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