Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2013-09-05
Number: 13-131/VII
Author-Name: Suzanne H. Bijkerk
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Vladimir A. Karamychev
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Otto H. Swank
Author-Workplace-Name: Erasmus University Rotterdam
Title: Aggressive Reporting and Probabilistic Auditing in a Principles-Based Environment
Abstract: We analyze the reporting strategies of firms and the investigation strategies of auditors in an archetype principles-based financial reporting system. To this end, we add a verification stage to a standard cheap-talk game, and apply the resulting game to financial reporting. We show that for a principles-based system to work properly, firms should bear a sufficient share of the cost of a thorough investigation. Furthermore, we find that a principles-based system is a mixed blessing. On the one hand, it leads to a plausible investigation strategy of the auditor, in which "suspected" reports receive most attention. On the other hand, a principles-based system only indirectly weakens firms' incentives to report aggressively.
Classification-JEL: D82, M42
Keywords: Cheap Talk, Financial Reporting, Principles-based Regulation, Stochastic Auditing
File-Url: https://papers.tinbergen.nl/13131.pdf
File-Format: application/pdf
File-Size: 281459 bytes
Handle: RePEc:tin:wpaper:20130131