Knowledge that Transforms

Monitoring, Moral Hazard, Contracting, Stochastic monitoring policies

Cost variance, Auditing, Agency Theory

G. William Glezen, James A. Millar, An Empirical Investigation of Stockholder Reaction to Disclosures Required by ASR No. 250, Journal of Accounting Research, Vol. 23, No. 2 (Autumn, 1985), pp. 859-870

In this paper, I provide two theories about why management might withhold information which is not proprietary, together with an analysis of the consequences of altering various assumptions underlying these theories. Proprietary information is considered here as any information whose disclosure potentially alters a firm's future earnings gross of senior management's compensation.' Even if a manager's private information is proprietary, shareholders may benefit occasionally from having this information disclosed (see Verrecchia [1983] and Dye [1984a]), although obvious explanations exist for the rarity of such disclosures. However, it is commonly believed that managers possess information about the firms they run, such as annual earnings' forecasts, whose release would affect the prices of their firms, but not the distribution of their firms' future

Internal control systems, Auditing, Accounting errors, Reliability model

Internal control systems, Budgeting, Functional activities

In a recent article, Menzefricke [1983] adapted the fixed constrained optimization approach (Boockholdt and Finley [1980]) to dollar-unit sampling. In Menzefricke's model, the auditor's objective is to determine the n, k pair (sample size and acceptance number) that minimizes total expected costs subject to a type II risk constraint. He provided an algorithm for determining the optimal n, k pair with two possible stopping rules, one which he proved would be optimal and one which he conjectured would also lead to an optimal solution. In this note I provide some counterexamples that demonstrate that his conjecture about the second stopping rule was incorrect.

Internal control system, Decision making, Parallel-processing control decisions

Douglas V. DeJong, Robert Forsythe, Russell J. Lundholm, Wilfred C. Uecker, A Laboratory Investigation of the Moral Hazard Problem in an Agency Relationship, Journal of Accounting Research, Vol. 23, Studies on Accounting Earnings and Security Valuation: Current Research Issues (1985), pp. 81-120

This paper presents an analysis of the audit risk consequences of PPD ex- tremeness deficiencies and miscalibration.While there is empirical evidence that auditors, like many other decision makers, assess miscalibrated PPDs , the attendant inferential risk consequences of such deficiencies have not been addressed in the extant literature.The comparative statics analysis performed in this study indicates that the risk effects of miscalibration and extremeness deficiencies on the auditor's (substantive testing) evaluation decision are complex and cannot be predicted from an examination of the planning (sampling size) decision.