The effects of imperfect auditing on managerial compensation |
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| Authors: | Angelo Baglioni Luca Colombo |
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| Institution: | 1. Division of Endocrinology, Diabetes and Metabolism, State University of New York and Kaleida Health, Buffalo, New York.;1. Department of Gastroenterology and Hepatology, VU University Medical Centre, Amsterdam, The Netherlands;2. Diabeter, Rotterdam, The Netherlands;3. Department of Paediatrics, Rijnstate Hospital, Arnhem, The Netherlands;4. Department of Medical Immunology, VU University Medical Centre, Amsterdam, The Netherlands;5. Department of Internal Medicine, Medical Centre Alkmaar, Alkmaar, The Netherlands;6. Department of Internal Medicine, VU University Medical Centre, Amsterdam, The Netherlands;1. Department of Clinical Oncology and Chemotherapy, Nagoya University Graduate School of Medicine, Nagoya;2. Center for Advanced Medicine and Clinical Research, Nagoya University Hospital, Nagoya, Japan;1. Diabetes Care Center, Salinas, California, United States;2. IDIBELL-Hospital Universitari Bellvitge, CIBERDEM, Barcelona, Spain;;3. Florida Hospital, Orlando, Florida, United States;4. Department of Endocrinology, Ochsner Medical Center, New Orleans, Louisiana, United States;5. Novo Nordisk A/S, S?borg, Denmark;;6. Department of Medical and Surgical Sciences, University Magna Graecia of Catanzaro, Italy. |
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| Abstract: | We study the optimal shareholder–manager contract having the property to induce the manager to exert high effort and truthfully reveal firm performance. This contract design problem is solved under the assumption of imperfect auditing, either because of mistakes or because of collusion between managers and auditors. The imperfection of the audit technology is costless up to a threshold, beyond which it causes a distortion in the incentive compatible contract or even prevents its existence. This result may help explain the observed decline in the use of stock options, tracing it back to an unfocused activity or poor performance of auditors. |
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