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

Auditors in the Economy and the Impact of Rent-Seeking Behaviour and Penalties
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Author(s): Bilge Öztürk-Göktuna (Galatasaray University, Turkey) and Mert Erinç (Bocconi University, Italy)
Copyright: 2020
Pages: 22
Source title: Emerging Applications of Differential Equations and Game Theory
Source Author(s)/Editor(s): Sırma Zeynep Alparslan Gök (Süleyman Demirel University, Turkey) and Duygu Aruğaslan Çinçin (Süleyman Demirel University, Turkey)
DOI: 10.4018/978-1-7998-0134-4.ch003

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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 behavioral dynamics. It appears that corruption in auditing sector and poor quality in financial reporting may arise as a temporally persistent outcome.

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