An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Simi Kedia
Rutgers University

Shiva Rajgopal
University of Washington

Abstract: The decision to misreport financial information is a function of the perceived costs and benefits from this activity. Though the benefits from misreporting are well documented, the ex ante cost of misreporting has largely been ignored in the literature. This cost is likely to be subjective and varying as a function of the information set available to firms. We characterize the information set to capture differences in beliefs regarding the ex ante costs of misreporting. We use distance to SEC offices, accounting practices of neighboring firms and characteristics of auditors in the region to proxy for differences in the information set of firms and the associated beliefs regarding the costs of misreporting. We find that the proxies for differences in ex ante costs of misreporting significantly explain misreporting intensity.

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