Accounting theories are the theories that have been developed over time for controlling and regulating the various accounting treatments that are incorporated in the different corporate entities all over the world. Accounting theories generally refers to the methodologies that have been established in order to guide the preparation of a financial report. The accounting theories have been modified over time in order to suit the current requirements of the corporate entities and other stakeholders of business.
The journal article that has been chosen for the purpose of analyzing this particular study is “Innovative Enterprise Solves the Agency Problem: The Theory of the Firm, Financial Flows, and Economic Performance” by William Lazonick.
The journal that has been chosen in this particular project suggests that the dominant ideology of the corporate governance has been to earn more profits. The primary tool for the firms for elevating the economic performance has been increasing the amounts of revenue earned instead of maximizing the shareholder value (Bosse and Phillips 2016).
This particular journal conveys the essential idea that the agency theory should be replaced by the innovation theory. The author further supports this statement by stating in his journal that the public shareholders do not invest in the productive assets of the company. The agency theory proposes the maximization of the shareholder value, which can only be achieved by the distribution of the free cash flow to the public stakeholders. The shareholders who are holding onto the shares will receive a part of the reaped revenue as increased stock prices can be achieved through stock repurchases. The agency theory indicates that the shareholders extract value due to the fact that they assume risk of contribution to the processes that lead to the creation of value. Therefore, at the time when the companies pay back the profits, the agency theory characterizes these distribution as the as the return of capitals to the shareholders (Hoenen and Kostova 2015).
The author further develops an innovation theory for the purpose of achieving the better understanding as to how a business enterprise can work much more efficiently compared to the previous standards. The innovation process that will be able to generate such outcomes are:
Therefore, the journal article leads to the identification of three social conditions that lead to the proper management of the above listed aspects of an innovation process. These social conditions are:
The author further states that the agency theory should be replaced by the innovation theory because the proper scrutiny of the operation and performance of the economy can be carried out with the help of the innovation theory. In spite of the existence of the agency theory, instances like the concentration of wealth in the hands of the rich households and the exploitation of the middle class employment opportunities cannot be explained. Thus, it can be evidently deduced that the shareholder maximization theory that is promoted by the agency theorists have worsened the performance by the employees instead of promoting them (Madison caes et al., 2016).
Harvey Norman is a large conglomerate based out of Australia and deals in furniture, bedding, computers and consumer electrical products. Being a multinational and a listed organization, the company will in all probabilities, follow the agency theory that is the management of the organization will be striving towards the maximization of the shareholder value. However, there are certain advantages that the multinational corporation may derive by the implementation of the innovation theory (Abhayawansa and Guthrie 2014). These are as follows:
Thus, the management of all these factors will lead to the successful implementation of the innovation theory in the organization of Harvey Norman.
Conclusion
Thus, as it can be concluded from the discussion in the preceding paragraphs, the substitution of the agency theory by the innovation appears to be a beneficial proposal for the big corporate entities. This is because the implementation of the agency theory as the potential accounting theory leads to the firms being more prone to agency costs. This means that the public shareholders never in reality invest in the value creation capabilities of the company. Moreover, the agency theorists lead to the senior executives of the firm gaining a major portion of the revenue that is incurred by the firms. Therefore, in order to resolve such a issue the necessity for an innovative enterprise is inevitable. Nevertheless, the techniques adopted by an innovative enterprise to allocate the resources and returns for the growth of the organization as well as the economy make the particular theory beneficial for the stakeholders of the firms and lead to reduced agency costs.
References
Abhayawansa, S. and Guthrie, J., 2014. Importance of intellectual capital information: a study of Australian analyst reports. Australian Accounting Review, 24(1), pp.66-83.
Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of Management Review, 41(2), pp.276-297.
Bruton, G., Khavul, S., Siegel, D. and Wright, M., 2015. New financial alternatives in seeding entrepreneurship: Microfinance, crowdfunding, and peer?to?peer innovations. Entrepreneurship Theory and Practice, 39(1), pp.9-26.
Chrisman, J.J., Chua, J.H., De Massis, A., Frattini, F. and Wright, M., 2015. The ability and willingness paradox in family firm innovation. Journal of Product Innovation Management, 32(3), pp.310-318.
De Massis, A., Frattini, F., Pizzurno, E. and Cassia, L., 2015. Product innovation in family versus nonfamily firms: An exploratory analysis. Journal of Small Business Management, 53(1), pp.1-36.
Hoenen, A.K. and Kostova, T., 2015. Utilizing the broader agency perspective for studying headquarters–subsidiary relations in multinational companies. Journal of International Business Studies, 46(1), pp.104-113.
Madison, K., Holt, D.T., Kellermanns, F.W. and Ranft, A.L., 2016. Viewing family firm behavior and governance through the lens of agency and stewardship theories. Family Business Review, 29(1), pp.65-93.
Oxford, R.L., 2016. Teaching and researching language learning strategies: Self-regulation in context. Taylor & Francis.
Payne, M., 2015. Modern social work theory. Oxford University Press.
Ritzer, G. and Stepnisky, J., 2017. Modern sociological theory. SAGE Publications.
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