Auditing, Auditor litigation, Rule 10b-5, Auditor liability

This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium, the ex ante tax rate on capital income is approximately zero. There is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation. Within this class, the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk. The tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks; thus there is no presumption that optimal labor tax rates follow a random walk. Most of the welfare gains realized by switching from a tax system like that of the United States to the Ramsey system come from an initial period of high taxation on capital income.

Joseph V. Carcello, Zoe-Vonna Palmrose, Auditor Litigation and Modified Reporting on Bankrupt Clients, Journal of Accounting Research, Vol. 32, Studies on Accounting, Financial Disclosures, and the Law (1994), pp. 1-30

[In the usual agency analysis of moral hazard, the principal is endowed with a production process and must hire an agent to manage it. Output depends on the agent's effort, the production process supplied by the principal, and some random state realization. A common assumption is that the output of the production process is costlessly observable and sufficiently informative about the agent's effort to warrant using it for contracting. However, this assumption may not be descriptive of a large number of settings. In fact, it is hard to conceive of many production settings in which the gathering and reporting of any information is totally free and independent of costly design decisions. For example, if the agent produces some product, it is not costless to monitor the number or the quality of the units produced; someone must be paid or a machine must be purchased to do so. In addition, some opportunity cost may have to be incurred to rearrange the production process to facilitate the assessment of the agent's work. In this article, we consider the implications of relaxing the assumption that output is costlessly observable and contractible, by analyzing the optimal design of a costly unconditional monitoring system. We characterize the monitoring system in terms of the Type I error associated with the obedient action and the Type II errors associated with the disobedient actions. We find that it is always optimal to design the monitoring system such that the Type I error is smaller than the Type II error for any disobedient action. Further, we find that as the costliness of the monitoring system increases, the Type I error increases monotonically, while the Type II error initially decreases and then increases.]

[This study develops an empirical model to examine the responsiveness of budgetary allocations to public demand for services and the resulting outcome-generating activities in the New York City Police Department (NYPD). The analysis combines nonfinancial measures of the results of operations with budgetary and financial measures. The model explicitly incorporates efficiency and effectiveness measures and reflects as well the interactive nature of outcome-generating activities in the NYPD. The setting investigated suggests that, as in for-profit managerial accounting, task complexity and budgetary slack may be important conditioning variables in performance assessment. The empirical analysis uses publicly available NYPD data. We find evidence that budgetary provisions are responsive to perceived social needs. In addition, task complexity is a pervasively important determinant of both budgetary allocations (a major cost-driver) and the effectiveness of the police department in achieving specific outcomes. The data also suggest that the department may rely extensively on budgetary slack to cope with rapid changes in demand. The nature of the outcome-generating activities of the organization is illustrated in the responsiveness of outputs and outcomes to increased inputs. These results illustrate both the feasibility and the potential usefulness of comprehensive performance evaluation in the not-for-profit sector. The next section of the paper provides background on the empirical research issues and a brief review of relevant academic research. The empirical model is developed in section II. Section III reports the results of the model estimation and hypothesis tests. We discuss the implications of the results in section IV.]

Presents an empirical model to examine the responsiveness of budgetary allocations to public demand for services in the New York City Police Department (NYPD). Resulting outcome-generating activities in the NYPD; Not-for-profit (NRF) organization efficiency and effectiveness; Analysis of NYPD data.

The purpose of this note is to propose a decomposition of the Gini index of inequality into within and between subpopulations using the Lerman-Yitzhaki covariance method. The present method suggests that once the population is arranged in ascending order of income and assigned ranks, the same ranks will be used to calculate total as well as between inequality. In this way, it differs from the one suggested by Jacques Silber (1989) in the measurement of between inequality and, thereby, in the interaction term.

This paper models the maintenance of management quality through the simultaneous functioning of internal and external corporate control mechnism—board dismissals and takeovers. We examine how the information sets of the board and the acquiror are noisily aggregated, and how this affects the behaviour of the board and the acquiror. The board of directors, acting ion shareholders' interests will sometimes oppose a takeover, and this opposition can be good news for the firm. An unsuccessful takeover attempt may be followed by a high rate of management turnover, because a takeover attempt conveys adverse information possessed by the bidder about the manager. If there is a probability that the board is ineffective, then a forced resignation of the manager can be either good or bad news for the firm. A positive effect is predicted to dominate when there is more adverse public information avilable about the manager's performance and when there is a higher ex ante probability that the board is ineffective, for example, of the board is management-dominated rather than outsider-dominated.