Limits to Auditor Reputational Incentives

39 Pages Posted: 21 Jun 2016

See all articles by Somdutta Basu

Somdutta Basu

Econ One Research, Inc.

Korok Ray

Texas A&M University - Mays Innovation Research Center

Date Written: June 17, 2016

Abstract

Why do reputable audit firms fail? This paper provides a formal theory of auditor reputation formation. Even under well-functioning reputation mechanisms, an auditor with a strong reputation has incentives to shirk. Above a threshold-reputation, the market belief about the auditor’s ability dissipates slowly, leading to low audit quality. Reputation incentives weaken further under fee competition in audit markets. The results are robust under contigent fees for auditors.

Suggested Citation

Basu, Somdutta and Ray, Korok, Limits to Auditor Reputational Incentives (June 17, 2016). Mays Business School Research Paper No. 2798238. Available at SSRN: https://ssrn.com/abstract=2798238 or http://dx.doi.org/10.2139/ssrn.2798238

Somdutta Basu

Econ One Research, Inc. ( email )

United States

Korok Ray (Contact Author)

Texas A&M University - Mays Innovation Research Center ( email )

4113 TAMU College State
TX 77843-4113
United States

HOME PAGE: http://mays.tamu.edu/directory/korok/

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