Regulation, Competition and Independence in a Certification Society: Financial Reports vs. Baseball Cards

53 Pages Posted: 6 Jul 2006 Last revised: 12 Jun 2013

See all articles by Karim Jamal

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: June 11, 2007

Abstract

Mandatory certification of the financial reports of publicly-held corporations by independent auditors has been a key element in U.S. regulatory framework to improve financial reporting. The economic consequences of mandatory certification remain controversial. Although each market is unique, comparative analyses of certification services across markets can yield useful insights into the value and consequences of mandatory audit of financial reports. Using a framework for analysis of certification services, we report: (1) descriptive data about certification activity for a range of private sector goods; (2) qualifications and interests of experts who provide online certification or opinion for a fee; and (3) analysis of an online market for certification of baseball card.

We find that (1) markets for certification services are ubiquitous in the economy, many with potential for conflicts of interest; (2) the grading scales vary from pass/fail to 100 points with greater use of the former by government agencies; (3) the unregulated market for baseball card certification is dominated by firms who also sell other services; (4) buyers of certification services are willing to pay more for stricter grading; and (5) the net returns to the purchase of stricter certification services are higher, i.e., there is little evidence of a race-to-the-bottom. These observations from unregulated markets for certification services raise interesting questions about several maintained assumptions about the federal regulation of certification of corporate financial reports (e.g., the importance of independence).

JEL Classification: M49, G34, G38

Suggested Citation

Jamal, Karim and Sunder, Shyam, Regulation, Competition and Independence in a Certification Society: Financial Reports vs. Baseball Cards (June 11, 2007). University of Alberta School of Business Research Paper No. 2013-1007. Available at SSRN: https://ssrn.com/abstract=912703 or http://dx.doi.org/10.2139/ssrn.912703

Karim Jamal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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