TEL  Vol.3 No.5 B , September 2013
State-Dependence and Conditional Audit Policy
Abstract: This paper investigates how the state-dependence between two periods affects the optimal audit decision. Using a principal-agent model, based on a state-dependent assumption, we find that it is desirable to use a conditional (punitive) audit mechanism when the agent’s under-declaration benefit is significant and the principal’s audit cost is moderate. In that case, the audit policy for the current period will be contingent on the audit result in the preceding period.
Cite this paper: R. Guo, Y. Chen and C. Lee, "State-Dependence and Conditional Audit Policy," Theoretical Economics Letters, Vol. 3 No. 5, 2013, pp. 22-30. doi: 10.4236/tel.2013.35A2005.

[1]   R. Antle, “The Auditor as an Economic Agent,” Journal of Accounting Research, Vol. 20, No. 2, 1982, pp. 503-527. doi:10.2307/2490884

[2]   D. P. Baron and D. Besanko, “Regulation, Asymmetric Information and Auditing,” RAND Journal of Economics, Vol. 15, No. 4, 1984, pp. 447-470. doi:10.2307/2555518

[3]   J. S. Demski and D. E. M. Sappington, “Hierarchical Regulatory Control,” RAND Journal of Economics, Vol. 18, No. 3, 1987, pp. 369-383. doi:10.2307/2555602

[4]   S. Baiman, J. H. Evans III and J. Noel, “Optimal Contracts with a Utility-Maximizing Auditor,” Journal of Accounting Research, Vol. 25, No. 2, 1987, pp. 217-244. doi:10.2307/2491016

[5]   E. Helland, “The Enforcement of Pollution Control Laws: Inspections, Violations, and Self-Reporting,” Review of Economics and Statistics, Vol. 80, No. 1, 1998, pp. 141-153. doi:10.1162/003465398557249

[6]   M. Landsberger and I. Meilijson, “Incentive Generating State Dependent Penalty System: The Case of Income Tax Evasion,” Journal of Public Economics, Vol. 19, No. 3, 1982, pp. 333-352. doi:10.1016/0047-2727(82)90060-3

[7]   J. Greenberg, “Avoiding Tax Avoidance: A (Repeated) Game-Theoretic Approach,” Journal of Economic Theory, Vol. 32, No. 1, 1984, pp. 1-13. doi:10.1016/0022-0531(84)90071-1

[8]   W. Harrington, “Enforcement Leverage When Penalties Are Restricted,” Journal of Public Economics, Vol. 37, No, 1, 1988, pp. 29-53. doi:10.1016/0047-2727(88)90003-5

[9]   L. Friesen, “Targeting Enforcement to Improve Compliance with Environmental Regulations,” Journal of Environmental Economics and Management, Vol. 46, No. 1, 2003, pp. 72-85. doi:10.1016/S0095-0696(02)00033-5

[10]   S. L. Stafford, “Self-Policing in a Targeted Enforcement Regime,” Southern Economic Journal, Vol. 74, No. 4, 2008, pp. 934-951.

[11]   A. S. Malik, “Self-Reporting and the Design of Policies for Regulating Stochastic Pollution,” Journal of Environmental Economics and Management, Vol. 24, No. 3, 1993, pp. 241-257. doi:10.1006/jeem.1993.1016