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retains the embezzled resources. In the second outcome, the auditor detects the fraud, so
the manager’s payoff is relatively low because he is sanctioned. The auditor’s objective is
to select an audit level to match the manager’s fraud level because a correct match leads
3 I present the game in a fraud context; however, characterizing the game as a reporting decision would allow the
same frictions. See Bloomﬁeld (1995) and Matsumura and Tucker (1992) for a discussion of modeling issues in
fraud settings. 268 The Accounting Review, April 2002 to an effective audit. For any given audit level, the auditor faces one of two outcomes. In
the ﬁrst, the auditor’s payoff is relatively high because the auditor is not assessed a penalty.
In the second outcome, the auditor’s payoff is relatively low because he is penalized for
not detecting the fraud.
Each player has three choice options in the experiment. This simpliﬁes the game and
provides clearer demarcations for comparisons across the settings. Table 1 shows the payoff
matrix. The m...
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This note was uploaded on 01/27/2014 for the course ACCY 405 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.
- Fall '08