Signaling and monitoring in public-sector accounting

Article Abstract:

Monitoring and signaling mechanisms are the primary mechanisms used to explain how information asymmetries are reduced through accounting and auditing. Formal models of the monitoring and signaling demands for public sector financial reporting are developed. These models are then tested empirically using quality of financial reporting as a dependent variable. Quality of financial reporting is measured by an entity's participation in the Certificate of Conformance Program (CCP) administered by the Government Finance Officers Association. The results indicate that the predictions from the signaling model are consistent with observed CCP participation, but the predictions from the monitoring model are not supported by observed CCP participation. A discussion of the article by Trevor S. Harris is included.

Accounting and auditing, Public sector

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Accountability, the dilution effect, and conservatism in auditors' fraud judgments

Article Abstract:

A study was conducted to examine the impact of accountability on auditor's fraud risk judgments in the presence of relevant as well as irrelevant information. Earlier studies have demonstrated that irrelevant information affects fraud risk assessments of auditors, a phenomenon referred to as the dilution effect. Results of this present study uncovered the dilution effect in the judgments of auditors both when they were held accountable and when they were not. Although accountability did not boost the dilution effect, it did lead to more conservative judgments of fraud risk. These findings were opined to be the result of auditors' practice of realigning their judgments to make them more defensible to their superiors.

Fraud, Responsibility

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Collusion in auditing

Article Abstract:

Collusion in auditing between agents, or an auditor and a manager, can have serious repercussions. Collusion is a private, extralegal arrangement in which agents act in a manner not intended by an owner. Auditing is meant to eliminate asymmetries in information, and the value of an audit report is affected by whether the auditor and the manager collude. Research using a three-person agency model that permits collusion reveals that managers bear no risk only over a situation characterized by higher outcomes. Owners can reduce the losses from collusion by restricting risk sharing to higher outcomes.

Ethical aspects

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