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Recent evidence suggests the connection between quality improvement and financial results may be weak. Consider the case of Analog Devices, Inc., a leading manufacturer of integrated circuits. Analog's TQM program included top management commitment and excellent training. Analog introduced a "Balanced Scorecard" emphasizing nonfinancial measures such as delivery performance, cycle time, wafer yield, and product development time to supplement the traditional managerial accounting system. The TQM program was a dramatic success. Yield doubled, cycle time was cut in half, and product defects fell by a factor of ten. However, Analog's financial performance worsened. To explore the apparent paradox we develop a detailed simulation model of Analog, including operations, financial and cost accounting, product development, human resources, the competitive environment, and the financial markets. We used econometric estimation, interviews, observation, and archival data to specify and estimate the model. We find that employee-based improvement programs like TQM can present a firm with a tradeoff between short and long run effects. In the long run TQM can increase productivity, raise quality, and lower costs. In the short run, these improvements can interact with prevailing accounting systems and organizational routines to create excess capacity, financial stress, and pressures for layoffs that undercut commitment to continuous improvement. We explore policies to integrate improvement programs like TQM with the dynamics of the firm as a whole to promote sustained improvement in financial as well as nonfinancial measures of performance.

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Deterring collusion is costly for the principal because he has to reward both strategic and non-strategic auditors for not accepting a potential bribe from the manager. Collusion is costly for the manager because of the bribe he has to pay to the (strategic) auditor. If the principal believes that there is a high probability enough that his auditor is non-strategic, he will offer a contract that does not prevent collusion between the manager and a strategic auditor.

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