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Abstract ▼ AI-Helper

This paper investigates the effort level of the supervisory institution to detect the fraudulent accounting of the firm and the plausibility of the collusion between the two parties using the game －theoretic approach. We also examine the characteristics of the optimal effort level of the supervisory...

This paper investigates the effort level of the supervisory institution to detect the fraudulent accounting of the firm and the plausibility of the collusion between the two parties using the game －theoretic approach. We also examine the characteristics of the optimal effort level of the supervisory institution through the various comparative static analyses. The main results of the paper are as follows. First, the optimal level of effort by the supervisory institution is inversely related with the volatility of the firm value and the risk tolerance of the outside investors. On the other hand, it is positively correlated with the size of penalty the supervisory institution should bear in case any accounting fraud goes undetected. Second, the collusion between the supervisory institution and the firm may serve as a possible equilibrium in some circumstances. However, the collusion equilibrium can be easily avoided by an appropriate choice of the penalty levied on the supervisory institution.

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