How Reliable Should Auditors Be? Optimal Monitoring in Principal-Agent Relationships

Posted: 10 Nov 2003

See all articles by Ingolf Dittmann

Ingolf Dittmann

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI)

Abstract

This paper considers a principal-agent model with auditing and collusion, in which the audit costs are a convex function of the audit reliability. The focus of interest is the question of the audit reliability chosen by the principal. It turns out that the optimal audit reliability strongly depends on the given maximum punishment and on whether collusion is possible or not. The principal chooses a higher level of reliability if collusion is possible. Moreover, in the presence of a high maximum punishment, the optimal corruptible auditor is very reliable and very expensive, whereas the optimal honest auditor is unreliable and cheap.

JEL Classification: D82, D73, L22

Suggested Citation

Dittmann, Ingolf, How Reliable Should Auditors Be? Optimal Monitoring in Principal-Agent Relationships. Available at SSRN: https://ssrn.com/abstract=257752

Ingolf Dittmann (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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Tinbergen Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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