Audit overruns meaning

A cost overrun is the amount by which actual expenditures exceed the planned amount

A cost overrun may occur for any of the following reasons: The scope of the project was expanded during the project without a sufficient increase in its planned cost

The initial cost estimation was flawed

The original planned cost was too low

On the other hand, if the audit technology is poor and the penalty rate is low, then the firm will always commit fraud

If the true cost overrun is high enough, the firm will claim the highest possible cost overrun

Otherwise, it will claim the cut-off cost overrun that allows it to avoid the audit

We characterize the optimal auditing policy of cost overrun claims as a function of the initial contractual payment, the share of the cost overrun paid by the administration, the cost and the accuracy of the auditing technology, and the penalty rate that can be imposed on fraudulent firms