Jeffrey Hammel Case (Links to an external site.) After we studied how accounting information is generated, we
Question:
Jeffrey Hammel Case (Links to an external site.) After we studied how accounting information is generated, we moved on to discuss how the quality and quantity of such information are assured in society. Basically, we learned that a perfect market will produce quality and quantity of (accounting) information up to the point where the marginal (additional) social benefit of that information just equals the marginal social cost of producing it. However, we noted that there are market failures that prevent such an optimum outcome to happen. Notably, we pointed out externalities, moral hazard, unanimity, and adverse selection as sources of market failure. Remedies of market failure involve market signalizing and disclosures, self-control by respective sources of information, and government regulations to eliminate information asymmetry.
Read the case of Jeffrey Hemmel, CPA (Links to an external site.). Open this document with ReadSpeaker docReader,[search SEC.gov documents for Jeffrey Hammel, Administrative Proceedings File No. 3-17782] where the SEC instituted administrative and cease-and-desist proceedings against Mr. Hammel due to material misrepresentations.
1. Discuss how this case plays out in the context of the quality (and quantity) of accounting information we discussed. In particular, discuss how moral hazard and adverse selection portrayed by this case. More importantly highlight how government regulations attempt to reduce information asymmetry in this case.