External Audit System of Project Evaluation: Optimal Structure and Audit Quality

Abstract

It is pertinent to build an effective external audit system to prevent manipulations in the analysis of project evaluation. In reality, it is difficult for an external auditor to understand details of the analysis. Hence, it is likely that he would misinterpret and penalize the analysts even though they have not manipulated the analysis. The possibility of misinterpretation gives analysts the disincentive for participating in project evaluation business. In the long term, this would hinder the implementation of socially desirable projects. This paper tries to derive the optimal structure of external audit system of project evaluation focusing on the quality of audit. We modify and analyze the principal=agent=auditor model which we suggested in Fukumoto and Tsuchiya (2004).