Auditors in the Economy and the Impact of Rent-Seeking Behaviour and Penalties

Öztürk Göktuna B., Erinç M.

in: Emerging Applications of Differential Equations and Game Theory, Sırma Zeynep Alparslan Gök,Duygu Aruğaslan Çinçin, Editor, IGI Publishinng, Pennsylvania, pp.33-54, 2019

  • Publication Type: Book Chapter / Chapter Research Book
  • Publication Date: 2019
  • Publisher: IGI Publishinng
  • City: Pennsylvania
  • Page Numbers: pp.33-54
  • Editors: Sırma Zeynep Alparslan Gök,Duygu Aruğaslan Çinçin, Editor
  • Galatasaray University Affiliated: Yes


Society often relies on information disclosed by enterprises and verified by auditors to decide on an efficient allocation of capital. Auditing sector serves as a means of verification to protect investors from making decisions based on inaccurate information. However, auditors can use their superior information for extracting additional rents. This study explores an economy where entrepreneurs choose their financial reporting quality considering incentives imposed by the society, and rent-seeking auditors may manipulate their reports to extract gains in the expense of public interest. The analysis captures the dynamics of strategy changes among different actors by introducing a population game framework. The steady-state equilibrium analysis shows that there is a pure state and mixed states whose stability is affected by policy parameters such as subsidies, taxes, competitive auditor fee, and rate of adjustment of different behavioural dynamics. It appears that corruption in auditing sector and poor quality in financial reporting may arise as a temporally persistent outcome.