Sanket Patil

Document Type

Working Paper

Abstract

A self-interested expert obtains evidence and takes actions on behalf of many clients. Afterward, the expert justifies these actions to an auditor who has limited expertise. The auditorverifies that the expert’s justification is consistent with the evidence and that the actions werein the clients’ best interest. We explore how this ex-post scrutiny disciplines the expert. Theconstraint of justifying actions to an auditor, even an auditor with little expertise, can force theexpert to act in the best interest of all clients under certain conditions. When these conditions donot hold, the expert devises a justification that makes the expert’s selfish actions appear clientoptimal. In this justification, the expert inflates the strength of weak evidence and deflates thestrength of strong evidence. Moreover, an increase in the auditor’s expertise can reduce clients’aggregate payoff.

Publication Date

1-4-2024

Publisher

Indian Institute of Management Bangalore

Relation

IIMB Working Paper-707

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