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Firm corruption in the presence of an auditor

By Michael Dietrich, Jolian McHardy and Abhijit Sharma


This paper develops a framework to explore firm corruption taking account of interaction with an auditor. The basic idea is that an auditor can provide auditing and other (consultancy) services. The extent of the other services depends on firm profitability. Hence auditor profitability can increase with firm corruption that may provide an incentive to collude in corrupt practices. This basic idea is developed using a game theoretic framework. It is shown that a multiplicity of equilibria exist from stable corruption, through auditor controlled corruption, via multiple equilibria to honesty on behalf of both actors. Following the development of the model various policy options are highlighted that show the difficulty of completely removing corrupt practices.

Topics: D21 - Firm Behavior: Theory, K42 - Illegal Behavior and the Enforcement of Law, C7 - Game Theory and Bargaining Theory
Year: 2010
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