Audits, Reputation, and Repeated Interaction in a Capital Budgeting Setting

Posted: 30 Sep 2011

See all articles by Markus C. Arnold

Markus C. Arnold

University of Bern - Institute for Accounting

Dominik Schreiber

University of Hamburg

Date Written: August 1, 2011

Abstract

This experimental study investigates the use of audits as a control instrument in capital budgeting processes and factors that contribute to audit efficiency (or inefficiency) in a repeated relationship. We disentangle reputation aspects of superiors and subordinates from an increased social content in repeated relationships. In settings where subjects face new counterparts every round, we find that reputation aspects strongly affect the superiors’ and subordinates’ behavior. This leads to a decrease in slack and an increase in the superior payoff. However, in a repeated relationship with an increased level of social content, these benefits are no longer present. In fact, the subordinates’ ability to retaliate against their superior for prior punishments in the repeated setting by reporting more slack in later rounds has negative effects on the use of audits and decreases audit efficiency. These findings imply that, in repeated relationships, social factors play an important role and might impair the disciplining effects of audits.

Keywords: capital budgeting, ex post audits, reputation, experiments, repeated interaction, norm enforcement

JEL Classification: C91, D82, G31, M41

Suggested Citation

Arnold, Markus C. and Schreiber, Dominik, Audits, Reputation, and Repeated Interaction in a Capital Budgeting Setting (August 1, 2011). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1935469

Markus C. Arnold

University of Bern - Institute for Accounting ( email )

Engehaldenstr. 4
Bern, 3012
Switzerland

Dominik Schreiber (Contact Author)

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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