The Market for liars: Reputation and auditor honesty

Arbeitspapier

In the model there are two types of financial auditors with identical technology, one of which is endowed with a prior reputation for honesty. We characterize conditions under which there exists a 'two-tier equilibrium' in which 'reputable' auditors refuse bribes offered by clients for fear of losing reputation, while 'disreputable' auditors accept bribes because even persistent refusal does not create a good reputation. The main findings are: (a) honest auditors charge higher fees, and have economic profits accruing to reputation; (b) as the fraction of auditors who are honest increases, the premium charged by reputable auditors eventually decreases, which diminishes the incentive to refuse bribes; (c) if the fraction of honest auditors exceeds an upper bound, there does not exist a two-tier equilibrium; (d) thus the reputation mechanism may be undermined by entry into the honest segment of the industry, if it is possible; (e) increasing auditor independence increases the upper bound.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: ISER Discussion Paper ; No. 587

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Accounting ; Asymmetric and Private Information; Mechanism Design ; Information and Market Efficiency; Event Studies; Insider Trading
• Thema: auditing ; reputation ; adverse selection ; auditor independence ; Wirtschaftsprüfung ; Adverse Selektion ; Reputation ; Theorie

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): McLennan, Andrew ; Park, In-Uck
• Ereignis: Veröffentlichung
• (wer): Osaka University, Institute of Social and Economic Research (ISER)
• (wo): Osaka
• (wann): 2003

Weitere Informationen

• Handle: http://hdl.handle.net/10419/92584
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