Auditing with a Chance of Whistleblowing

In this study, we develop a strategic auditor-whistleblower-enforcer model to investigate the impact of promoting whistleblowing on audit quality, social welfare, and detection efficiency. We find that, on the one hand, as more whistleblowing helps identify financial misreporting and reveals audit failures, it motivates the auditor to improve audit quality. On the other hand, more whistleblowing may crowd out the enforcer's investigative effort and reduce the likelihood of detecting audit failures, thereby dampening the auditor's incentive to improve audit quality. In contrast to conventional wisdom, we demonstrate that under certain conditions, encouraging whistleblowing not only impairs audit quality, but also lowers social welfare and detection efficiency.