The Manager and the Auditor in a Double Moral Hazard Setting: Efficiency through Contingent Feess and Insurance Contracts

Our article integrates the manager’s care in the literature on auditor’s liability. With unobservable efforts, we face a double moral hazard setting. It is well-known that efficient liability rules without punitive damages do not exist under these circumstances. However, we show that the problem can be solved through strict liability, con-tingent auditing fees, and fair insurance contracts. Neither punitive damages nor deductibles above the damages are required.