Frequent audits and honest audits
UB Economics Working Papers E22/417
38 Pages Posted: 24 Mar 2022
Date Written: February 17, 2022
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: Suggested Citation