Auditing and Game Theory: A Survey

A continuing debate in the area of financial accounting and reporting relates to the question of the principal-agent relationship. A common example of the agent-principal relationship arises between those who own a business (shareholders) and those who manage it (the manager). In a firm, the manager, who has private information can use his discretion to preserve his personal interest. The auditor then plays the role of a controller trying to align the interest of the parties. Generally, accounting studies have focused on analyzing the statistical properties of accounting data, and their implications on decision making. An alternative approach, that takes into consideration the strategic interaction of the different decision makers, has been developed using a "game-theoretic view" of accounting data. This chapter presents basic setting that describes Game theory and reviews the main studies that have applied this theory in the audit field. This study can help the non-specialist reader understanding the importance of strategic interaction in the auditing process.