Optimal Regulation of Auditing |
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Authors: | Pagano Marco; Immordino Giovanni |
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Institution: | * Marco Pagano is affiliated with Università di Napoli Federico II, CSEF and CEPR, Via Cintia, 80126 Napoli, Italy, e-mail: mrpagano{at}tin.it and Giovanni Immordino is affiliated with Università di Salerno and CSEF, 84084 Fisciano (SA), Italy, e-mail: giimmo{at}tin.it |
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Abstract: | We study regulation of the auditing profession in a model whereaudit quality is unobservable and enforcing regulation is costly.The optimal audit standard falls short of the first-best auditquality, and it is increasing in the riskiness of firms andin the amount of funding they seek. The model can encompasscollusion between clients and auditors, arising from the jointprovision of auditing and consulting services: deflecting collusionrequires less ambitious standards. Finally, banning the provisionof consulting services by auditors eliminates collusion butmay not be optimal in the presence of economies of scope. (JELClassification: G28, K22, M42). |
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Keywords: | auditing regulation enforcement collusion |
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