Unformatted text preview: interactions with client personnel.
I investigate self-serving biases in an experimental setting that has auditing frictions,
while also incorporating the precepts of experimental economics. I investigate an ‘‘audit
trust’’ game played by a pair of subjects: a manager and an auditor. Each manager chooses
a level of misappropriation, hereafter denoted as fraud. The auditor’s goal is to predict the
manager’s fraud level, because correctly anticipating the fraud level leads to an effective
I develop a 2 2 full factorial, between-subject experimental design. The ﬁrst treatment
manipulates the manager’s communications to the auditor (referred to as the puffery treatment). The puffery treatment has two levels—the no-puffery setting and the yes-puffery
setting. In the no-puffery setting, managers cannot communicate to their auditor-partners
their nonbinding intention to commit low levels of fraud. Without such communication,
auditors have a limited basis on which to trust managers, and economic theory predicts that
auditors will protect themselves by selecting the Nash strategy,...
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