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A stakeholder model of competing demands for
control and auditing
Robert W Knechel, University of Florida
Jeroen Suijs, RSM Erasmus University
Marleen Willekens, Tilburg University
ABSTRACT. The purpose of this paper is to analyze Pareto efficiency of demand for control. We model the selection of control mechanisms by stakeholders as a strategic game. We presume that the demand for control mechanisms is dependent on the interaction of risks affecting the stakeholders of an organization and the available risk reducing (control) mechanisms. We find that strategic interaction between these stakeholders generally results in Pareto inefficient outcomes. In particular, we show that, when decision rights over control mechanisms are separable overinvestment in control mechanisms is the most likely outcome although underinvestment is possible under certain conditions. When decision rights over control mechanisms are shared between stakeholders, underinvestment in the quality of control mechanisms cannot arise. We also show that regulation imposing a lower bound on the quality level of control mechanisms does not improve stakeholders welfare.
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