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Barone, G, Conti, L, Narciso, G and Tonello, M (2020)

Auditors’ conflict of interest: does random selection work?

Trinity Economics Papers tep0820, Trinity College Dublin, Department of Economics.

ISSN/ISBN: Not available at this time. DOI: Not available at this time.

Abstract: Third-party auditors are usually chosen and paid by the agent that is being audited and this may lead to a significant conflict of interest and to less strict audits. We investigate the effect of a new random allocation mechanism, according to which, starting from 2012, auditors of Italian municipalities have had to be chosen by means of a random draw from a large pool of experts. By exploiting the staggered adoption of the new allocation rule across municipalities, our difference-in-differences estimates show that the new regime implies a worsening of municipalities’ reported public finances, in terms of budget surpluses of the probability to be in financial distress. The effect is largely driven from municipalities endowed with lower social capital, so signalling that random allocation is somehow a substitute for the solution of the conflict of interest problem. In these municipalities, we also find that the new mechanism reduces some fraud detection indicators based on Benford’s law.

@TechReport{, author={Guglielmo Barone and Laura Conti and Gaia Narciso and Marco Tonello}, title={{Auditors’ conflict of interest: does random selection work?}}, year=2020, month=Apr, institution={Trinity College Dublin, Department of Economics}, type={Trinity Economics Papers}, url={}, number={tep0820}, }

Reference Type: Technical Report

Subject Area(s): Accounting, Economics