Honesty and Intermediation: Corporate Cheating, Auditor Involvement and the Implications for Takeoff

Abstract

We examine honesty and credible auditing in rm-investor relations in a repeated game of imperfect information, embedded in a general equilibrium framework. Informed auditors enhance credibility over a range of audit fees – despite the auditors incentive to collude – provided the probability of detection is imperfectly correlated across clients. Auditing can enhance growth especially for a relatively egalitarian distribution of wealth. We show that audit fees must be neither too high nor too low to enhance client credibility, highlight the role of mandatory audit

fee disclosure, interpret international differences in shareholding patterns and uncover a possible rationale for audit industry concentration.