The role of audit thresholds in the misreporting
of private information
Brian Mittendorf
Published online: 26 February 2009
Ó Springer Science+Business Media, LLC 2009
Abstract The accounting profession has faced considerable criticism in recent
years for failing to effectively combat reporting manipulation. A particular point of
contention is the use of audit thresholds. The tendency for auditors to suppress
inconsistencies that are deemed immaterial has been viewed as an open invitation
for abuse. This paper revisits the effectiveness of audits and the misreporting of
private information in light of audit thresholds. The paper demonstrates that while
audit thresholds may create incentives for misstatements, the predictability of such
misstatements may actually serve to promote efficiency. In effect, an environment in
which parties are expected to systematically bias their reports can bring the threat of
audit consequences for further exaggeration to the forefront. Such a consideration
also suggests that more relaxed audit thresholds (and the ensuing increase in
equilibrium misstatements) may be condoned by report recipients and can actually
lessen inefficiencies wrought by adverse selection.
Keywords Auditing Materiality Private information Reporting
JEL Classification D82 M42 M48
1 Introduction
Predictable manipulation of reported information has been documented in a variety
of circumstances including management profitability forecasts, analyst recommen-
dations, internal cost budgets, and periodic financial statements. It is often argued
that much of the fault for such systematic manipulation lies in the nature of audit
B. Mittendorf (&)
Yale University, 135 Prospect Street, New Haven, CT 06520, USA
e-mail: brian.mittendorf@yale.edu
123
Rev Account Stud (2010) 15:243–263
DOI 10.1007/s11142-009-9088-5
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