The Effects of Joint Audits on Audit Quality and Audit Costs: A Game-theoretical Explanation for Contradictory Empirical Results

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We analyze how auditor expertise and the auditors’ (dis)similarity affect audit quality and audit costs in a joint audit (JA) setting. We model both harmful free-riding incentives and a beneficial synergy effect between auditors. We find that audit quality is high and audit costs are low if both auditors have similarly high expertise. Free riding of one auditor occurs most likely if the auditors are dissimilar. In such a JA situation, allocating more of the audit work to the auditor with high expertise can increase audit quality and decrease audit costs. However, an imbalance in the allocation of the audit work can be harmful if both auditors have similar expertise. We show that JAs can lead to higher audit quality and lower audit costs than single audits (SAs) when synergy effects are sufficiently high. In contrast, low synergy effects (i.e., due to rivalry) can lead to coordination difficulties in JAs and result in lower audit quality and higher costs than SAs. Our game-theoretical analysis provides insights into the effects of institutional parameters like a mandated allocation of the audit work and a proportional litigation rule on the JA outcomes. Our findings thus can help to prevent unintended consequences from a mandatory JA regulation.