Is honesty the best policy? A game theory perspective of auditing Online publication date: Sat, 16-Jun-2012
by P. Ben Chou; Wei Xu; Asokan Anandarajan; Dennis Valenti
International Journal of Behavioural Accounting and Finance (IJBAF), Vol. 3, No. 1/2, 2012
Abstract: We extend and refine the welfare game developed by Coate et al. (2002) in two directions. First, by allowing the client and auditor to choose their strategies sequentially, we show that the most efficient equilibrium is that the client moves first to honestly report earnings, which is followed by the auditor that chooses to perform a normal audit. Second, by including the possibility that the client can corrupt the auditor with side payments, which results in a failed audit, the regulator can impose an ex ante flexible penalty level that increases in proportion to the client's maximum benefits from misstating earnings. Such a preemptive regulation makes the most efficient equilibrium obtainable in which the client will move forward to report earnings honestly, followed by the normal audit strategy chosen by the auditor, even when the auditor may not be independent.
Online publication date: Sat, 16-Jun-2012
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Behavioural Accounting and Finance (IJBAF):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email firstname.lastname@example.org