When the American economist George Akerlof wrote his celebrated 1970 paper about "lemons", he described a dysfunctional world where inferior goods drove out better ones because suppliers could not attract a premium for higher-quality products. Customers might be prepared to pay $1,000 for a "peach", a well-kept used car, as against just $500 for a "lemon", in Akerlof’s example. But if the lemon owners concealed their cars’ faults and passed them off as peaches, buyers would rationally lower the price they would offer to reflect the higher possibility of ending up with a duff vehicle. That way, through a process of adverse selection, those lower prices would lead to the peaches being withdrawn from the market. All that would remain would be duds. Some worry that a similar process is afflicting the accountancy profession. The sudden collapse of Carillion has put audit quality firmly back under the spotlight. The UK outsourcing company’s income was massively restated and its assets imp...

BL Premium

This article is reserved for our subscribers.

A subscription helps you enjoy the best of our business content every day along with benefits such as exclusive Financial Times articles, Morningstar financial data, and digital access to the Sunday Times and Times Select.

Already subscribed? Simply sign in below.



Questions or problems? Email helpdesk@businesslive.co.za or call 0860 52 52 00.