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Accounting Recognition, Moral Hazard, and Communication *
Author(s) -
LIANG PIERRE JINGHONG
Publication year - 2000
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/vk8r-aadh-ur0d-6qr6
Subject(s) - audit , accounting , private information retrieval , valuation (finance) , accounting information system , moral hazard , agency (philosophy) , judgement , business , actuarial science , computer science , economics , microeconomics , incentive , political science , computer security , sociology , social science , law
Two complementary sources of information are studied in a multiperiod agency model. One is an accounting source that partially but credibly conveys the agent's private information through accounting recognition. The other is an unverified communication by the agent (i.e., a self‐report). In a simple setting with no communication, alternative labor market frictions lead to alternative optimal recognition policies. When the agent is allowed to communicate his or her private information, accounting signals serve as a veracity check on the agent's self‐report. Finally, such communication sometimes makes delaying the recognition optimal. We see contracting and confirmatory roles of accounting as its comparative advantage. As a source of information, accounting is valuable because accounting reports are credible, comprehensive, and subject to careful and professional judgement. While other information sources may be more timely in providing valuation information about an entity, audited accounting information, when used in explicit or implicit contracts, ensures the accuracy of the reports from nonaccounting sources.