• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Agency Theory

Extracts from this document...

Introduction

During this essay an attempt will be made to underline the importance of Agency Theory within the accounting practice. The area that will be discussed will be, Agency Theory its self, Agency problems, Corporate Governances, Scandals in the accounting practices and the general contribution that Agency theory has had within the existing practice of international accounting. The development of Agency Theory An Agency Theory describes the relationship between two individuals regarding delegating decision making. The theory also known as "principle - Agent theory explains the relationship between Principle such as a share holders, and Agents such as companies executive. In this relationship the principle hires the agent to perform work. In the mid 1700s Adam smith noted the troubling aspect between the agent and the principle. In his first book "The Theory of Moral Sentiments 1759" Adam Smith expressed the view of human motivation and argued that the struggle is described with term he used "Passions" and "Impartial spectator" which I will provide further clarification. In effect by the early 1970s it had become its own subject of economic enquiry called "Agency theory" with significant papers published Jensen and Meckling 1976. The Theory effectively restated the Smith puzzle as to how to acquire an agent (Executive-manager) ...read more.

Middle

It was stated that a presumably unknown person replaced Tylenol Extra-strength capsules with cyanide laced capsules, once sealed and delivered seven people had purchased the item and died within 48hours, at which time Tylenol an alternative for aspirin was the leading product in its field by which they had held 37% of market share (Berge, 1998). The chairman James Burke first strategy guidance was "how to protect the people" and second "how do we save this product"; which resulted in a national recall of every capsule regardless of the financial implications it had. As we measure the true corporate environmental behaviour the company has, we look at how the risk for public safety was regard far higher than their financial growth. With the help of media coverage and sympathy i.e. compensation to the victims family; today the firm has fully recovered and is considered as an examples of how organizations should react, which was demonstrated by taking the decisions to act promptly when confronted with a crisis. Triple bottom line accounting means expanding the traditional reporting framework to take into account the ecological and social performance in addition to the financial performance of the business. This phrase was used by John Elkington in 1994, which was later expanded on in his 1998 book "Cannibals with Forks: the Triple Bottom Line of 21st Century Business". ...read more.

Conclusion

The report chaired by Derek Higgs in 2003 aimed towards corporate governance directed by the UK government. Complimenting the combined code by recommending annual reports as well as suggesting that non executive directors should meet once year without the participation of the directors as this was the purpose of the Higgs report. Overall the contribution of Agency Theory towards accounting practices is quite vast. The relationship developed between two parties is relevant in order to achieve high levels of success just as long as the interests between both are aligned and not at the expense of one another. Accounting practice has a close relation to factors involved within the theory such as information asymmetry. To develop accounting policies to be beneficial on a wider scale, the increase knowledge of the self-interests of the agents may be a reliable source in order to achieve and improve relevant standards and policies. Not only has Agency Theory been an impact on the accounting practices but the effects of Enron and WorldCom and the scandals that occurred have proven to change the accounting practices by which the Sarbanes-Oxley Act 2002 was introduced. With companies moving more gradually towards an understanding of the value created by good corporate governance. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. ABS-CBN Financial Analysis. ABS-CBN Corporation is a Filipino media conglomerate and the country's largest ...

    Is cash being generated by sale of fixed assets and debt? No new capital infusion? For 2011 and 2010, the cash is generated mainly by debt. There was no capital infusion though a large part of investing activities in 2011 was due to the proceeds from sale of Sky Cable PDRs and Issuance of Convertible Note.

  2. The Importance of Communication in Accounting. Todays accountant, especially within the managerial accounting realm, ...

    Well thought out questions also help insure and clarify perceptions on the part of all parties involved. Questions also show another that one is listening and helps with the listening process itself. (Walters, 2001) When auditors do their job correctly, management will receive accurate information in regarding risk identification and

  1. Livent Inc.: Accounting for Pre-Production Costs

    A work that is an origination has the greatest degree of risk associated with it and therefore employing even the current policy on it may be viewed as too aggressive of an approach. It would be difficult to justify 3450.21's criteria of a future market being clearly defined since Livent would be venturing into an unknown work.

  2. Microsoft Audit Planning - 8 Steps

    and Microsoft 365), products and services (Microsoft Office 2013, Xbox), hardware and devices (Personal PCs, Servers) which delivers new opportunities, greater convenience, and enhancement to both business and individuals. They trade their business worldwide and generate their revenues from their research and development, as at 30 June 2013, they have almost more than 100 offices around the world.

  1. Critical review on Accounting for varieties of capitalism: The case against a single set ...

    For example, Van Tendeloo and Vanstraelen (2005) found that regarding to earnings management German firms applying IAS do not exhibit remarkable differences, when compared to those following German standards. It seems that the advantages of enforcing accounting standards convergence for all types of capitalism are indefensible.

  2. Analysis Project, I have to decide to make a financial and business comparison ...

    nearly by 36.09% since 2007, as compared to 14.94% of M&S. Its investing and finance policy enabled to enjoy a steady momentum of 23% over three years for its dividend per share, which was mainly due to the capital structuring and relying on equity finance.

  1. The purpose of this report is to give our client-Sobeys Inc.s board of directors ...

    Opening balance sheet transitional provisions 3. Financial Instruments standards. 4. Investments in associates, joint ventures or subsidiaries 5. Goodwill and other intangible assets not subject to amortization ? impairment testing 6. Disclosing management compensation. The most important difference is that IFRS requires private entities to give more in-depth disclosure

  2. Accounting & Its Regulatory Framework of Scomi Group Bhd

    Quick asset (acid test) ratio ?Acid test ratio refers to key measure of a company liquidity that exclude the inventories or stock to be more focus on the liquidity of assets per dollar of liabilities? (Businessdictionary, 2010). In 2005 Scomi had RM1.10 and increase to RM1.22 of liquid assets per

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work