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| Author: | Morton, S. |
| Title: | Strategic auditing for fraud |
| Journal: | Accounting Review
1993 : OCT, VOL. 68:4, p. 825-839 |
| Index terms: | AUDITING REPORTING FRAUD ADVERSE SELECTION |
| Language: | eng |
| Abstract: | This essay studies an audit-reporting game in which a manager reports on the privately observed value of the firm. The report may be understated if some of this value is appropriated to the manager's own use. Only a costly audit can directly verify the report and impose penalties on the manager when fraud is discovered. The optimal audit policy for the owner of the firm is completely characterized and is shown to be both probabilistic and contingent: a report is never audited if it is sufficiently large, and is audited with a probability that is strictly less than one, otherwise. |
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