Review of Accounting Studies

, Volume 15, Issue 2, pp 243–263 | Cite as

The role of audit thresholds in the misreporting of private information

Article

Abstract

The accounting profession has faced considerable criticism in recent years for failing to effectively combat reporting manipulation. A particular point of contention is the use of audit thresholds. The tendency for auditors to suppress inconsistencies that are deemed immaterial has been viewed as an open invitation for abuse. This paper revisits the effectiveness of audits and the misreporting of private information in light of audit thresholds. The paper demonstrates that while audit thresholds may create incentives for misstatements, the predictability of such misstatements may actually serve to promote efficiency. In effect, an environment in which parties are expected to systematically bias their reports can bring the threat of audit consequences for further exaggeration to the forefront. Such a consideration also suggests that more relaxed audit thresholds (and the ensuing increase in equilibrium misstatements) may be condoned by report recipients and can actually lessen inefficiencies wrought by adverse selection.

Keywords

Auditing Materiality Private information Reporting 

JEL Classification

D82 M42 M48 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Yale UniversityNew HavenUSA

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