Assumption of the traditional agency theory
The traditional agency theory explains the assumptions regarding how the experience and the ability of the human that are used to solve the issues of human obligations that is the outcome of the day-to-day communication of the production of agencies (Cavanagh et al. 2016). It considers the practical ontology while taking into account the particular importance of four types of ontological practical factors with regard to the crucial practicality. The alteration of structure and the agency’s production is the main aim of the traditional agency theory. It further, recommends various types of human agencies that are differentiated through analysing the benefits of self-advantages which in turn, hypothesize the process for the types of agencies that are produced and maintained regularly through daily communication (Kuhner and Pelger 2015). Moreover, it states the manner through which the human implement the ‘know-how’ for creating the realistic attitudes in association with the daily communication for the obligation of the knowledge in association with the concepts that are generally confined to the humans.
- It assists the managers and the owners the manner which the appropriate contractual agreements are to be selected under different circumstances and provided the best control for each aspect. This theory is known as the “Optimal control monitoring selection” (Frias?Aceituno, Rodríguez?Ariza and Garcia?Sánchez 2014).
- It provides delegate and specific quantitative and scientific approach for explaining te reason why control is so important and therefore, must be applied in the organizations. Therefore, it gives the explanation for the implementation of impressive technique for the managerial accounting and is known as organizational theory.
The main objective of introducing the “In formativeness principle” was to answer the queries with regard to the traditional agency theory. Agency theory undertakes the accumulation of further data for the efforts and skill of the agents as it can be used to improve the explanation the way for improving the fee structure of the management’s control system. This approach states the data regarding the specific action of the agent’s skill, effort and shall be considered for the contracts of compensation. The agent’s compensation is the activities of the attributable of the management’s action (Mitnick 2015). Moreover, the contract explains that the standards as compared to the budgets differentiate the probable outcomes into the favourable and unfavourable one.
- Various doubts are there for the presentation of the relations between the shareholders and the executives or the managers depending on the agency theory (Sztompka 2014).
- The agency theory are costly and not effective economical as the approach that are responsible for protecting the shareholder’s interest can hamper the strategic decision’s realization as well as can restrict the activities of the stakeholders, ignoring the shareholder’s investment plan (Thalberg 2014).
One of the alternatives of the agency theory is the stewardship theory that draws conclusions to the sociological and psychological arguments. Depending only upon the agency theory, the user cannot justify the organizational complexities (Schillemans 2013). However, the stewardship theory takes into consideration the managers as well as the directors as they have same interest as compared with the stakeholders of the organization(Farkas 2016). It further assists in solving the issues that arise on account of the fact that the agent works for others, may not have the similar opinion with regard to the best possible action and enable them to stick to the personal belief for encouraging the outcome of the transaction.
Influence of traditional agency theory on the accounting aspects
Stewardship is generally linked with agency theory and states the broader concept as compared to the resource allocation and it takes into consideration the past performance as well as the expected future performance of the organization. The main objective of stewardship theory is to provide the information with regard to the constructive dialogues to the management and the investors (Welsh et al. 2013). Thus, it is considered as the crucial objective for ensuring that appropriate importance has been given to the performance of the organization while preparing the financial statements. It also suggests that the accounting standards and the GAAP plays crucial role in forming the opinions on the financial reporting.
The valuation procedure plays an important role in measuring the value of the assets and liabilities of the organization and reporting those assets and the liabilities in the finance statement. There are various methods of valuation that can be used by the organizations for measuring their assets, for instance, the fair value method, the present value method and the historical valuation method. The valuations are carried out in accordance with the accounting rules and accounting standards and it requires the suitable judgements and assumptions of the accountant (Bingham and Kiesel 2013). However, the method of valuation is chosen depending upon the circumstances; purpose and structure of the organization are used for various purposes like tax assessment, measuring liabilities, valuation of the firm and assessing the organization’s performance.
The discussion regarding the agency theory states that there are some difficulties in pursuing the valuation usefulness and stewardship simultaneously. However, as per the recent evidence, the positive correlation among the two objectives has been identified (Drymiotes, and Hemmer 2013). These findings support the decision of FASB/IASB to include the stewardship approach within the valuation usefulness under the modified conceptual framework. It is further identified that quality of accounting that involves the relevance and freedom for the error has the same impact on valuation usefulness as well as the stewardship theory. Moreover, prudence on the accounting system has various consequences for the objectives as it does not have any impact on the valuation usefulness and negatively affects the stewardship. Therefore, doubts are there regarding the view of the standard-setters that the stewardship theory automatically will be met through focussing on the valuation usefulness (Kuhner and Pelger 2015).
