BUSINESS
Eunice D61-83846-2016. Final Project 13-12-2017-unlocked.pdf

222 agency theory agency theory was formed by stephen

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2.2.2 Agency Theory Agency theory was formed by Stephen Ross and Barry Mitnick. Ross developed an economic theory of agency whereas Mitnick developed institutional theory. All the same, the approaches of Mitnick and Ross were both based on similar concepts. Ross discovered the study of an agency about the problem of compensation where the agency
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11 was listed regarding incentive problem essence. Mitnick, on the other hand, added the commonly used insights for institutions around the globe which have evolved into dealing with institutional agencies while responding to the imperfect relationship of companies (Shapiro, 2005). The agency theory uses the allegory of agreement to conceptualize three problems that emerge from the first delegation of duty to an agent in a case where the principal has little direct lapse (Bergen et al., 1992; Eisenhardt, 1989). The first setback is Goal irregularity when the director perceives that the agent's goal arises from the principal interests. The second issue is Risk asymmetry, where the principal observes that the agent may possess different attitudes towards risk and consequently differing risk decisions. The third crisis is information unevenness which occurs when one party holds information that the other party desires but do not have. Tipuric (2008) supports the agency theory to be a framework for analyzing conflicting interests between the primary stakeholders and development of mechanisms for resolving conflicts. He, however, observed that the determination of principal-agent relationship depends on the concurrent and differential interplay among the goal, risk and information asymmetries rather than anyone. Carlson et al. (2008) observed that goal asymmetry arise when an agent fails to understand Principal's requirements leading to failure to align their actions with the principal’s demands. An agency relationship exists in a situation where principle delegates work to an agent. In this study, the international audit firms may be seen as agents who have been entrusted audit and accountancy assignments by their respective clients. The individual clients are consequently regarded as Principals under the agency theory, and they form part of the business environment. Audit and accountancy services are however not necessarily
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12 performed based on the Principal's interests but according to international auditing standards, international accounting standards, and international financial reporting standards and laid down policies and procedures. This could result in goal asymmetry problem particularly when the purpose of the principal is not aligned with these criteria. The auditors are required to make independent audit opinion on the financial statements examined based on their professional expertise without taking into consideration the entire interest of the principal or client. There are circumstances where the auditor's independence has been compromised resulting to an accountant giving a clean opinion
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