Optimal Regulation of Auditing

32 Pages Posted: 15 May 2007

See all articles by Marco Pagano

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Giovanni Immordino

University of Salerno - Centre for Studies in Economics and Finance (CSEF)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.

Keywords: auditing, regulation, enforcement, collusion

JEL Classification: G28, K22, M42

Suggested Citation

Pagano, Marco and Immordino, Giovanni, Optimal Regulation of Auditing (May 2007). CESifo Working Paper Series No. 1980. Available at SSRN: https://ssrn.com/abstract=986551

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

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Centre for Studies in Economics and Finance (CSEF) ( email )

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Einaudi Institute for Economics and Finance (EIEF)

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Rome, 00187
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Research Institute of Industrial Economics (IFN)

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Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Giovanni Immordino

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy

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