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Aggressive Reporting and Probabilistic Auditing in a Principles-Based Environment

Author

Listed:
  • Suzanne H. Bijkerk

    (Erasmus University Rotterdam)

  • Vladimir A. Karamychev

    (Erasmus University Rotterdam)

  • Otto H. Swank

    (Erasmus University Rotterdam)

Abstract

We analyze the reporting strategies of firms and the investigation strategies of auditors in an archetype principles-based financial reporting system. To this end, we add a verification stage to a standard cheap-talk game, and apply the resulting game to financial reporting. We show that for a principles-based system to work properly, firms should bear a sufficient share of the cost of a thorough investigation. Furthermore, we find that a principles-based system is a mixed blessing. On the one hand, it leads to a plausible investigation strategy of the auditor, in which "suspected" reports receive most attention. On the other hand, a principles-based system only indirectly weakens firms' incentives to report aggressively.

Suggested Citation

  • Suzanne H. Bijkerk & Vladimir A. Karamychev & Otto H. Swank, 2013. "Aggressive Reporting and Probabilistic Auditing in a Principles-Based Environment," Tinbergen Institute Discussion Papers 13-131/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130131
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    File URL: https://papers.tinbergen.nl/13131.pdf
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    References listed on IDEAS

    as
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    5. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    6. Vieru, Markku & Schadewitz, Hannu, 2010. "Impact of IFRS transition on audit and non-audit fees: evidence from small and medium-sized listed companies in Finland," MPRA Paper 44664, University Library of Munich, Germany.
    7. Gigler, F, 1994. "Self-Enforcing Voluntary Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 224-240.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cheap Talk; Financial Reporting; Principles-based Regulation; Stochastic Auditing;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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