In this setting the managers serve as agents for the

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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...
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This note was uploaded on 12/08/2012 for the course ACCT 564 at Washington University in St. Louis.

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