Accountants’ Loss Functions and Induced Preferences for Conservatism

The purpose of this paper is to analyze the properties of optimal incentive schemes, and their implications, for accountants in a simple model of the accountant’s role in the production of information for a user. We find that a key property of the optimal incentive scheme for the accountant is its asymmetry: typically, the accountant will be penalized differently for different types of errors. This asymmetry has implications for the structure of auditors’ legal liability and for accountants’ preferences for conservative accounting practices.