The market for liars: Reputation and auditor honesty

Andrew McLennan, In-Uck Park

Research output: Contribution to journalArticle (Academic Journal)

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Abstract

In the model there are two types of nancial 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 oered by clients for fear of losing reputation, while "disreputable" auditors accept bribes because even persistent refusal will not create an improved reputation. Such an equilibrium may fail to exist because competition among reputable auditors drives fees below the level at which refusing bribes is optimal. Sustaining such an equilibrium requires both that entry into the reputable segment is impossible or unprotable, and also that the reputable segment is prevented from expanding past the point where the equilibrium collapses.
Original languageEnglish
Pages (from-to)49–66
Number of pages18
JournalInternational Journal of Economic Theory
Volume12
DOIs
Publication statusPublished - 27 Jan 2016

Keywords

  • auditor reputation
  • fee premium
  • independence
  • audit insurance

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