The auditors payoffs under this audit level are

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Unformatted text preview: they achieve a meaningful payoff separation across the choice options. The Manager’s Fraud Level Determines the Auditor’s Payoffs Only When the Auditor Is Penalized To see this, consider again the trust/cooperate combination. The auditor’s payoffs under this audit level are either 111.42 (auditor is penalized) or 53.61 (auditor is not penalized). If the auditor is not penalized, then the payoffs do not change when the manager commits higher levels of fraud. Thus, the 53.61 payoff remains the same for the cooperate, Nash, and cheat fraud levels. However, when the auditor is penalized, the payoffs change to 184.29 and 248.49 for the Nash and cheat fraud levels, respectively. The auditor’s penalty increases with higher fraud levels because it is a function of the amount of undetected fraud. Note that the auditor’s payoffs decrease with higher audit levels regardless of whether the auditor is penalized, because higher audit levels are more costly. Summary of Payoff Matrix The manager’s expected payoffs depend on his fraud level (which determines the payoff amounts) and the audit level (whi...
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