As per Wang, 2010, Agency theory provides information about the relationship between an agent in a business and a principal of a business. This theory is all about solving the relationship between the two and reducing the conflict of interest between both the parties. This theory provides the assistance in solving the fundamental issues between both agent and the principal. Production of agency is a new assumption of agency theory which has been recently arose. The major issue in this concept is that it is expected that one person will understand the interest of the other one. Agency theory provides us information about the interest of both the parties and the point where there can be conflict of interest and how the issue could resolve.
The major assumption of agency theory is that an agent frequently interacts with other agents in order to generate information about various business perspectives and without any human limitation. The major participant in an agency theory is an agent who is obliged to perform its duties with utmost care and diligence. In agency business the agent represent itself towards the third party on behalf of the principal and conducts business. They are required to act as per the interest of the parties. The major assumption in agency theory can be summed as:
Agency theory focuses mainly on the traditional concept of recording the transactions, presenting the same and summarizing for the company. The two aspects of agency theory which are affected by the traditional agency theory in accounting are political and professional. Accounting provides the information to the accountant about recording, analyzing and presenting the financial information. The accountant mainly deals with the professional aspect where the auditor and financial executive agree on certain procedures and assumption for measurement and disclosure. Accounting theory provides us information about the economic information and the effect of the same on the accounting procedure. Therefore accountant focuses on professional aspect in order to meet the business objectives. (Schillemans 2012)
As per Hypko, et. al., 2010, Compensation is the benefit provided to the employees in exchange for the services provided by them. It is a type of measure to motivate employees to retain them in the business and they could serve the company in a better manner. As workers are the important asset of the company so it is very important that the company could take all measures to retain them and keeping them satisfied with the incentives. Agency theory is also untouched from this concept as compensation affects the agents too. There are many ways to provide compensation to the employees in exchange of the services which can be monetary or non monetary. Compensation can be paid in cash, pension, gratuity, perquisites such as allowance, promotion etc. agency theory also explains about the compensation related to the executives pay. Many theories have been provided to explain about the compensation theory. One way of providing compensation is sharing of ownership with the agents by the executives. On the basis of relationship of agent and principal, it also provides compensation by sharing the ownership and also by delegating the decision making with the agent. (Pearson & Marler 2010)
Traditional agency theory work on the concept of serving the needs of the principal. It is required to match conflict of interest whereby the agent has to serve the needs of the principal and the principal has to provide adequate compensation. Sometimes there can be situation where there is conflict of interest between the two. Managers when act as an agent of the shareholders have to take decision where they are required to take decision as per their needs. Agency work according to the need of the agent so it is very important that the agent has requisite knowledge to serve the principal. Principal has to check about the working of the agent and his knowledge. Another criticism of this theory is the trust between the agent and the principal and their perspective towards the risk. When both the parties have different perspective towards risk then conflict arises between the two. There can be many issues such as objectives, compensation, pattern of doing work etc. these two are the criticism related with the agency theory which need to be critically evaluated. (Nyberg et al. 2010)
It is hard to compare any theory in comparison with the agency theory but one such theory which can be assumed in place of this is the shareholders theory. Companies and its executives need to focus on shareholders in order to serve them better so that the objectives of the organization are fulfilled. The basic objective of the organization is to fulfill the long term objective which can be fulfilled when the organization focus on the long term objective. The objective of the organization is to increase the profit as well as to increase the market value of the organization and overall the objective of the organization is to increase the shareholder value. The responsibility to fulfill the objective is on the executives and managers and it is crucial for them to focus on this factor. The attitude of the shareholder and the other stakeholders affect the organization and also its growth. Shareholders theory provides us the support either positive or negative to the organization. (Lan & Heracleous 2010)
Stewardship refers to the term where a person is appointed in order to manage the affairs of the entity so that the operations can be conducted in a smooth manner. It works as an agent on behalf of the employees and only difference is that it is not bounded by the geographical boundaries of the organization. in accounting the term stewardship has its different meaning which separates itself from entity and from those charged with governance in the management. Stewardship provides the assistance by improving the administration and conservation of resources. They also provide the services by safeguarding of asset and custodianship of the asset towards the organization. The term stewardship is provided in the accounting standard provided under IFRS and FASB. It also provides the responsibility of the stewardship for the efficient administration of the organization and the responsibility of steward for the same. On behalf of the employees as an agent the steward takes the responsibility of accounting as well as finance, property and other affairs. (Fayezi, O’Loughlin & Zutshi 2012)
