We argue that the market for audit services resembles a common value procurement auction in that there is common uncertainty regarding audit cost and auditors generate a private estimate of cost prior to quoting a price. We examine two audit markets that take this form of market institution. First, we examine a simple market setting where auditors determine only price and interact with robot clients. Next, we examine an enriched market setting that incorporates theoretically important features of the market for audit services. We find that auditors in the simple audit market learn to avoid the winner's curse with pricing experience but this learning effect is hindered in the enriched market. Auditors in the enriched market reduce audit effort when they suffer the winner's curse. Our evidence suggests that low balling can occur due to the winner's curse, and this source of low balling poses a threat to audit quality.
This case exposes students to decision making in an ethically and legally ambiguous situation. It also asks them to practice using their ethical sensitivity by identifying situations where ethical conflicts are present. Students will learn the Securities and Exchange Commission's definition of insider trading and gain an understanding of the Supreme Court's recent interpretations regarding the specifics of what constitutes insider trading. Students will also learn about the legal protection afforded to whistleblowers under the Sarbanes-Oxley Act and learn about the code of ethics requirement applicable to public company's senior financial officers and the chief executive officer. Finally, students will be exposed to the definition of an internal control deficiency and learn how to identify two types of internal control deficiencies.
When choosing to implement a tournament to improve employee performance, managers may choose between two horizons: a single tournament (grand tournament) or a series of consecutive shorter tournaments (repeated tournament). This study extends prior research by investigating whether the level of heterogeneity in ability among employees competing in a tournament affects their tournament performance. Heterogeneity in ability refers to the degree of task ability variation within a tournament group. We examine tournament groups where the task ability of tournament participants is homogeneous (similar) or heterogeneous (varied). We find when employees' ability is heterogeneous, repeated tournaments yield greater employee performance than in grand tournaments. However, when employees' ability is homogeneous, we find no difference in employee performance between repeated tournaments and grand tournaments. Our results extend the management accounting literature by documenting that the effect of tournament horizon on employee performance depends upon the degree of heterogeneity in ability among employees.
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