Auditing in an Agency Setting

  • Wolfgang Ballwieser


Agency theory is concerned with contracts which lead to optimal incentives and risk-sharing. The purpose of this paper is to examine the influence of auditing on both aspects, when audits are performed (i) by an owner of a firm (who is a principal) and (ii) by an auditor in order to motivate the firm’s manager (who are both agents). We especially ask, under what conditions the owner can expect truthful financial reporting from the manager and a truthful report by the auditor. We further ask, whether it is likely to expect coalitions of the manager and the auditor against the owner. Since all results are gained in one-period agency models with at most two agents, the stability of results and the practical relevance of the models are discussed. Though the models, up to now, have no decision-supporting function they tell us that coalition-forming of agents against the principal seems to be likely if there are no other factors which are neglected in agency theory so far.


Cash Flow Agency Theory Sharing Rule Account Research Optimal Contract 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Antle, R.L. (1981): Moral Hazard and Auditor Contracts: An Approach to Auditors’ Legal Liability and Independence, Ph.D. Diss., Stanford UniversityGoogle Scholar
  2. Antle, R.L. (1982): The Auditor as an Economic Agent, Journal of Accounting Research 20, 503–527CrossRefGoogle Scholar
  3. Arrow, K.J. (1985): The Economics of Agency, in: Pratt, J.W.; Zeckhauser, R.J. (eds.): Principals and Agents: The Structure of Business, Boston, Mass., 37–51 (almost identical with Agency and the Market, in: Arrow, K.J.; Intriligator, M.D. (eds.): Handbook of Mathematical Economics, Vol. III, Amsterdam 1986, 1183–1195 )Google Scholar
  4. ASOBAC (1972): Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts, Accounting Review 47, Supplement, 15–74Google Scholar
  5. Bailey Jr., A.D. (1981): Statistical Auditing: Review, Concepts, and Problems, New York, London, Sydney etc.Google Scholar
  6. Baiman, S. (1979): Discussion of Auditing: Incentives and Truthful Reporting, Journal of Accounting Research 17, Supplement, 25–29CrossRefGoogle Scholar
  7. Baiman, S. (1982): Agency Research in Managerial Accounting: A Survey, Journal of Accounting Literature 1, 154–213 (reprinted in Mattes-sich, R. (ed.): Modern Accounting Research: History, Survey, and Guide, Vancouver 1984, 251–294 )Google Scholar
  8. Baiman, S.; Evans III, J.H.; Noel, J. (1985): Optimal Contracts with a Utility-Maximizing Auditor, Unpublished Working Paper, Graduate School of Industrial Administration, Carnegie-Mellon University, and Graduate School of Business, University of PittsburghGoogle Scholar
  9. Ballwieser, W. (1985): Ergebnisse der Informationsökonomie zur Informationsfunktion der Rechnungslegung, in: Stöppler, S. (ed.), Information und Produktion, Essays in Honor of W. Wittmann, Stuttgart, 21–40Google Scholar
  10. Ballwieser, W. (1987): Kapitalmarkt, Managerinteressen und Rolle des Wirtschaftsprüfers, in: Schneider, D. (ed.): Kapitalmarkt und Finanzierung, Berlin, in printGoogle Scholar
  11. Demski, J.S.; Patell, J.M.; Wolfson, M.A. (1984): Decentralized Choice of Monitoring Systems, Accounting Review 59, 16–34Google Scholar
  12. Demski, J.S; Sappington, D. (1984): Optimal Incentive Contracts with Multiple Agents, Journal of Economic Theory 33, 152–171CrossRefGoogle Scholar
  13. Fama, E.F. (1980): Agency Problems and the Theory of the Firm, Journal of Political Economy 88, 288–307CrossRefGoogle Scholar
  14. Fellingham, J.C.; Newman, D.P.; Suh, Y.S (1985): Contracts without Memory in Multiperiod Agency Models, Journal of Economic Theory 37, 340–355CrossRefGoogle Scholar
