Incentive issues in transfer pricing

This thesis is concerned with the transfer of resources within an organization. It is assumed that top level management wish to allocate scarce corporate resources as effectively as possible. However, top level management do not have enough information to fully assess the potential return from deployment of resources, in particular divisions of the corporation. Hence, top level management require divisional managers who hold such information to communicate it. Any resultant allocation of corporate resources will clearly affect the profit attained by a division. In addition, it is assumed divisional managers will be compensated partly on the basis of divisional profit, in order to promote higher levels of divisional management effort provision. The inter-relationship between the allocation of corporate resources and divisional management's resultant compensation, leads to an incentive problem. Divisional managers will perceive advantages from communicating information to top level management about the division's potential returns in a strategic (untruthful) fashion in order to improve their compensation. In this thesis it is argued that opportunities for misrepresentation should be controlled. The major result of the thesis is to propose a method for allocating scarce corporate resources and compensating divisional managers, that induces them to tell the truth and provide appropriate levels of managerial effort

The Audit Firm Rotation Rule: A Review of the Literature

There has been considerable interest in mandatory audit firm rotation (RR) as a means to protect auditor independence. A small number of countries, including Italy, have a legal requirement for audit firms to be rotated after a maximum specified period (1 out of the G7 countries and 2 out of the 15 European Union countries before the 2004 enlargement). In 2003, and in a 2004 update, the independent academics of SDA Bocconi School of Management studied the impact of mandatory audit firm rotation in Italy (SDA Bocconi School of Management 2003) and concluded that the policy seems to lead to additional cost, greater concentration of work amongst the largest audit firms, negative impact on audit quality (most noticeably in the years immediately after the rotation) and is ignored by the stock market. The aim of the present study is to give a rather complete framework of the available studies on the topic