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Aggressive Reporting and Probabilistic Auditing in a Principles-Based Environment

Author

Listed:
  • Suzanne H. Bijkerk

    (Erasmus University Rotterdam)

  • Vladimir A. Karamychev

    (Erasmus University Rotterdam)

  • Otto H. Swank

    (Erasmus University Rotterdam)

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.

Suggested Citation

  • Suzanne H. Bijkerk & Vladimir A. Karamychev & Otto H. Swank, 2013. "Aggressive Reporting and Probabilistic Auditing in a Principles-Based Environment," Tinbergen Institute Discussion Papers 13-131/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20130131
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    References listed on IDEAS

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    More about this item

    Keywords

    Cheap Talk; Financial Reporting; Principles-based Regulation; Stochastic Auditing;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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