The interdependence of reporting discretion and information efficiency in laboratory markets

Article Abstract:

The relationship between market efficiency and the exercise of reporting discretion was examined using laboratory methods. The study focused on how subjects allocate favorable and unfavorable information among signals that are broadly available and those that are less available. Results showed that the reporting decisions of managers are affected in a predictable manner by the nature and level of market inefficiencies. It was also found that investors are usually able to predict and reverse the effects of the reporting decisions of managers, with average market prices lower when managers are allowed to exercise discretion. Finally, findings also indicated that allowing managers to have reporting discretion makes the market to under-react to the public signal since investors find it hard to employ the realization of the manipulated public signal to estimate the extent of report inflation.

Corporation reports, Company reports, Earnings per share

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Fraud detection: a theoretical foundation

Article Abstract:

The strategic interaction between a manager capable of fraud and an auditor who can detect irregularities was examined using a theoretical foundation that combines the game-theoretic analysis method and the economic experimentation method. Specifically, the study explored how examinations and balances, fraud detection, and incidence of fraud may be affected by the auditor's penalty, auditing standard requirements, the quality of the internal control system, and audit fee. Findings revealed that a higher auditor's penalty leads to more examinations of balances and fraud detection, and less examinations of transactions and fraud. With greater testing requirements, audit expenses and fraud detection rise, while discretionary testing and fraud commission decline. There is less fraud when the audit fee is high. Testing, fraud detection and fraud prevention were found to be directly related.

Fraud investigation

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Strategic dependence and inherent risk assessments

Article Abstract:

The efficiency and effectiveness of an audit rest considerably on the auditors' ability to accurately assess the inherent risk that the account balance that they are auditing is misrepresented. A study is conducted to identify the factors which influence the accuracy of inherent risk assessments. It employs an explicit audit model of the formation of expectations to identify audit features which can affect the auditors' ability to anticipate a manager's strategic action. Findings show that the accuracy of auditors' inherent risk assessments is determined by such factors as the risk of unintentional errors, variations in manager's possible payoffs, precision of the audit technology and regulatory restrictions on detection risk.

Risk assessment, Decision theory

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