Using an Augmented Revelation Mechanism to Resolve Tacit Collusion in Auditing

This paper reexamines the problem of multiple equilibria in an audit set-ting. When both the manager and the auditor are subject to moral hazard and truth-telling problems, one undesirable equilibrium that may arise results in both parties exerting low effort and reporting high output, in-terpreted here a s tacit collusion. The Ma, Moore and Turnbull (1988) augmented revelation mechanism is used to remove the undesirable equi-librium. To keep the mechanism simple, only one agent (the manager) is given an expanded message space. 1