Frequent audits and honest audits

UB Economics Working Papers E22/417

38 Pages Posted: 24 Mar 2022

See all articles by Jacopo Bizzotto

Jacopo Bizzotto

Oslo Business School - OsloMet

Alessandro De Chiara

Central European University (CEU) - Department of Economics; University of Barcelona; University of Barcelona - Barcelona Economic Analysis Team (BEAT)

Date Written: February 17, 2022

Abstract

A regulator hires an auditor to inspect a firm. Audits serve two purposes: to detect violations and to motivate the firm to invest in compliance. Auditor and firm can collude to hide violations. Honest audits require sufficient monetary incentives for the auditor, and more frequent audits call for larger incentives. We link the optimal audit frequency to the budget constraint faced by the regulator, and to the firm's bargaining power in the collusive agreement. We show that (i) the optimal audit frequency need not be monotonic in the regulator's budget size, (ii) tolerating collusion can foster ex-ante investment, and (iii) a regulator that enjoys more flexibility in designing the auditor's compensation scheme might be less willing to deter corruption.

Keywords: Auditing, corruption, information design, regulation

JEL Classification: D73, K42, L51

Suggested Citation

Bizzotto, Jacopo and De Chiara, Alessandro, Frequent audits and honest audits (February 17, 2022). UB Economics Working Papers E22/417, Available at SSRN: https://ssrn.com/abstract=4037316 or http://dx.doi.org/10.2139/ssrn.4037316

Jacopo Bizzotto (Contact Author)

Oslo Business School - OsloMet ( email )

Pilestredet 35
Oslo, 0166
Norway

Alessandro De Chiara

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

University of Barcelona - Barcelona Economic Analysis Team (BEAT) ( email )

Gran Via de les Corts Catalanes
Barcelona, 08007
Spain

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