[Accounting numbers are frequently used for performance evaluation because they are typically the firm's main source of formal information. As a result, employees become concerned about accounting-based budgeting processes. Whether it would be economically valuable to allow an employee to become a participant in this process is determined by the link between accounting signals and the performance expected of that employee. This article shows that by dividing activities into those that directly influence accounting measurements and those that do not, certain aspects of this link can be modeled. The results of a principal-agent analysis indicate that, in some cases, participation designed to communicate the agent's private information has no economic value even though the principal is willing to pay nonzero amounts to observe that information. The result of zero value to participation is obtained because if the agent's compensation depends only on accounting data (e.g., product cost data), any information concerning indirectly related activities may have no motivational effect on the agent and, hence, would not be useful. Conversely, if the indirectly related activities are costly to the agent (i.e., if they cause disutility), it is useful for the principal to have access to this information to adjust the agent's compensation accordingly.]

[Williamson (1975) argues that firm organization is superior to open-market contracting due to the presence of an internal audit function that considers less formal evidence and explores byways not usually open to participants in open-market exchanges. This paper models the internal audit function as a scarce economic resource and the use of that resource for the provision of incentives. Information useful for incentives is assumed to be limited to verifiable information. The quantity of verifiable information produced by the internal audit function is constrained by either the time an internal auditor can spend verifying evidence or the time that employees have available to make such evidence verifiable (e.g., time spent with paperwork). The internal audit function is shown to produce near first-best solutions in a principal-agent model with simple and realistic policies that use only a small fraction of all available information. The attainment of such efficiency, however, depends on the level of management to which the internal auditors report. If independence is impaired, the firm may have to resort to other sources of contracting information, such as its financial reports. Because the information contained in financial reports is more limited than that provided by the internal audit function, first-best solutions may no longer be possible. Certain inadequacies of using financial reports as incentive devices may be mitigated by allowing the employee discretion over accounting alternatives. Such acts, however, may appear to outsiders to be income manipulations aimed solely at maximizing compensation.]

[This paper examines the voluntary disclosure of nonproprietary information using the model of uncertain information endowment developed by Dye (1985) and Farrell (1986), and extended by Jung and Kwon (1988). The paper focuses on a broad family of functions relating the probability of information acquisition to ex post information quality. The paper shows that for each function there is some region that displays a negative relation between ex ante information quality and the frequency of disclosure. In addition, a sub-family of functions is identified for which ex ante information quality and the frequency of disclosure are negatively related everywhere. These results indicate that the economic intuition that higher informational asymmetry is accompanied by more voluntary disclosure is not generally true.]

[We demonstrate that when cost differences among CPA firms serve as a source of economic rents to the incumbent auditor, the switching costs previously cited as the source of the auditors' rents may actually reduce the auditors' economic rents to the benefit of the client. This result has implications for how switching costs affect the way audit engagements are structured and how clients invest in their relationships with auditors. While the resulting behavior may appear to be inefficient or of a suspicious nature, it is a natural consequence of imperfect competition. This behavior includes (i) clients under-investing in their accounting systems, (ii) clients accepting their current auditor's management advisory services (MAS) bid, even though a rival CPA firm has submitted a lower bid for identical MAS, and (iii) inefficient same sourcing for MAS and audit services when CPA firms treat their audit and non-audit divisions as separate profit centers.]

Abstract. This note demonstrates purely statistical conditions under which a monitor will be valuable in the presence of predecision asymmetric information and self‐reporting. This result is an extension of the information value results found for principal‐agent problems with symmetric information. Résumé. Cette note démontre les conditions statistiques pures sous lesquelles un moniteur sera valable en présence d'une information asymétrique préalable. Ce résultat est un prolongement des résultats de la valeur de l'information obtenus pour des problèmes de mandant‐mandataire avec une information symétrique.

Financial reporting, Reporting accuracy, Uncertainty, Precision

Financial reporting, Information asymmetry, Principle-agent model

Managerial accounting, Information asymmetry, Communication

Abstract Presents a study which models the internal audit function as a scarce economic resource and the use of that resource for the provision of incentives. Background on the internal audit function; Internal auditing used for performance evaluation; Internal auditing not used for performance evaluation.

Abstract Explores the use of accounting numbers in employee evaluation. Employee participation in accounting-based budgeting processes; Determination of employee participation; Links between accounting signals and performances expected to employees; Results of principal-agent analysis; Results of zero value to participation.