Collusion, shading, internal and external auditing in the simple hierarchical agency

Abstract

ABSTRACT This paper introduces a model combining “shading” from behavioral contract theory and collusion in hierarchical organizations to analyze optimal auditing strategies. It investigates whether internal, external, or both auditors should be used to mitigate collusion and shading, contributing to both analytical auditing and collusion literature. The model emphasizes the trade-offs in supervision accuracy, collusion easiness, fixed costs, and shading pressure between internal and external auditors. This work enriches understanding of resource allocation and decision processes in hierarchical organizations.