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Continuing dangers of disinformation in corporate accounting reports

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  • Kane, Edward J.

Abstract

Insiders can artificially deflect the market prices of financial instruments from their full-information or inside value' by issuing deceptive accounting reports. Incentive support for disinformational activity comes through forms of compensation that allow corporate insiders to profit extravagantly from temporary boosts in a firm's accounting condition or performance. In principle, outside auditing firms and other watchdog institutions help outside investors to identify and ignore disinformation. In practice, accountants can and do earn substantial profits from credentialling loophole-ridden measurement principles that conceal adverse developments from outside stakeholders. Although the Sarbanes-Oxley Act now requires top corporate officials to affirm the essential economic accuracy of any data their firms publish, officials of outside auditing firms are not obliged to express reservations they may have about the fundamental accuracy of the reports they audit. This asymmetry in obligations permits auditing firms to continue to be compensated for knowingly and willfully certifying valuation and itemization rules that generate misleading reports without fully exposing themselves to penalties their clients face for hiding adverse information. It is ironic that what are called accounting ethics' fail to embrace the profession's common-law duty of assuring the economic meaningfulness of the statements that clients pay it to endorse.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 13 (2004)
Issue (Month): 1-2 ()
Pages: 149-164

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Handle: RePEc:eee:revfin:v:13:y:2004:i:1-2:p:149-164

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Web page: http://www.elsevier.com/locate/inca/620170

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  1. Michael C. Jensen, 1994. "Self-Interest, Altruism, Incentives, And Agency Theory," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(2), pages 40-45.
  2. Becht, Marco & Bolton, Patrick & Roell, Ailsa, 2003. "Corporate governance and control," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 1, pages 1-109 Elsevier.
  3. Bebchuk, Lucian Arye & Fried, Jesse & Walker, David I, 2002. "Managerial Power and Rent Extraction in the Design of Executive Compensation," CEPR Discussion Papers 3558, C.E.P.R. Discussion Papers.
  4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  5. Roberts, Robin W. & Dwyer, Peggy D. & Sweeney, John T., 2003. "Political strategies used by the US public accounting profession during auditor liability reform: The case of the Private Securities Litigation Reform Act of 1995," Journal of Accounting and Public Policy, Elsevier, vol. 22(5), pages 433-457.
  6. Elroy Dimson & Massoud Mussavian, 1998. "A brief history of market efficiency," European Financial Management, European Financial Management Association, vol. 4(1), pages 91-103.
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Cited by:
  1. Edward Kane, 2005. "Charles Kindleberger: An Impressionist in a Minimalist World," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(1), pages 35-42, March.

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