Agency theory can be linked to the relationship between the principal that is the company with its agent (executives). Agency theory can be linked to that financial economics that stresses on the interest that has an element of conflict in the people nature that contains a similar nature of interest in the assets. The agency theory rests upon certain assumptions. Firstly, the directors, managers, as well as the executives have not shareholding in the company and they strive to attain the goal of the company. Hence, they should not be made responsible for their decision-making capacity.
Secondly, the executive is correlated in a direct manner with the performance of the managers and this link enables the company in the achievement of the goals. Hence, it is needed to be strengthened. Thirdly, the agency mainly stresses on the adjustment process of goals that are in conflict between the agent and the principal and to ensure that the performance of the agent is in tune with the principles of the company (Bagozzi et. al, 2013).
Two aspects of accounting influenced by the agency theory are:
The agency theory influences the financial management and risk tolerance. It needs to be noted that every investor is associated with a different risk tolerance level. When it comes to agency theory, there are strong chances that principals and agents have a high level of risk in terms of tolerance and can impact the level of understanding and failure to agree on the decision of investing (Fehr & List, 2004). For example, when it comes to shareholder-executive link, the executive may have a wish of acquiring the companies that are struggling so that increasing market share can be attained. However, this might be a risky venture for shareholders.
When it comes to the concept of finance, the agency relationship is fiduciary implying that the agents are needed to act in the best interest of the principals (Mock, 2010). The fiduciary responsibilities highlight an agency relationship and lead to strong security of the principals. The financial planner contains the power of attorney for an individual client (Cheng & Warfield, 2005). For example, the planner conducts financial transactions on behalf of the individual without the permission or awareness. As per the example, the financial planner is needed to make a decision that works in the best interest of the client instead of doing correct things with the money of company for personal gains.
The assumptions of the agency theory have a major influence on the Executive compensation. The executives are always in the hunt for buying of cheaper raw materials for the process of production as a bonus will be received for reducing the cost (Fitzgerald, 1998). However, in the long run, it will be harmful to the smooth functioning of the company and will damage the company’s goodwill.
Secondly, the strategies of risk mitigation considered by the executives and adopted might not be fruitful to the shareholders. The Executive may not be comfortable in spending towards the research and development activities. It might be a strategic step however, it can destroy the stakeholder relationship (Lowe et. al, 2002).
Hence, from the above discussion, it can be said that the agency theory of executive compensation might not bring a positive result.
The main criticism of the agency theory is the disagreement that is present in the agency cost. It is difficult to ascertain whether the agency cost should be linked to debt are greater or when linked to equity. Agency costs are additional expenses incurred so that the agents work in the best interest of the company. The existence of this cost proves to be a problem (Pepper & Gore, 2014).
Secondly, the theory lacks in power as compared to explanation. It means that the theory is more concerned with the description and could not provide an explanation in detail apart from the definition. Therefore, the criticism is directed more towards the application of the theory as it fails to provide a solution and more theoretical in approach (Niemi & Sundgren, 2012). The theory is abstract in nature and is different from the reality. It is even a strong simplification of the behavior of the human. It is of the opinion that the self-interest is unable to provide all the explanation of the motive that the people have. Therefore, it is unable to describe the human behavior in every scenario.
The alternative to agency theory is the stewardship theory. The theory of stewardship rejects the assumptions framed by the agency theory where the managers perceive that the satisfaction of the goals of the shareholder’s goals in their personal interest. It needs to be noted that separation of ownership, as well as the corporate control, does not lead to the conflict of goals (Hartzell & Starks, 2003). When it comes to the agency theory, it is believed that managers when left unattended make decisions as per the self-interest. Further, the stewardship theory overlaps this problem in the sense that if provided authority and responsibility the agent can act on the principle behalf. Therefore, when it comes to stewardship the major emphasis is on the model of human traits (Langer, 2011). This is absent in the case agency theory and agency stresses on the fulfillment of own goals.
Stewardship has widespread implication when it comes to recognition, measurement, as well as presentation. The presence of this theory has provided variety in the level of thinking when it comes to the accounting issues (Nau, 2010). When capitalization of acquisition cost needs to be done when it comes to a business combination it can be under stewardship. When it comes to a business combination. It is proposed that it would be expensed because the booking of the acquisition will be done at an initial level at the fair value of the business that is acquired. It is tagged as an approach to resource allocation. When it comes to the approach f stewardship, the users will hold management accountable for every cost that is linked to the acquisition that is in the year of acquisition and in the further years striving to witness a return on total cost (Hernandez, 2008). Therefore, in the further years of acquisition, it is of vital importance to know the acquisition total cost. It reflects the present value of an acquired asset to project the appreciated value. Hence, impairment provides the additional information about the decision making of the management.
