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In contrast managers who are sanctioned do learn the

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Unformatted text preview: arn of the managers’ trustworthiness, consistent with delayed feedback in naturally occurring settings (Palmrose 1994). The auditor knows that he will not pay a penalty for rounds when a manager is sanctioned; however, this sanction information tells the auditor nothing about the manager’s fraud level because the frequency of sanctions depends entirely on the audit level, a feature known by the auditor (see Table 1). In contrast, managers who are sanctioned do learn the audit levels. However, auditors do not know that the managers learn this. I chose not to inform auditors that their managers receive information about audit levels (when the auditor detects fraud) to lessen auditors’ ability to signal the audit level to managers and thus become a leader, as in a leader/ follower game.7 Thus, auditors’ information restrictions limit them from forming a justifiable basis for trusting managers. These conditions create a fertile environment for selfserving biases to arise. At the end of the reg...
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