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on Accounting and Auditing |
| By: | Brishti Guha (School of Economics and Social Sciences, Singapore Management University) |
| Abstract: | We apply a game-theoretic model to the analysis of the recent spate of corporate scandals in which firms have cheated their investors, often with the aid of external auditors. We characterize the different types of equilibria that obtain for different parameter ranges in an auditor’s absence (the parameters we consider being “early signal accuracy” – a measure of transparency – and “withdrawal costs” – a measure of the liquidity of investments). We also analyze whether and under what conditions the presence of an informed auditor could lead to an improvement in the sense of honest behavior replacing cheating as the firms’ equilibrium strategy. In doing so we take into account the auditor’s incentives to collude with his clients or extort from them. We use our results to derive some policy predictions including those relating to the Sarbanes-Oxley reforms, and contrast the case of a firm-hired intermediary (like an auditor) with the situation in which an intermediary is hired by investor consortia. Interestingly, we find that mandatory disclosure of audit fees could guarantee honest behavior, in equilibrium, for much of the parameter space in which cheating would have prevailed in an auditor’s absence – as investors are able to check that audit fees lie in a range which removes incentives to cheat for the auditor and his clients. Such disclosure would need to be backed by heavy penalties for false disclosure. We also find that while firm-hired intermediaries have a non-monotone reaction to improvements in public transparency, initially favoring and then opposing them, investor-hired intermediaries unambiguously dislike improvements in public transparency. We argue that frequent rotation of an auditor’s clients may have costs, not just benefits. |
| Keywords: | Corporate governance, auditing, disclosure, repeated games |
| JEL: | C72 D82 L20 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:15-2005&r=acc |
| By: | Brishti Guha (School of Economics and Social Sciences, Singapore Management University) |
| Abstract: | We examine self-enforcing honesty in firm-investor relations in an imperfect public information game. Minimum firm size requirements and moral hazard limit ability to raise outside capital, yielding a floor on personal wealth required to enter entrepreneurship. Credible auditing could create efficiency gains. We propose mandatory disclosure of audit fees and an interpretation of international differences in shareholding patterns. We endogenize auditor-firm collusion and extortion by auditors. We embed our game-theoretic analysis in a general equilibrium model to generate unique equilibria that trace the impact of the distribution of wealth on the existence of the market and consequences for development. |
| Keywords: | Corporate governance, moral hazard, vicious circles, inequality and development, general equilibrium, repeated games. |
| JEL: | D82 G3 O1 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:18-2005&r=acc |
| By: | Merxe Tudela; Garry Young |
| Abstract: | Household indebtedness has grown sharply in the United Kingdom in recent years. This paper proposes a framework for understanding this based on a model in which households are assumed to plan their lifetime spending rationally, allowing for bequests to future generations. The model is set up to be consistent with both aggregate and disaggregated balance sheet positions as revealed in the British Household Panel Survey. The paper goes on to outline the effect on debt and balance sheets of changes in interest rates, house prices, preferences and retirement income. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:266&r=acc |
| By: | García-Fronti, Javier (University of Warwick and CSGR, University of Warwick); Miller, Marcus (University of Warwick, Centre for Economic Policy Research and CSGR, University of Warwick); Zhang, Lei (University of Warwick and CSGR, University of Warwick) |
| Abstract: | The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided. |
| Keywords: | Supply and demand shocks ; financial crises ; contractionary devaluation ; Keynesian recession |
| JEL: | E12 E4 E51 F34 G18 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:760&r=acc |