After we studied how accounting information is generated, we moved on to discuss how the quality and quantity of such information is assured in society. Basically we learnt that a perfect market will produce quality and quantity of (accounting) information up to the point where the marginal (additional) benefit of that information just equals the marginal cost of producing it. However, we noted that there are market failures that prevent such an optimum outcome. Notably we pointed out externalities, moral hazard, and adverse selection as sources of market failure.
Remedies to market failure involve market signalizing and disclosures, self-control by respective sources of information, and government regulations to eliminate information asymmetry.
Read the case of Jeffrey Hemmel, CPA,[search SEC.gov documents for Jeffrey Hammel, Adminstrative Proceedings File No. 3-17782] where the SEC instituted administrative and cease-and desist proceedings against Mr. Hammel due to material misrepresentations.
Discuss how this case plays out in the context of quality of accounting information we discussed. In particular discuss moral hazard and adverse selection portrayed by this case. Importantly highlight how government regulations attempt to reduce information asymmetry in this case.
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