  15. Harris, M.; Raviv, A. (1978): Some Results on Incentive Contracts with Applications to Education and Employment, Health Insurance, and Law Enforcement, American Economic Review 68, 20–30Google Scholar
  16. Harris, M.; Raviv, R. (1979): Optimal Incentive Contracts with Imperfect Information, Journal of Economic Theory 20, 231–259CrossRefGoogle Scholar
  17. Holmström, B. (1979): Moral Hazard and Observability, Bell Journal of Economics 10, 74–91CrossRefGoogle Scholar
  18. Holmström, B. (1982): Moral Hazard in Teams, Bell Journal of Economics 13, 324–340CrossRefGoogle Scholar
  19. Lambert, R.A. (1983): Long-Term Contracts and Moral Hazard, Bell Journal of Economics 14, 441–452CrossRefGoogle Scholar
  20. Levinthal, D.A. (1985): Three Essays on Economic Models of Organizations, Ph.D. Diss., Stanford UniversityGoogle Scholar
  21. Mookherjee, D. (1984): Optimal Incentive Schemes with Many Agents, Review of Economic Studies 51, 433–446 (reprinted in Binmore, K.; Dasgupta, P. (eds.): Economic Organizations as Games, Oxford, New York 1986, 197–214 )CrossRefGoogle Scholar
  22. Myerson, R.B. (1979): Incentive Compatibility and the Bargaining Problem, Econometrica, 61–73Google Scholar
  23. Namazi, M. (1985): Theoretical Developments of Principal-Agent Employment Contracts in Accounting: The State of the Art, Journal of Accounting Literature 4, 113–163Google Scholar
  24. Ng, D.S. (1978): An Information Economics Analysis of Financial Reporting and External Auditing, Accounting Research 53, 910–920Google Scholar
  25. Ng, D.S.; Stoeckenius, J. (1979): Auditing: Incentives and Truthful Reporting, Journal of Accounting Research 17, Supplement, 1–24CrossRefGoogle Scholar
  26. Noel, J.C. (1981): Agency Costs and the Demand and Supply of Auditing, Ph.D. Diss., The Ohio State UniversityGoogle Scholar
  27. Penno, M. (1985): Informational Issues in the Financial Reporting Process, Journal of Accounting Research 23, 240–255CrossRefGoogle Scholar
  28. Radner, R. (1981): Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship, Econometrica 49, 1127–1148CrossRefGoogle Scholar
  29. Rees, R. (1985): The Theory of Principal and Agent. Part 1 and 2, Bulletin of Economic Research 37, 3–26 and 75–96Google Scholar
  30. Roberts, D.M. (1978): Statistical Auditing, New YorkGoogle Scholar
  31. Rogerson, W.P. (1985): Repeated Moral Hazard, Econometrica 53, 69–76CrossRefGoogle Scholar
  32. Shavell, S. (1979): Risk Sharing and Incentives in the Principal and Agent Relationship, Bell Journal of Economics 10, 55–73CrossRefGoogle Scholar
  33. Townsend, R.M. (1982): Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information, Journal of Political Economy 90, 1166–1186CrossRefGoogle Scholar
  34. Verrecchia, R.E. (1986): Managerial Discretion in the Choice among Financial Reporting Alternatives, Journal of Accounting and Economics 8, 175–195CrossRefGoogle Scholar
  35. Watts, R.L.; Zimmerman, J.L. (1983): Agency Problems, Auditing, and the Theory of the Firm: Some Evidence, Journal of Law and Economics 26, 613–633CrossRefGoogle Scholar
  36. Watts, R.L.; Zimmerman, J.L. (1986): Positive Accounting Theory, Englewood Cliffs, N.J.Google Scholar
  37. Woodland, B.M. (1981): Incentive Contracts with Auditing and Monitoring in the Principal-Agent Relationship, Ph.D. Diss., Purdue UniversityGoogle Scholar
  38. Yandell, D.S. (1981): Auditing in a Principal-Agent Model: Information and Incentives in Contract Design, Ph.D. Diss., Purdue UniversityGoogle Scholar

Copyright information

© Springer-Verlag Berlin · Heidelberg 1987

Authors and Affiliations

  • Wolfgang Ballwieser

There are no affiliations available

Personalised recommendations