This paper considers the effects of a mandated audit when the firm operates in a contingent‐claims production economy. An adverse selection problem is introduced by assuming that random state realization and resulting productive outcome is not observable to consumer‐investors, but is observable to the firm manager. This raises the possibility that managers may cheat by reporting a lower outcome than actual, and appropriating the difference. Such behavior is controlled, but not eliminated, by the presence of a costly mandated audit, which may detect such cheating. Managers compete for positions in a competitive managerial labor market, and managerial effort is assumed to be observable. Despite this, cheating managers do not deliver a first‐best level of effort in the model and this is a second cost to society of the assumed information asymmetry. The economic impact of changes in audit intensity on manager and investor decision making is examined. Résumé. L'auteur étudie, dans l'article qui suit, les conséquences de la vérification demandée par les instances supérieures de l'entreprise lorsque cette dernière œuvre dans une économie de production de titres de créance conditionnels. Un problème qui complique la sélection tient à l'hypothèse selon laquelle la réalisation aléatoire de l'état de la nature et le rendement qui en découle ne peuvent être observés par les consommateurs‐investisseurs, mais peuvent l'être par le gestionnaire de l'entreprise. Ainsi est‐il possible pour les gestionnaires de tromper les consommateurs‐investisseurs en faisant état d'un rendement inférieur au rendement réel et en s'appropriant la différence. Ce genre de comportement peut être contrôlé, mais non supprimé, grâce à une vérification demandée par les instances supérieures de l'entreprise, opération coûteuse mais qui peut permettre de détecter les fraudes. Les gestionnaires se disputent des postes administratifs dans un marché concurrentiel. L'on suppose que l'effort qu'ils fournissent est observable. Malgré cela, les gestionnaires qui fraudent ne fournissent pas un effort de tout premier ordre à l'Intérieur du modèle, et c'est un second coût pour la société que l'asymétrie supposée de l'information. L'auteur analyse l'incidence économique de la modification de l'intensité de la vérification sur la prise de décisions des gestionnaires et des investisseurs.

Probabilistic reporting, Asset valuation, Scoring Rule, Probability distribution

Auditing, Possibility theorem, Valuation, Group preferences

William R. Scott, [Discussion of Auditor's Loss Functions Implicit in Consumption-Investment Models]: A Reply, Journal of Accounting Research, Vol. 13, Studies on Statistical Methodology in Auditing (1975), pp. 124-125

In a previous paper,' I demonstrated how the problems faced by the auditor of a firm's published annual financial statements in deciding (1) how much audit evidence to obtain and (2) what set of balance sheet valuation numbers to choose in the light of this audit evidence can be regarded as a problem in Bayesian point estimation. In effect, the auditor was viewed as picking a vector of numbers (the balance sheet) to summarize his posterior probability distribution (i.e., posterior to his audit examination) of those balance sheet parameters for which he is held responsible by the nature of his audit engagement. He does this subject to a loss function whereby he is penalized for discrepancies between the balance sheet numbers so chosen and their subsequent realization. Given the professional nature of the auditor's engagement, it seems reasonable to suggest that this loss function really derives from the various financial statement users. If they rely on the audited statements as inputs into decisions when those statements contain auditor's errors, they will suffer an opportunity loss of expected utility. This raises the question, of course, of who these users are and how financial statement errors operate to cause utility losses. The approach in this paper is to pick a specific, well-defined normative decision problem for which audited financial statements have the potential to be useful and find the loss function that is implicit in it. The problem I have chosen is an individual's consumption-investment

There now exists a relatively large body of literature dealing with statistical sampling in auditing. This literature is mainly classical, in the sense that the auditor subjectively specifies desired confidence intervals1 and confidence levels as the basis for designing his audit sample.2 In specifying a confidence level, the auditor should take his evaluation of the adequacy of the firm's internal control into account, i.e., better internal control allows a lower audit size and enables the auditor to accept the resulting lower level of confidence in his estimates. However, no formal mechanism exists for linking the auditor's prior assessment of internal control and his sample design. Rather, this is left to the auditor's judgment.3 The lack of such a mechanism is a major defect of the classical approach to statistical sampling in auditing.

The purpose of this paper is to model the legal exposure of auditors and to study the extent to which limitations on this exposure affect auditors' chosen audit intensity and collusion with management. Résumé. L'article qui suit a pour but de modéliser les risques auxquels sont exposés les vérificateurs de par la loi et de voir dans quelle mesure les limites de ce risque influent sur l'intensité de la vérification dont décident les vérificateurs et sur la collusion avec la direction.

[Understanding managers' incentives to disclose information voluntarily has been described as "the quintessential accounting problem" (Verrecchia 1990a, 245). In contrast to economic consequences (positive) theories, Leftwich (1990, 41) states that "there are few empirical investigations of the effect of an information role on accounting choice" and that "information economics has yet to yield a set of empirically testable propositions." This study addresses this empirical deficiency by testing hypotheses developed from two disclosure theories by examining Canadian firms' voluntary disclosure of defined benefit pension plan (DBPP) information. First, Verrecchia's (1983) proprietary cost theory states that the incentive to disclose information is a decreasing function of the potential proprietary costs attached to a disclosure and an increasing function of the favorableness of the news in a disclosure. Second, Diamond (1985) explains firms' voluntary disclosures through information cost savings. He shows that if a firm commits to a policy of disclosing relevant information, it will preempt investors' private information search activity. This provides a pareto improvement through lower overall information production costs. This study demonstrates the proprietary cost implications and valuation relevance of pension disclosures and then develops hypotheses and empirical surrogates for proprietary costs and private information acquisition cost savings in this setting. The results are consistent with the proprietary cost theory but are equivocal with respect to the information cost savings hypothesis. Proprietary costs mitigate the adverse selection argument in favor of full disclosure; moreover, the disclosures are conditioned on the favorableness of the news. Proxies representing proprietary costs related to labor are negatively associated with firms' DBPP disclosures.]