Week 8 Discussion
For this discussion, your focus will be on what asymmetric information, moral hazard, and adverse selection have to do with corporate hiring staff accountants.
Instructions
Consider the following statement:
Many corporations require all staff accountants to hold not only a degree in accounting but also to have a CPA license. There is a substantial higher cost to hiring CPAs.
In your discussion post, address the following:
- Speculate on why corporations do not lower their explicit payroll cost by hiring accountants without a CPA. Consider how asymmetric information, moral hazard, and adverse selection may impact the perception of risk.
Corporations require all staff accountants to hold a degree in accounting and a CPA license despite the higher cost because they believe that this is the best way to minimize risk and ensure high-quality work. Asymmetric information refers to the situation where one party in a transaction has more information than the other party. In this case, the corporation has limited information about the qualifications and skills of the accountant. By requiring a CPA license, the corporation can be more confident that the accountant has a certain level of knowledge and expertise in accounting, reducing the asymmetry of information.
Moral hazard refers to the situation where one party in a transaction is incentivized to act in a way that is not in the best interest of the other party. In this case, hiring an accountant without a CPA license might result in the accountant cutting corners or engaging in unethical behavior. The CPA license serves as a signal that the accountant has been trained to follow ethical and professional standards, reducing the risk of moral hazard. Adverse selection refers to the situation where one party in a transaction has more information than the other party and this information asymmetry leads to a situation where the less informed party is disadvantaged. In this case, the corporation may believe that hiring an accountant without a CPA license increases the risk of hiring someone who is not fully qualified for the job. By requiring a CPA license, the corporation can reduce the risk of adverse selection and ensure that it is hiring the best candidate for the job.
In conclusion, corporations require all staff accountants to hold a CPA license to reduce the perception of risk associated with asymmetric information, moral hazard, and adverse selection. The explicit payroll cost of hiring CPAs is higher, but the corporation believes that this cost is outweighed by the benefits of reduced risk and improved work quality.