The main objective of financial reporting is to provide high-quality information pertaining to finance and that links to economic entities and is highly useful for the economic decision making. The valuation focus plays an important role because comprehensive research services are provided that influences the overall reporting process (Burns & Kedia, 2006). Moreover, valuation focus is linked to appraisal and procedure thereby leading to an enhanced level of practice and these benefits the activities of the company at large. The quality of the information is of high caliber because valuation focus helps in the strong process of appraisal. It enhances the total market efficiency.
Pursuing stewardship and valuation together is a complex issue because both are directed towards a different set of action. Stewardship focus on the problem that if responsibility is provided to the agent then he can act on behalf of the principle (Kuhner & Pelger, 2015). Therefore, the stewardship balances on the concept of functioning and responsibility. On the valuation is more concerned with the appraisal and evaluation which needs to be done for a better financial prospect. However, if stewardship is applied that it automatically defines that the agent will undertake measures that will help the principle (Bushman & Smith, 2001). No need of valuation arises in this scenario and hence, both should not be used together.
In the paper of Agyei et. al, (2013) the research aim is to evaluate the presence of audit expectation gap in Ghana. The study considered the instrument utilized by Best & Tan (2001). The study stressed on the audit gap and more specifically the responsibility of an auditor that pertains to the detection of fraud and its prevention and to lay a strong mechanism of internal control (Agyei et. al, 2013).
The main aim of paper by Gunathilaka (2012) evaluates the differences that exist between the auditor and the society in terms of responsibility and reliability of the function of an audit and the utility of audit (Gunathilaka, 2012). The main stress of the paper is to project about the public awareness and increasing the performance of auditor and this must be the focus of the policy makers that will enable the eradication of the misconception.
Claim: Auditor is responsible and must trace all fraud
Null Hypothesis: Auditor is responsible for internal control and not every aspect of fraud detection
Only 2 options
Reject Null Hypothesis: Auditor is responsible for fraud detection in the organization
Not reject: Auditor responsible for overall fraud detection
When it comes to the article Agyei, the measurement is done by way of Likert scale and the items in the scale are ranged from least to highly satisfied. Hence, it is an ordinal scale and is different from the nominal scales. The ordinal scale leads to a comparison of the degree of which the two subjects contains the dependent variable. In this scenario, convenient sampling was utilized to select the respondents who responded to the questionnaires (Block, 1993). The process of convenient sampling was used because it depended entirely on the respondents, the auditors and the presence Likert scale were used for answering the question (Agyei et. al, 2013). Ordinal scaling was used because items were required to be ascertained on a single dimension and arrayed with an interval that is equivalent. Basically, an ordinal level of measurement is used when the observations need to be classified that are not only mutually exclusive and exhaustive but the elements have some explicit link attached to it.
In the article of Gunathilaka, the ratio scale is used that measures the variables in an informative manner. It is an interval scale with the additional benefit of zero position that stresses on the unavailability of the quantity that needs to be measured 9 Gunathilaka, 2012). The Journal of Agyei uses a ratio scale that is the rolling up of the other three scales. Just like the nominal scale, it contains the labels for each object ( the groups and the level of education are provide clearly). Going by the ordinal scale, the ordering of the objects are done (gender and occupational experience). As per the interval scale, the similar difference at two places on the scale contains the same difference.
Going by the discussion, it can be said that the ratio scale approach is more rigorous in nature. As the name indicates, the meaningful ratio can be done on a ratio scale and hence, the entire study becomes meaningful. It is an informative scale and hence the presence of this scale leads to a better course of study and derive at a proper course of action.
In the journal of Agyei, the target population consisted of auditors and stockbrokers that pertain to Greater Accra region. The respondents were the auditor selected from Accra region while stockbrokers were from the Ghana Stock Exchange (Agyei et. al, 2013).
In the journal of Gunathilaka, the target population consisted of 150 chartered accountants, auditors, business managers, etc and 100 students of management. The selection was random in nature when it comes to the professionals.
The choice of the population in both the journals is done with precision because the population selection was done in tune to the subject of the journal. The journal needed auditors, professionals, managers, stock brokers for answering the questions and hence, the selection was aptly done.
