A proposed corporate governance reform: Financial statements insurance

نویسنده

  • Joshua Ronen
چکیده

The inherent conflicts of interest in the auditor–client relationship and the unobservability of financial statement quality are likely culprits in the recent corporate scandals such as Enron and WorldCom. The solution proposed here is a financial statement insurance (FSI) mechanism. Instead of appointing and paying auditors, companies would purchase financial statement insurance that provides coverage to investors against losses suffered as a result of misrepresentation in the financial reports. The coverage and the premiums would be publicized. The insurance carriers then would appoint and pay the auditors. Those announcing higher limits of coverage and smaller premiums would distinguish themselves in the eyes of the investors as companies with higher quality financial statements. In contrast, those with smaller or no coverage or higher premiums would reveal themselves as having lower quality financial statements. Every company would be eager to get higher coverage and pay smaller premiums, lest it be identified as the latter. By transferring the hiring decision to the insurer, this scheme eliminates the auditor’s inherent conflict of interest. The publicization of the coverage and the premium credibly signals the quality of the insured’s financial statements and direct investments towards better projects. At the same time, the ability to signal the quality of financial statements provides companies with incentives to improve them. Thus, FSI will result in fewer misrepresentations and, accordingly, in fewer suits and smaller shareholders’ losses, as well as a more efficient allocation of resources. # 2006 Elsevier B.V. All rights reserved. JEL classification: G22; G18; G28; K22; L22; L51; M41

برای دانلود متن کامل این مقاله و بیش از 32 میلیون مقاله دیگر ابتدا ثبت نام کنید

ثبت نام

اگر عضو سایت هستید لطفا وارد حساب کاربری خود شوید

منابع مشابه

China’s Insurance Regulatory Reform, Corporate Governance Behavior and Insurers’ Governance Effectiveness

External regulation is an important mechanism to improve corporate behavior in emerging markets. China's insurance governance regulation, which began to supervise and guide insurance corporate governance behavior in 2006, has experienced a complex process of reform. This study tested our hypotheses with a sample of 85 firms during 2010-2011, which was obtained by providing a questionnaire to al...

متن کامل

Establishing a Deposit Insurance System in China: A Long-Awaited Move Toward Deepening Financial Reform

III. The Fundamentals of China’s Deposit Insurance and the Unresolved Issues 70 A. Governance, Mandates and Powers ......................................................... 70 B. Mandatory Membership .......................................................................... 74 C. Limited but High-Level of Coverage ....................................................... 76 D. Pricing Mechanism ....

متن کامل

Bank’s Corporate Governance: Quantifying the Effects in Iranian Banking Networks

The most important tool for promoting the bank’s stability and health is the establishment of a standard corporate governance structure for managing the bank's business. Redesigning the relationships between bank management, shareholders and the rest of the bank’s stockholder, including the objectives, the risk and audit indices, and internal control of the bank, is recognized as the foundation...

متن کامل

Corporate Governance and the Indonesian Financial System Corporate Governance and the Indonesian Financial System: A Comparative Perspective

Financial systems reform and corporate reform are deeply intertwined and thus are best addressed simultaneously and comprehensively. Indonesia is seeking to do this by developing rules, institutions, and mechanisms to achieve good corporate governance, while working to build an effectively functioning financial system that facilitates good corporate governance. This paper explores this quest in...

متن کامل

Does Corporate Governance Matter More for Firms with High Financial Slack?

We examine whether and how the effect of corporate governance depends on a firm’s financial slack, financial resources not committed to any specific use. On one hand, financial slack may be spent by self-interested managers for their private benefits, so its level is positively associated with the degree of agency conflicts. This implies that corporate governance matters more for high financial...

متن کامل

ذخیره در منابع من


  با ذخیره ی این منبع در منابع من، دسترسی به آن را برای استفاده های بعدی آسان تر کنید

برای دانلود متن کامل این مقاله و بیش از 32 میلیون مقاله دیگر ابتدا ثبت نام کنید

ثبت نام

اگر عضو سایت هستید لطفا وارد حساب کاربری خود شوید

عنوان ژورنال:

دوره   شماره 

صفحات  -

تاریخ انتشار 2006