Regulatory performance of audit tournaments and compliance observability

Cason, Timothy N., Friesen, Lana and Gangadharan, Lata (2016) Regulatory performance of audit tournaments and compliance observability. European Economic Review, 85 288-306. doi:10.1016/j.euroecorev.2016.03.009

Author Cason, Timothy N.
Friesen, Lana
Gangadharan, Lata
Title Regulatory performance of audit tournaments and compliance observability
Journal name European Economic Review   Check publisher's open access policy
ISSN 0014-2921
Publication date 2016-06-01
Year available 2016
Sub-type Article (original research)
DOI 10.1016/j.euroecorev.2016.03.009
Open Access Status Not Open Access
Volume 85
Start page 288
End page 306
Total pages 19
Place of publication Amsterdam, Netherlands
Publisher Elsevier
Language eng
Subject 2003 Finance
2002 Economics and Econometrics
Abstract This paper examines the effectiveness of traditional regulatory schemes and newly emerging social information schemes for achieving compliance. Our experiment focuses on two stochastic audit schemes for enforcing regulatory compliance. In the Random Audit mechanism firms are randomly chosen for inspection. In the Tournament Audit mechanism the probability of inspection increases with the degree of estimated underreporting. To study the effects of social information, the experiment varies the observability of identity, output, and compliance decisions. Optimal output is theoretically independent of the auditing scheme, but equilibrium reporting is higher under the Tournament mechanism than Random auditing. Experimental findings are broadly consistent with the theoretical predictions for reporting, but deviate modestly for output. In particular, we find that average output is lower and reporting is higher in the Tournament treatment compared to the Random Audit treatment. At the individual level, a majority of participants misreported in most periods. Social observability does not affect output or reporting significantly in either of the audit treatments.
Keyword Auditing
Rank-order tournament
Laboratory experiment
Social observability
Tax compliance
Q-Index Code C1
Q-Index Status Provisional Code
Grant ID 20110044
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
School of Economics Publications
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Created: Wed, 20 Apr 2016, 20:33:25 EST by Alys Hohnen on behalf of School of Economics