Article2002

Accounting Policies in Agencies with Moral Hazard and Renegotiation

69 citations0/0 files storedJournal of Accounting Research

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Accounting and Organizational Management

Abstract

We emphasize the role of accounting policies, and their audit, in an earnings management setting. We use a two–period agency in which three frictions interact: the agent privately observes action (or effort) supply and output, and the initial contract is subject to renegotiation. This creates a setting in which both players’ behavior is of concern, and, importantly, information rationing is efficient. Moreover, this information rationing is directly interpretable as being produced by an accounting policy whose application is ensured by an auditor.

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References

1997The conservatism principle and the asymmetric timeliness of earnings1 1992An Analysis of the Principal-Agent Problem 1982Information, trade and common knowledge 2002Evidence from Auditors about Managers' and Auditors' Earnings Management Decisions 1995Arm's Length Relationships 1990Moral Hazard and Renegotiation in Agency Contracts 2001Conservatism, Optimal Disclosure Policy, and the Timeliness of Financial Reports 1998Earnings Management and the Revelation Principle

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