The Effects of Subjectivity on Manager and Auditor Reporting

• 成果类型: Article
• 署名作者: Lee, Kyungha (Kari); Menon, Rahul
• 署名单位: Rutgers University System; Rutgers University New Brunswick; Purdue University System; Purdue University
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-52316
• 发表日期: 2019
• 页码: 273-295
• 关键词: fair value measurements; reliability; uncertainty; relevance

摘要

This paper develops an economic model of how subjectivity in accounting estimates affects a manager's reporting behavior and auditors' subsequent information aggregation decision. In our model, the auditor receives a potentially manipulated report from the manager and uses an additional, albeit less precise, estimate to verify the report. We show, perhaps surprisingly, that as subjectivity increases, the auditor puts more weight on the manager's report, but the manager manipulates her report less. The overall effect of subjectivity on audit precision and the expected bias in the audited report is nonmonotonic. We further analyze how subjectivity affects the manager's investment behavior and optimal compensation structure. By introducing the notion of subjectivity, our model provides novel insight and empirical implications on managerial reporting behavior, audit quality, and investment efficiency when involving accounting estimates.