Effects of Joint Audits on Audit Quality and Audit Costs: A Game-Theoretical Explanation for Contradictory Empirical Results
68 Pages Posted: 1 Apr 2021 Last revised: 31 May 2022
Date Written: March 30, 2021
Abstract
Using a model of a joint audit (JA) with a proportionate liability rule, we analyze how the similarity of the two auditors in their client fit affects their free riding incentives and the synergy effect realized. We find that audit quality in a JA is high (low) and audit costs are low (high) if both auditors fit the client’s characteristics similarly well (if the auditors are dissimilar and one auditor therefore free-rides). A JA can lead to higher (lower) audit quality and lower (higher) audit costs than a single audit (SA) if the synergy effect is sufficiently high (low). Imbalances in the allocation of the audit work can increase (decrease) audit quality and decrease (increase) costs if the auditors’ similarity is low (high). A shared audit in case the auditors’ similarity is relatively low can lead to lower (higher) audit quality and higher (lower) audit costs than an SA (JA).
Keywords: audit regulation, joint audit, shared audit, audit quality, audit costs, coordination, free riding, synergy
JEL Classification: M42, M48
Suggested Citation: Suggested Citation