The Auditor's Slippery Slope: The Ill Effects of Reputation

32 Pages Posted: 4 Dec 2008 Last revised: 19 Aug 2010

See all articles by Carlos Corona

Carlos Corona

Carnegie Mellon University - David A. Tepper School of Business

Ramandeep S. Randhawa

University of Southern California

Date Written: October 17, 2008

Abstract

Reputational concerns have been commonly perceived to have a positive effect on auditing firms' execution of their monitoring and attesting functions. This paper demonstrates that this need not always be the case by studying a two period game of repeated interaction between a manager and an auditor under the assessment of the market for audit services. Regarding reputation as the sole motivator for the auditor, we illustrate how reputational concerns induce an auditing firm to misreport. We investigate the reasons and circumstances under which such misreporting takes place. In particular, a strategic manager can induce the audit firm down a 'slippery-slope' situation, wherein the managerial fraud increases as the tenure of the audit firm progresses, while the auditor's fraud reporting probability decreases.

Keywords: Audit, Auditor, Reputation, Fraud, Reporting, Disclosure

JEL Classification: M49, M41, M43, G38

Suggested Citation

Corona, Carlos and Randhawa, Ramandeep S., The Auditor's Slippery Slope: The Ill Effects of Reputation (October 17, 2008). McCombs Research Paper Series No. ACC-04-08, Available at SSRN: https://ssrn.com/abstract=1310914 or http://dx.doi.org/10.2139/ssrn.1310914

Carlos Corona (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Ramandeep S. Randhawa

University of Southern California ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
273
Abstract Views
1,749
rank
121,500
PlumX Metrics