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Misreporting, Optimal Incentives, and Auditing

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  • Gino Loyola
  • Yolanda Portilla

Abstract

We propose a model that rationalizes the adoption of a misreporting system allowing managerial earning manipulation. A key element of our approach is the possibility of a tacit collusion between the board and the top management at the expense of shareholders and outside investors. Our framework predicts that the adoption of a misreporting system is mainly related to (i) the cost to the management of implementing such a system, (ii) the level of incentives and punishment the board faces, and (iii) the degree of independence/integrity of external auditors.

Suggested Citation

  • Gino Loyola & Yolanda Portilla, 2018. "Misreporting, Optimal Incentives, and Auditing," International Review of Finance, International Review of Finance Ltd., vol. 18(2), pages 287-295, June.
    • Handle: RePEc:bla:irvfin:v:18:y:2018:i:2:p:287-295
    DOI: 10.1111/irfi.12128
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    1. Loyola, Gino & Portilla, Yolanda, 2020. "Managerial compensation as a double-edged sword: Optimal incentives under misreporting," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 994-1017.

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