This study aims to examine how firms choose an auditor in the presence of bilateral information asymmetry between insiders and outsiders regarding firms’ economic performance.
Abstract
Purpose
This study aims to examine how firms choose an auditor in the presence of bilateral information asymmetry between insiders and outsiders regarding firms’ economic performance.
Design/methodology/approach
This study presents a one-period reporting bias game with a firm’s risk-neutral manager and investors in the capital market, in which a manager with private information chooses an auditor and reports earnings to investors who acquire their own information. The analysis focuses on the possibility that the manager engages an auditor to constrain earnings management as a commitment device to minimize reporting error cost.
Findings
The results show that the manager’s optimal auditor choice is determined based on investor sensitivity to the earnings report, and managerial incentives for earnings management, discounted by the uncertainty of reporting errors. The results for optimal auditor choice are counterintuitive: engaging a higher-quality auditor could seemingly be associated with aggressive earnings management.
Originality/value
This study advances the understanding of the theoretical basis of firms’ auditor choice in the context of market investors’ information acquisition when auditors exercise their discretion in reporting. This issue has received limited attention in the extant literature.
Details
Keywords
Makoto Mizukawa, Hideo Matsuka, Toshihiko Koyama and Akihiro Matsumoto
The Japan Robot Association (JARA) has been conducting standardization activities (ORiN: Open Robot Interface for the Network) in which the main subject is the network interface…
Abstract
The Japan Robot Association (JARA) has been conducting standardization activities (ORiN: Open Robot Interface for the Network) in which the main subject is the network interface in the robot controller. In the 1999 international robot exhibition, our activities and results were opened and demonstrated to the public. In this demonstration, industrial robots from 13 Japanese domestic robot manufacturers, that had different specifications and structures, were connected to each other with a communication network. Using ORiN API, applications for production system management and 3‐D robot motion monitoring were demonstrated. The purpose of this demonstration is to verify the openness of the networked robot and to certify the proposed de facto standard protocol and robot model. The background of those activities, the outline of the design guidelines, the demonstration for verification, a schedule and plan towards the de facto and/or ISO standard are all mentioned.