Can Audits Backfire?

Audits are generally intended to monitor compliance with existing rules. However, audits can also create unintended effects and incentives through the specific protocol by which they are executed. In particular, audits can discourage the use of complex administrative procedures with more rules for auditors to check.

This paper investigates the effects of procurement audits on public entities’ choice of purchase procedures in Chile. While the national procurement legislation tries to promote the use of more transparent and competitive auctions rather than discretionary direct contracts for selection of suppliers, auctions are significantly more complex and the audit protocol mechanically leads to more scrutiny and a higher probability of further investigation for auctions than for direct contracts.

Using a regression discontinuity design based on a scoring rule of the National Comptroller Agency, we find that audits lead to a decrease in the use of auctions and a corresponding increase in the use of direct contracts. In order to further test the underlying mechanism, we develop a new approach to conduct subgroup analysis in regression discontinuity designs while holding other observables constant.