ABSTRACT Technological advances are reshaping the business landscape, yet their use in financial reporting has been slow. We develop a model in which auditors and companies make technology investment decisions and examine their impact on audit fees and outcomes. Our analysis shows that auditors and companies may fail to invest in mutually beneficial technology that would enhance audit quality, resulting in coordination failure. We also demonstrate how legal liability, client business risk, and auditor pricing power affect the conditions under which such coordination failure occurs. Furthermore, technology investments can either increase or decrease audit fees. When companies can choose among projects with varying risk levels, technology investments can increase audit failure risk while improving welfare by enabling them to pursue riskier but more profitable projects. Our results provide a rationale for regulatory intervention to facilitate technology investments in the financial reporting environment and offer empirical predictions. JEL Classifications: M41; M42; M48.

ABSTRACT Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms’ choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto-dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a microfoundation for accounting measurement regulation. JEL Classifications: D02; D61; D83; H11; M40; M41; M48.