The term valuation has great significance for any organization. It heavily influences the decisions as well as actions of the organization. It is the process of determining the value of the assets in present terms so that accurate decisions could be made. Valuation is used in various phases of business such as acquisition, mergers, and capital budgeting and other investment decisions. Various methods are used for determining value of the assets and of the organization as a whole such as net asset pricing method, market price method, and intrinsic value method. As per the respective approach the organization can choose the method for valuation. By net asset method the organization values organization on the basis of net assets possessed excluding liabilities. Under market price method the organization conducts valuation on the basis of market price of the shares or under options future or forward with reference to the government risk free securities. Generally valuation is done as on the last year or on a specific event so that proper valuation can be made. Valuation is also required under book keeping and accounting in order to access correct information of the transaction in the books. By adopting valuation strategy of the assets the organization can assess the net worth of the organization which can be reflected in the annual financial statement of the entity. (Gil-Alana, Iniguez-Sanchez & López-Espinosa 2011)
Stewardship and valuation are different in their perspective and nature. Basic fundamental of accounting is to provide correct information to the users of the financial statement. It will help in evaluating the actual worth of the entity which can be communicated to its various stakeholders such as creditors, investors etc. Valuation helps to assess the correct value of the stewardship responsibility to provide information about the usage of the resources by the steward towards the organization. Valuation process helps in performing the stewardship responsibility through valuation process. It also provides us about the management communication to the stakeholders. The stewardship provides the organization same services as that of agency.
The basic aim of this study is to provide information about the reason behind audit expectation. By audit expectation gap is the difference between the level of expectation of the users and public of financial statement and the level of commitment devoted by the auditor in conducting audit. This gap is calculated by studying the difference between the plans prepared by the auditor with the actual work conducted. This research focuses on the difference between both the perceptions. The research provides the audit expectation as perceived in Ghana as well as in Sri Lanka. This research studies the auditor’s responsibility and reliability of audit function.
The objective of the study provided by the researcher Gunathilaka is to ascertain the expectation of the society towards the auditor towards the duties and responsibility. The study considers that the expectation of the public is more than that of actual performance of the auditor. With increase in education to the investors they demand lesser about audit assurance. It is important to continuously look towards the duties and responsibility in order to reduce the gap of audit expectation. The study makes the use of bipolar likert scale to ascertain the views towards the study of expectation of the society with that of the auditor. Also the research provides that the expectation level is lower in case of investor group. (Adeyemi & Uadiale 2011)
Both the study use different variables in order to study the concept of audit expectation gap while performing audit procedure by the auditor. One research uses the sampling method to select the user of the financial statements. User will be selected as respondent for the research to be conducted. Respondent selected will be chosen to answer the questionnaire and this method was based on the availability and willingness of the respondent. As every user has its own perception to evaluate the auditor’s responsibility towards the audit procedure and the actions need to be taken by the auditor in order to fulfill the expectation gap. The respondents were chosen by different methods in order to collect the real information.
The other research in Sri Lanka used by the researcher was based on the T-test in which the sample view of different class of peoples were taken and a comprehensive test was done in order find the agreement or disagreement towards a particular view in questionnaire and the user needs to give points ranging from one to five. If the user gives point one towards a questionnaire it means that the user strongly disagrees with the view provided in questionnaire and if the user gives point five in a question that means a strong agreement is present. It helps in maintaining the external validity and comparability of evidences provided from across different countries.
Both researches use different perspective in order to ascertain the audit expectation through users of financial statement. The research conducted in Ghana was based on sampling method in which the population was selected as per the willingness and availability of the users. The questions asked in the questionnaire were also close ended. The population was selected for the research was based on the skill and prior knowledge to choose the respondents. The respondents were chosen from different backgrounds such as stockbrokers were chosen from the list of brokerage companies. As the stockbrokers were working for these companies and it will be easy to get knowledge about the different perspective of the companies. (Salehi 2011)
While the other research in Sri Lanka was selected on the same basis but on a more descriptive approach. This approach also includes collection of demographic data of the respondents. The survey instrument was sent to chartered accountants as well as auditor group. Among the number of survey instrument sent for the questions the instrument received were calculated in order to take the final decision for sampling. The objective for taking decision based on the selected population was fulfilled as the respondents were in complete knowledge about the factors of auditing procedure. This makes the research more informative and descriptive to conduct the study.
The participants for conducting the research were selected on the basis of randomly selected from the directory of persons related to the company. The participant included were chartered accountants, investors brokers which were directly in contact and were in continuous knowledge with the company. Overall population was selected randomly on the basis of directory and list provided for the selected participant. The sampling also continues with the mean of the population selected for study. Calculation of mean was followed by T-test. This approach was beneficial in calculating the size of population. The significance of the test was checked also by the Levene’s test.
