Commercial insurance of financial disclosure: Auditors' independence, and investors' protection

Dan Palmon, Ephraim F. Sudit

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

In this paper the authors propose, for preliminary consideration and discussion, a system of commercial insurance of financial disclosures (CIFD), under which users of financial information (owners and potential owners of business enterprises) and providers of financial information (managers of business enterprises) would be able to purchase insurance policies from private insurers (commercial insurance companies). These insurance policies would be designed to protect users of financial statements from specific, well-defined losses directly attributable to their use of financial disclosures that failed to conform to contractually defined standards. To reduce their own risks insurance companies will likely purchase from assurance experts (certified public accountants, financial analysts, and management consultants) services assuring adherence to standards. The paper discusses the dynamics of the decisions and negotiations within and among groups of investors, managers, insurers, assurors, and government regulators. The advantages of CIFD over current US regulation of financial disclosure are analyzed. Those advantages, which include increases in the independence of external auditors, improvements in the quality of their audits, and better protection for investors, are assessed. It is argued that CIFD may be capable of evolving into a very flexible system that would accommodate alternative regulatory structures.

Original languageEnglish (US)
Pages (from-to)27-40
Number of pages14
JournalGroup Decision and Negotiation
Volume18
Issue number1
DOIs
StatePublished - Jan 2009

All Science Journal Classification (ASJC) codes

  • Decision Sciences(all)
  • Arts and Humanities (miscellaneous)
  • Social Sciences(all)
  • Strategy and Management
  • Management of Technology and Innovation

Keywords

  • Auditing
  • Capital markets
  • Financial fraud
  • Financial statements
  • Insurance
  • Regulation

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