Auditors’ and Investors’ Assessment of Free Riding in Joints Audits

Abstract

Auditing plays an important role in investor protection. Hence, improving audit quality is a current matter of standard setters. In this context we focus on the auditors’ and investors’ perspectives on a joint audit and the related effects of free riding. In joint audits two or more auditors issue a common audit report. Thus, joint audits are believed to improve audit quali-ty. Nonetheless, joint audits constitute free-riding options, and even both auditors might try to free ride simultaneously. Therefore, by unchallenging the potential positive joint audit effects, this paper focuses on the effects of free riding using a game-theoretic research model.

Regarding the situation of the auditors we show that free riding options result in higher audit costs compared to single audits. We derive conditions of indifference between a single and a joint audit from the perspective of an auditor, nevertheless a joint audit might be assessed superior, if a potential cost-advantage surmounts the negative effects of free-riding.

Independent of the situation of auditors’ we show that investors assess a joint audit differently and that joint audits might be assessed superior to single audits from an investor’s perspective despite of or rather because of free-riding and/or cost disadvantages by the auditors. Finally, we provide conditions that a joint audit is superior to a single audit from the auditors’ and investors’ perspective.

Keywords: joint audits, free riding, game theory

JEL Classification: M42, M48