Accounting-Based Monitoring: Evidence from Supply Chain Contracts

Abstract

This paper investigates the role of accounting-based monitoring in supply chain contracts. Using material supply agreements filed with the SEC from 2000 to 2023, I document that 31.42% of contracts include some form of accounting-based monitoring. In over 70% of these cases, customers hold verification rights over suppliers' accounting information, indicating that accounting-based monitoring predominantly flows from customers to suppliers. Customers impose more intensive monitoring when suppliers face higher cost volatility or cost-adjusted pricing, whereas suppliers monitor more when customers are financially weaker. Intensive customer monitoring improves operating efficiency for both parties, reducing cost volatility and shortening cash-conversion cycles. Overall, the evidence suggests that accounting-based monitoring is an important contractual mechanism for managing operating risk and improving operating efficiency along supply chains.