Social Responsibility of the Auditor as Independent Gatekeeper : An Experimental Investigation

Auditors are the gatekeepers to the public securities markets and their independence is central to the effectiveness of auditors as gatekeepers. Our general interest is on independence and we investigate how financial and non-financial incentives affect choices made by an auditor-gatekeeper whose decisions affect the welfare of the investors. We have a three player game: a manager, an auditor, and the investors. The manager proposes the division of an amount between himself and the investors, subject to the approval of the auditor. The combination of the proposed amount and the auditor's accept/reject decision determines the payoffs of the manager and the investors. The gatekeeper-auditor has two potential objectives: (1) to protect the investors' economic interests and (2) to prevent misconduct by the manager. We examine how financial independence and auditor's social responsibility affects the auditor's behavior. Somewhat surprisingly, we find that the auditor represents the investors as well as the investors would if they were to represent themselves. We also find that the removal of the auditor's financial interests leads to lower social welfare