In this paper I use a principal-agnet framework to explore the relation between the hierarchical structure of firms and the accounting information technologies available to them. My analysis is related to that in Melumad, Mookherjee, and Reichelstein  and Ziv . In this paper, I take an approach that allows the principal to choose the number of layers in the firm, the number of agents in each layer, and the quantity and quality of information in the firm (subject to the available information technology). This paper also complements Baiman, Larcker, and Rajan's  analysis of the optimal allocation of tasks from a parent firm to its business units. Finally, my analysis extends Calvo and Wellisz , who consider a world where the probability an employee is monitored decreases with the ratio of employees to supervisors. I show that a number of layers of supervisors is finite.
In section 2, I introduce the basic model. In section 3, I discuss the optimal hierarchical structure of the firm. Section 4 provides a summary. Highlights of the proofs are provided in Appendix A.