The Good, the Bad, and the Regulator: An Experimental Test of Two Conditional Audit Schemes |
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| Authors: | Jeremy Clark Lana Friesen rew Muller |
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| Institution: | Clark:;Senior Lecturer, Department of Economics, University of Canterbury, Private Bag 4800, Christchurch, New Zealand. Phone 011 643 364–2308, Fax 011 643 364–2635, E-mail Friesen:;Lecturer, Commerce Division, Lincoln University, P.O. Box 84, Canterbury, New Zealand. Phone 011 643 325–3627, Fax 011 643 325–3847, E-mail Muller:;Professor, Department of Economics, McMaster University, Hamilton, Ontario, Canada, L8S 4M4. Phone 1–905–525–9140 ext. 23831, Fax 1–905–521–8232, E-mail |
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| Abstract: | Conditional audit rules are designed to achieve regulatory compliance with fewer inspections than required by random auditing. A regulator places individuals into audit pools that differ in probability of audit or severity of fine and specifies transition rules between pools. Future pool assignment is conditional on current audit results. We conduct an experiment to compare two specific schemes—Harrington's Past-Compliance Targeting and Friesen's Optimal Targeting—against random auditing. We find a production possibility frontier between compliance and minimizing inspections. Optimal targeting generates the lowest inspection rates as predicted, but random auditing the highest compliance. Past-compliance targeting is intermediate. |
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