Does co-operation in auditing matter? A comparison of a non-cooperative and a cooperative model of auditing

A game model of auditing including internal control investigation and substantive testing is analysed as a non-cooperative game. It is shown that in order for the presumed socially desirable outcome of high and honest effort by all to be obtained, it is necessary to adjust the cost structure to ameliorate the costs of not-qualifying erroneous accounts if the auditor can prove he or she has worked hard. Comparison with a cooperative game analysis of the model shows that there is a region of parameters where both cooperative and non-cooperative versions of the game lead to this socially desirable outcome. The significance of this result is that whilst society expects an ‘independent’ auditor not to cooperate with the auditee, the practical realities of auditing require a considerable degree of cooperation. This leads to an ‘expectations gap’ between what society expects and what actually happens, except in those cost regions where both the cooperative and non-cooperative versions of the audit game lead to the same solution.