The Role of Auditing in Buyer-Supplier Relations

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.

Keywords: supply chain management, supplier audits, profit sharing, informational rents

JEL Classification: D82, M40, M46, M49

Accepted Paper Series