Infrastructure Requirements for an Economically Efficient System of Public Financial Reporting and Disclosure

an economically efficient system of public financial reporting (audited accounting information) and disclosure (non-accounting information). Financial reporting and disclosure are complementary means of ameliorating information asymmetry between managers and parties contracting with their firm, including shareholders, lenders, suppliers, customers, and employees. The efficiency of a country’s financial reporting and disclosure system therefore is crucial to its development of economically efficient public corporations and public securities markets as well as to the development of its economy. A skeptical view of making sudden changes to reporting and disclosure systems is adopted, due to the economic, political, legal, and institutional complexity involved in effecting actual change. A particularly skeptical view is reserved for simply mandating new accounting standards for public financial reporting. This amounts to little more than “window dressing,” unless it is accompanied by wholesale revision of the infrastructure that determines the financial reporting incentives of managers and auditors. If forced to nominate a single place from which to