Final answer:
Greater use of fair value accounting might increase information risk due to more estimation and judgment required, which can lead to less reliable financial reporting. Methods to reduce imperfect information risk include warranties and certifications to assure quality and competency, coupled with measures such as auditing standards and transparency in reporting. Information risk can impact financial decision-making, pricing, and the quality of transactions.
Step-by-step explanation:
The move toward greater use of fair value accounting might increase information risk because fair value often involves more estimation and judgment than historical cost accounting, potentially leading to less reliable and more variable financial reporting.
To reduce the risk of imperfect information, mechanisms such as auditing standards, transparency in financial reporting, and the use of market-based evidence can provide more assurance to users of financial statements. Imperfect information can adversely affect price, quantity, and quality by making it more difficult for buyers and sellers to agree on a price and for investors to make informed decisions regarding the provision of financial capital.
Ways to reduce the risk of imperfect information include the use of warranties, occupational licenses, and certifications to assure product quality and competency. In financial markets, cosigners and credit ratings can also play a role in reducing information asymmetry. These methods work by providing additional assurance and thus reducing uncertainty for the parties involved in a transaction.