This preview shows page 1. Sign up to view the full content.
Unformatted text preview: o are
not directly involved in running the business (stockholders) and the use of professional managers hired by the owners to run the corporation on a day-to-day
basis. In this setting, the managers serve as agents for the owners (sometimes
referred to as principals) and fulﬁll a stewardship function by managing the corporation’s assets.
Accounting and auditing play important roles in this principal–agent relationship. We ﬁrst explain the roles of accounting and auditing from a conceptual
perspective. Then we’ll use an analogy involving a house inspector to illustrate
the concepts. First, it is important to understand that the relationship between
an owner and manager often results in information asymmetry between the two
parties. Information asymmetry means that the manager generally has more
information about the “true” ﬁnancial position and results of operations of the
entity than does the absentee owner. Before continuing, stop and consider the
following questions. What negative consequences could this information asymmetry have for the absentee owner? How...
View Full Document
This note was uploaded on 12/08/2012 for the course ACCT 564 at Washington University in St. Louis.