The selection of participants was done in tune to the range of questions and the range of answers. Since, both the journal dealt with the audit expectation so it was obvious to select professionals and other related personnel’s that was done accordingly. In Agyei, 50 questionnaires were sent to the respondent group and convenient sampling was used. In the case of Gunathilaka 150 questionnaires were sent randomly to the professionals (252 respondents).
In the case of Agyei, the questionnaires were close ended and the perception of the respondent group in terms of duties and responsibilities of auditors were extracted on the other hand, in the journal of Gunathilaka the questions pertained to the responsibility of an auditor (Gunathilaka, 2012). The statistical package was used for obtaining the data.
Non-response bias happens when a vital difference exists between the ones who responded to the survey and ones who did not. It might happen for various reasons such as when people fail to participate, the survey might be constructed in a poor manner, and the nature of the survey determines the response rate. Some people fail to return the survey. Further, the certain group remains more concerned with the answer. If the genre is to their taste, the answer might be dealt with precision.
Both the study has selected their target as per the demand of the study. Fir, instance, the answer to the questions regarding auditor expectation in Gunathilaka journal can be best described by the professionals, chartered accountants and hence, the same was selected that address non-response bias. On the other hand, in the case Agyei, the respondents consisted of auditors, as well as stockbrokers leading to addressing of non-response bias.
The response rate is the journal of Agyei was inadequate because 50 questionnaires were distributed to each group of respondents that is the auditor and stockbrokers (Agyei et. al, 2013). Out of it, 30 were returned from the auditors and 35 from the stockbroker side. In this regard, the response rate fell on the shorter side. The same has been witnessed in the case of Gunathilaka where 252 responses were received that projects a response rate of 45.8% Going by the study, this response rate were adequate for the study (Gunathilaka, 2012).
In the case of Agyei, the study depended on the primary data and questionnaires were used to collect descriptive, as well as explanatory data. The collected data were evaluated in a descriptive manner with the help of statistical package for social sciences (SPSS version 14.0).
In the case of Gunathilaka, the mean score was received for every statement that is present in the instrument that tested the responsibility of an auditor. The usage of t-stat and its mean differences were done (Gunathilaka, 2012). The mean score was computed from every instrument of the survey. There was six statement of the instrument that tested the reliability of audit work./
The flaw that was observed in the case of Agyei is that the study was limited to stockbrokers who are users of the financial statements and hence, the result might fail to answer from the perspective of every financial statement user (Agyei et. al, 2013). Hence, the study should include more users of the financial statements for a better course of study. In the study of Gunathilaka, the samples were utilized from the people who dwell in Columbo and linked to the corporate sector. Specifically, the major thrust was on the business linked respondents (Gunathilaka, 2012). However, samples from another segment of the population might fetch a different result.
References
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Anbar, A & Eker, M. 2010, ‘An Empirical Investigation for Determining of the Relation between Personal Financial Risk Tolerance & Demographic Characteristic’, Ege Academic Review, vol. 10, no. 2, pp. 503-523
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Hartzell, J.C & Starks, L.T 2003, Institutional investors and executive compensation, Journal of Finance, vol. 58, pp. 2351–2374.
Hernandez, M 2008, ‘Promoting Stewardship Behavior in Organizations: A Leadership Model’, Journal of Business Ethics vol. 80, pp. 121–128
Kuhner, C & Pelger, C 2015, ‘On the relationship of stewardship and valuation—an analytical viewpoint’, Abacus, vol. 51, no. 3, pp. 379-411.
Langer, S 2011, Factors Affecting CFO Compensation, Strategic Finance Magazine, vol. 81 no.9, pp. 38-44.
Lowe, K.B, Milliman, J, Cieri, H.D, & Dowling, P.J 2002, International Compensation, Oxford press.
Mock, T 2010, ‘A Ten-Country Comparative Analysis’, Human Resource Management, vol. 41, no. 1, pp. 45-66.
Nau S 2010, ‘Adopting Fairer Compensation’, American City & County, vol. 114, no. 1. pp. 10-21
Niemi, L & Sundgren, S 2012, ‘Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs’, European Accounting Review,vol. 21, no. 4, pp. 767-796.
Pepper, A & Gore, J 2014, The economic psychology of incentives: An international study of top managers. Journal of World Business, vol. 49, no.3, pp. 350-61.
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