Essays on behavioral auditing: A game-theoretic approach

Traditionally, there are two major parties in the public accounting profession: auditors and clients. Recently, due to the rapid growth of management advisory services (MAS), consultants with special expertise have emerged as an important third party to be reckoned with. In the meantime, due to CPA firms' increasing financial dependence upon MAS, accounting researchers have sensed the need to pay special attention to auditor-consultant interactions, in addition to the conventionally emphasized auditor-client interactions. Among research tools, Game Theory is recently introduced. The motivation of adopting the game-theoretic approach is that it allows us to take the strategic aspects of auditor-client and auditor-consultant interactions into account. In this research, the game-theoretic approach is employed to explore both auditor-client interactions and auditor-consultant interactions. One major result of our proposed auditor-client incomplete information game is that, after allowing for multiple client types, the "standard strategy" of extending audit procedures and issuing the opinion truthfully can be a pure strategy equilibrium solution for the auditor. On the other hand, there are two major results from the "extended property right model". First, the optimal ownership structure of a CPA firm can be either "integration" or "nonintegration", depending upon the level of dependency of agents' assets. Second, if integration is preferred, the residual rights of all coalition assets should be assigned to the agent whose marginal productivity on the stage-one investment is highest.