This paper investigates how damage apportionment between auditor and auditee affects the quality of the internal control system (ICS), the supplied audit quality, and social welfare. The analysis takes place in a setting where the audit is not only required to meet obligations towards the primary addressees of the audited report, but where the auditor assumes a public responsibility that also makes them responsible for the losses of ‘foreseeable third parties’. Using a game-theoretic model, I show that shifting liability away from the auditor towards the auditee can lead to higher audit quality but lower ICS quality. The empirical evidence shows that internal controls and external auditing can be either complements or substitutes. Furthermore, assigning all the damages to the auditor leads to a Pareto-efficient allocation of ICS quality and audit quality. This finding justifies the common ‘deep pocket’ assumption in the auditing literature.

中文翻译：

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损害分摊对内部控制系统质量和财务报告准确性的影响

本文调查了审计师和受审计方之间的损害分摊如何影响内部控制系统 (ICS) 的质量、提供的审计质量和社会福利。分析发生在这样一种环境中，即审计不仅需要履行对被审计报告的主要收件人的义务，而且审计师承担公共责任，也使他们对“可预见的第三方”的损失负责。使用博弈论模型，我表明将责任从审计员转移到受审计方可以导致更高的审计质量，但降低 ICS 质量。经验证据表明，内部控制和外部审计可以是互补的，也可以是替代的。此外，将所有损失分配给审计师会导致 ICS 质量和审计质量的帕累托有效分配。这一发现证明了审计文献中常见的“财大气粗”的假设是正确的。