Discipline with Common Agency: The Case of Audit and Non-Audit Services

Fuqua School of Business

26 Pages Posted: 11 Jan 2001

See all articles by Carolyn B. Levine

Carolyn B. Levine

Carnegie Mellon University - David A. Tepper School of Business

Laura J. Kornish

University of Colorado at Boulder - Leeds School of Business

Date Written: November 2000

Abstract

Using a common agency model, we investigate the strategies of self-interested auditors (the agent) hired by both managers (for non-audit services) and shareholders (conducting an audit) of the same firm. In a single period model, managerial discretion over consulting fees can influence auditors to issue reports that are more favorable than warranted. Shareholders, represented by an audit committee cannot recover truth-telling. Removing the current restriction on contingent audit fees allows audit committees to offset the incentives provided by management and instead provide the auditor incentives to report truthfully. Extending the model to a multiperiod framework, the audit committee can motivate truth-telling by making retention decisions which are contingent on outcome. Auditors will consider the impact of overreporting on their ability to generate future audit fees from the same client.

Keywords: Auditor independence, Common agency, Truth telling, Contingent fees

JEL Classification: C70, M49, D81, G34

Suggested Citation

Levine, Carolyn B. and Kornish, Laura J., Discipline with Common Agency: The Case of Audit and Non-Audit Services (November 2000). Fuqua School of Business, Available at SSRN: https://ssrn.com/abstract=250929 or http://dx.doi.org/10.2139/ssrn.250929

Carolyn B. Levine (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Laura J. Kornish

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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