Abstract

http://ssrn.com/abstract=1517486
 


 



Granting an Exit Option to Conduct an Audit


Dongsoo Shin


Santa Clara University - Leavey School of Business

Sungho Yun


Hanyang University - Economics

December 2, 2009

Bulletin of Economic Research, Forthcoming

Abstract:     
We study a principal-agent relationship with auditing in which information from an audit is “soft” – by conducting an audit, the principal observes the agent’s private information, but cannot obtain a verifiable evidence on the information. Moreover, the principal’s auditing effort is unverifiable in our model. Therefore, besides the agent’s misreporting incentive, there is the principal’s incentive to accuse the truthful agent even without auditing. If the principal’s auditing effort is verifiable, granting no exit option to the agent is optimal although the principal can still accuse a truthful agent after the audit. We show that when the principal’s auditing effort is unverifiable, granting an exit option to the agent and auditing are complementary. Without granting an exit option to the agent, no auditing is optimal, and the principal grants an exit option to conduct a sincere audit, which in turn mitigates the agent’s misreporting incentive. Our analysis also reveals that, when the cost of auditing is sufficiently large, the principal conducts more sincere audits with a smaller amount of penalty.

Keywords: Auditing, Exit Option, Principal-Agent, Soft Information

JEL Classification: D82, L23

Accepted Paper Series





Not Available For Download

Date posted: December 4, 2009  

Suggested Citation

Shin, Dongsoo and Yun, Sungho, Granting an Exit Option to Conduct an Audit (December 2, 2009). Bulletin of Economic Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1517486

Contact Information

Dongsoo Shin (Contact Author)
Santa Clara University - Leavey School of Business ( email )
500 El Camino Real
Santa Clara, CA California 95053
United States
Sungho Yun
Hanyang University - Economics ( email )
Ansan, kyunggi-do 425-791
Korea
Feedback to SSRN


Paper statistics
Abstract Views: 207

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.297 seconds