Strategic Errors and Audit Quality - An Experimental Investigation

We report experimental results for a simple bimatrix game between a manager and an auditor. We investigate whether the quality of audited financial statements improves if the relative proportion of perfectly honest auditors increases. We find that the quality of audited reports is higher if computerized auditors who always perform a high audit effort are present. This result is in direct contrast to the Nash prediction for our game. The Quantal Response Equilibrium, which explicitly takes into account boundedly rational behavior, supports our experimental data. Our main findings depend neither on framing nor the payoff matrix we use.