Asymmetric Information, Moral Hazard, and Adverse Selection

Posted: November 8th, 2023

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Asymmetric Information, Moral Hazard, and Adverse Selection

A business has several options when it comes to processing its payroll. The enterprise can process the financial information itself or outsource the activity by hiring a payroll management company or a certified public accountant (CPA). CPAs and payroll firms offer different levels of accounting service, which is why selection should be strategic to avoid or mitigate adverse selection, moral hazard, and asymmetric information. While the firm has two accounting options, the goal is to use the alternative with the least liability for financial malpractice.

A moral hazard happens when there is asymmetric information between contracting parties (Charupat, Huang, and Milevsky 140). Asymmetry is when one party in a financial agreement has more material knowledge than the others (Ibe para 4). Adverse selection occurs when parties most likely to take risks become the most likely to receive insurance (Charupat, Huang, and Milevsky 140). The three risk management concepts form the basis of why corporations do not lower their payroll costs to recruit uncertified CPA accountants.

            A CPA certification acts as a filter screen for Human Resources to use to ensure they do not hire accountants that will be dishonest with the business’ finances. Professional certification is a way for HR to know a candidate possesses the knowledge, skill, competence, and ethical character to produce high-quality work with minimal supervision or training (Snell and Bohlander 265). CPAs have to pass a difficult finance and economics exam that informs the potential employer that they are competent and knowledgeable. Certification is a screen that also benefits the employer with the reduced risk of hiring accountants with the inclination to engage in illegal activities.

The certified accountant protects the enterprise from lawsuits linked to accounting malpractice. The hiring firm is assured of internal compliance with financial regulations for reporting while also benefiting from improving public trust. Business stakeholders will perceive there are lower risks of fiscal liability within a company if it hires CPAs.

Works Cited

Charupat, Narat, Huaxiong Huang and Mishe Milevsky. Strategic Financial Planning over the Lifecycle: A Conceptual Approach to Personal Risk Management. Cambridge University Press, 2012.

Ibe, James. “Adverse Selection and Moral Hazard: Pondering Policy Implications of Asymmetric Information.” LinkedIn, 23 Feb. 2019, Accessed 22 November 2022.

Snell, Scott and George Bohlander. Managing Human Resources. Cengage Learning, 2013.

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