This paper presents an agency model in which one of several monitoring systems can be chosen, if the agent possesses private information about the firm's production technology, the principal may rationally prefer to delegate the choice of the monitor to the agent even though the agent's compensation will depend on the monitoring information. In general, this expansion of the contracting space allows the principal to orchestrate more efficiently the agent's effort and monitoring system choices. The model suggests that the existence of alternative accounting methods and the delegation of their selection to management may represent rational equilibrium behavior.

We emphasize the role of accounting policies, and their audit, in an earnings management setting. We use a two–period agency in which three frictions interact: the agent privately observes action (or effort) supply and output, and the initial contract is subject to renegotiation. This creates a setting in which both players’ behavior is of concern, and, importantly, information rationing is efficient. Moreover, this information rationing is directly interpretable as being produced by an accounting policy whose application is ensured by an auditor.

Theory and practice of financial reporting are typically centered on the notion of income measurement. In this article, the authors adopt a fundamental measurement perspective. Income measurement is then argued to exist in a world of complete and perfect markets, but not necessarily otherwise. Hence, at a fundamental level the central feature of financial reporting cannot be income measurement. The writers then offer a reinterpretation of income reporting and accrual notions in terms of a "cost-effective" communication procedure.

This article presents a study on a cooperative formulation of the audit choice problem in auditing in the U.S. Under appropriate conditions, this leads to group level surrogate utility and probability functions such that the audit program chosen should maximize expected surrogate utility. Thus, the auditing problem is conceptually reduced to a Bayesian decision problem. The normative utility function, however, is determined by summing the auditee's and auditor's respective risk tolerances; and the probability function is determined by sampling both individuals' opinions in proportion to their marginal stake in the choice consequence. That is, the appropriate functions are composites and are not, in the general case, those of the auditors.

The article focuses on accounting systems disclosing income information. Income measurement entails reporting in each time period: present-period cash flows; and an accrual measure based on these cash flows and the change in the expected present values of future cash flows. Information disclosure is ensured if one can always identify which of the possible events in a given event structure has occurred in each time period. D. Vickrey introduces the concept of "weak transparency," referring to the special case of a null information structure. Under the null information structure, there is a constant mapping from underlying states of nature to the set of reported events (or the possible messages to be conveyed). There is essentially no information to be conveyed by income measurement when the information structure is null, so the invertibility condition is satisfied trivially. The main implication of the "possibility result" is that the ability of an accounting system to convey information is not constrained by a requirement that it value assets or measure income.

Discusses a link between two conflicting approaches to accounting theory. Proper income measurement or asset evaluation; Information disclosure; Corporate income measurement in the two approaches; Divergence of accounting value and economic value.

We analyze the optimal behavior of an organization when its employees can manipulate the organization's accounting system to their private advantage. We find that the organization may benefit by helping its employees manipulate the system. This help can reduce the employees' private returns from devoting effort to further manipulation of the accounting system, which reduces the cost of motivating the employees to devote their effort to improving the real (rather than the measured) performance of the organization.

We examine the design of asset revaluation policies in settings where a regulator can mandate fair value disclosure in order to mitigate a lemons problem in the asset resale market. The welfare-maximizing policy generally prescribes fair value certification for the lower asset values and (less costly) historical cost reporting for the higher asset values. The potential for voluntary certification can reduce welfare by increasing equilibrium certification costs and promoting underinvestment in socially valuable projects. Thus, a single regulated source of information (mandated disclosure) can be preferable to two sources of information (mandated and voluntary disclosure).