may be one reason why the institution of auditing is so enduring.

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  • Anil Arya & Jonathan Glover, "undated". "Maintaining Auditor Independence," Corporate Finance & Organizations _017, Ohio State University.
  • Handle: RePEc:wop:ohstfi:_017

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    1. repec:bla:joares:v:31:y:1993:i:1:p:92-112 is not listed on IDEAS
    2. Jacques Crémer, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 275-295.
    3. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring.
    4. Myerson, Roger B, 1986. "Multistage Games with Communication," Econometrica, Econometric Society, vol. 54(2), pages 323-358, March.
    5. repec:bla:joares:v:32:y:1994:i:2:p:224-240 is not listed on IDEAS
    6. Joel S. Demski & David E.M. Sappington, 1991. "Resolving Double Moral Hazard Problems with Buyout Agreements," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 232-240, Summer.
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    Cited by:

    1. Marcelo Caffera & Juan Dubra, 2005. "Getting Polluters to Tell the Truth," Microeconomics 0504008, EconWPA.

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