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| Author: | Pae, S. Yoo, S.-W. |
| Title: | Strategic Interaction in Auditing: An Analysis of Auditors Legal Liability, Internal Control System Quality, and Audit Effort |
| Journal: | Accounting Review
2001 : JUL, VOL. 76:3, p. 333-356 |
| Index terms: | AUDITORS LIABILITIES INTERNAL CONTROL CONTROL SYSTEMS AUDITING |
| Language: | eng |
| Abstract: | This paper presents a model in which a firm's owner, an auditor, and outside investors strategically interact. The owner's investment in the quality of the firm's internal control system and the auditor's effort jointly affect the informativeness of the auditor's report on the firm's financial statements. If the auditor's legal liability to investors is large, then an efficiency loss arises because the owner underinvests in the internal control system and the auditor overinvests effort. On the other hand, if the liability is small, then an efficiency loss arises from the owner's overinvestment and the auditor's underinvestment. Regulators can improve allocative efficiency by changing the auditor's legal liability. |
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