Urs Fischbacher
University of Zurich
Ulrike Stefani
University of Zurich
Abstract: Simple "matching pennies games" have been used frequently to model the strategic manager-auditor interaction. We conducted an experiment to test if the predictions of those models are con-firmed in the laboratory. The focus is on the impact of "perfect" auditors, who always exert high audit effort, on the quality of audited financial statements, compared to a situation where only op-portunistic types are present. Standard theory predicts that if the percentage of perfect auditors is sufficiently small, the remaining opportunistic auditors should completely compensate their perfect colleagues' high audit effort. Therefore, audit quality should remain constant. In our experiment, opportunistic auditors only partially offset audit quality, and managers manipulated financial state-ments less often. The resulting quality of audited financial statements was higher in the presence of perfect auditors. In games with mixed strategy equilibria, deviations from standard theory have been attributed to the strong strategic dependence in such a game. This result has been obtained by introducing exogenous errors into the game. We show that the quantal response equilibrium, a theory of endogenous errors, reduces strategic dependence and can account for the observed behavior.
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