Project selection and audited accrual measurement in a multi-task setting

Abstract

This paper studies monitoring and accrual measurement in a principal-agent setting. The advantage of the principal-agent setting is that it allows accrual measurement to be explicitly connected to monitoring and to encompass questions of managerial behaviour and communication incentives. It also allows the analysis to take place in a setting where competing and complementary sources of information are available. Here the accrual measurement is used to discipline other, perhaps more timely, sources of information and to carry information itself. The argument rests on a two-period agency setting. The usual moral hazard story is expanded to include the agent also observing .a potential project opportunity (e.g. an additional customer, a labour-saving opportunity or whatever). This creates an interest in monitoring the agent's project selection. This monitoring may, it turns out, be useful for purposes of controlling the familiar short-run versus long-run tension or for better managing short-run incentives. Accrual questions enter in terms of allocating the project's up-front cost across the two periods, thereby separating expenditure from expense. In information-content terms, though, this turns out, given that cashflow is observed, to be equivalent to a monitor story that reports on project selection.