The questionnaire for ascertaining the sampling method was sent to the selected to the participant and was sent to different classes of participant such as chartered accountants, clients, stock brokers and management students. The research conducted by researcher in Ghana was selected from central business district of Accra. And from the list received the questionnaire was sent to different classes among them.
Non response bias is the situation where the sampling survey is made by sending questionnaire to respondents but the response is not received within time for conducting research. This is the bias where the result received from respondents differs from non residents. This situation occurs where communication is made through mail and response is supposed to be received from the respondents through mails and the response rate for the same is very low.
In order to address non response bias various techniques are used such as comparing the response of different quartiles received by the respondents in demographic form. Other procedure which can be used to address is e mail surveys in which if response is not received they are been called to give response toward the survey which is also called non response follow up.
Both the research have been conducted by giving questionnaire to the respondent from which response have been received. The responses received in both the researches were received in adequate quantity. The responses received constitute adequate quantity of males and females. In relation to the responses sent to the participants lesser number of responses was received back. This also includes responses and non responses from the clients, chartered accountants, management audit. Overall we can say that the responses received are adequate. Both researches conducted received responses efficiently and effectively.
Both the research used different perspective for calculating the responses from different respondents. The data was deeply analyzed by providing questionnaire to the respondents. The approach adopted by the researcher Gunathilaka was more rigorous as this adopted the use of sampling along with different test performed in order to get the accurate and time bound results. For determining sampling of the given population the researcher has conducted T-test and other research and also analyzing the responses and non responses from the sample calculated. This was also followed by taking response from the responses not received through other methods so as to generate more information. Although the primary stem adopted under both the study was same as both included questionnaire on the basis of five point scales but this research conducted the research into the secondary step. To effectively conduct the research and to conduct the study of possible reasons behind the audit expectation gap. A rigorous approach was adopted by the research in this approach to ascertain the actual result of the hypothesis.
Another reason that this research has taken rigorous approach is that the researcher has bifurcated the responses received from the respondent on the basis of the age group of the males and females which was further followed by bifurcating on the basis of experience possessed by the individual. (Ruhnke & Schmidt 2014)
Although the research was conducted efficiently but then also certain flaws can be seen in conducting the research by the researcher. One flaw which can be seen is improper method for sending the responses to the respondent. Such technique could be used by which the response from the respondent could be received more effectively and in minimum time. The other flaw in the research was assessing the audit expectation gap not from the point of view of the business class persons who are in direct contact with the financial statement of the company.
References
Adeyemi, SB & Uadiale, OM 2011, ‘An empirical investigation of the audit expectation gap in Nigeria’, African Journal of Business Management Vol. 5(19), pp. 7964-7971, 9 September, 2011.
Fayezi, S, O’Loughlin, A & Zutshi, A 2012, ‘Agency theory and supply chain management : a structured literature review’, Supply chain management : an international journal.
Gil-Alana, L, Iniguez-Sanchez, R & López-Espinosa, G 2011, ‘Endogenous problems in cross-sectional valuation models based on accounting information’, Review of Quantitative Finance and Accounting, 2011, vol. 37, issue 2, 245-265.
Hypko, P, Tilebein, M & Gleich, R 2010, ‘Benefits and uncertainties of performance?based contracting in manufacturing industries: An agency theory perspective’, Journal of Service Management, Vol. 21 Issue: 4, pp.460-489.
Lan, LL & Heracleous, L 2010, ‘Rethinking Agency Theory: The View from Law’, Academy Of Management Review.
Nyberg, AJ, Fulmer, IS, Gerhart, B & Carpenter, MA 2010, ‘Agency Theory Revisited: CEO Return and Shareholder Interest Alignment’, Academy Of Management Journal.
Pearson, AW & Marler, LE 2010, ‘A Leadership Perspective of Reciprocal Stewardship in Family Firms’, Entrepreneurship Theory And Practice.
Ruhnke, K & Schmidt, M 2014, ‘The audit expectation gap: existence, causes, and the impact of changes’, Accounting And Business Research.
Salehi, M 2011, ‘Audit expectation gap: Concept, nature and trace’, African Journal Of Business Management.
Schillemans, T 2012, ‘Moving Beyond The Clash of Interests: On stewardship theory and the relationships between central government departments and public agencies’, Public Management Review.
Wang, A 2010, ‘Comparison of Real Asset Valuation Models: A Literature Review’, International Journal Of Business And Management.
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