Audit expectation gap in Sri Lanka – The role of policy makers
Aim of the above mentioned research is analysing the disparities between the auditors and society that are linked with the responsibility, function and usefulness of audit. the other aim were to identify variances among the auditor’s role as compared to the expectation of users of financial statements in Sri Lanka like the potential investors, shareholders, creditors, debtors and the consumers. Moreover, the aim of the research was to analyse the factors for minimising the expectation gap (Gunathilaka 2012).
Influence of traditional agency theory on the compensation approach
Aim of the above mentioned research was to evaluate the gap in expectation of audit in Ghana and is concerned about the auditor’s role for detection and prevention of fraud and the impact of internal control in the organization under audit. Thus, the main aim is to find out the gap under expectation of audit from the aspect of stockbroker and auditors (Agyei, Aye and Owusu-Yeboah 2013).
From the objectives of the research, the research hypothesis is established as follows –
H0: The auditor’s responsibility and internal control will not be competent for identifying and preventing the frauds associated with the financial statement
H1: The auditor’s responsibility and internal control will be competent for identifying and preventing the frauds associated with the financial statement
Audit expectation gap in Sri Lanka: variables of this research were measured through allocating the score one for strong disagreement and the score five for strong agreement. For the research, the management students, investors, chartered accountants and investors were selected as respondents (Gunathilaka 2012). This will further help the researcher to perform a descriptive study according to the variables selected.
An assessment of Audit Expectation Gap in Ghana: variables of this research were measured through usage of statistical package for Social sciences (SPSS). Closed-ended questions were used for study and score of one to five were assigned for strong agreement and strong disagreement (Agyei, Aye and Owusu-Yeboah 2013).
Audit expectation gap in Sri Lanka: scale of five-point bipolar Likert was used for the research questionnaire for getting the feedback from the participants. The participants were asked to tick the chosen option in the provided space in the questionnaire (Gunathilaka 2012).
An assessment of Audit Expectation Gap in Ghana: non-probability method of sampling was used for this research. Both purposive as well as convenient methods were utilized. The purposive approach was used for the financial statement users like investors, creditors and shareholders’ whereas, the convenient methods used for the respondents of the research survey (Agyei, Aye and Owusu-Yeboah 2013).
Audit expectation gap in Sri Lanka: The survey questionnaire was send to the 150 chartered accountants based on the random selection from the directory of the chartered accountants. The questionnaire were further issued to 150 professional accounting clients, 100 management students and 150 stockbroker investors (Gunathilaka 2012).
An assessment of Audit Expectation Gap in Ghana: the respondents were mainly the auditors and the stockbrokers who were invited from Greater Accra. Most of the invited participant was from central business district from Accra. Stockbrokers were selected through brokerage firms that are listed under the stock exchange of Ghana (Agyei, Aye and Owusu-Yeboah 2013).
Criticism of the traditional agency theory
Audit expectation gap in Sri Lanka: Questionnaires were distributed to 150 investors through stock brokers and to others through random distribution (Gunathilaka 2012).
An assessment of Audit Expectation Gap in Ghana: The survey instruments were personally distributed to each of the respondent (Agyei, Aye and Owusu-Yeboah 2013).
In some cases, all the chosen members for the research do not wish to answer or send the feedback form. The non-response bias is characterized as the bias emerging from the circumstance where the perspectives of the respondents shift from that of the non-respondents. The reason of non-response might be as per the following –
- The focused participants are not generally possible to reach
- Some members just neglect to return back the questionnaire
- The respondents were not quick to answer the inquiries incorporated into the research
- The respondents had less thought with respect to the appropriate responses of the inquiries
- The strategy pick was not suitable for carrying out the study, for instance, if the old matured individuals are made a request to send their feedback through online application, clearly the response rate will be decreased (Hashimoto et al. 2013).
For the study topic “An assessment of Audit Expectation Gap in Ghana” – out of total questionnaire sent to the participants, some were returned back from each group and from the total return 20 were send back to the respondent again for expressing their view. The final non-respondent under both the research were communicated through e-mail and thereafter, who still not responded were considered as non-respondents and were not considered for the result. Though there is no specific relation among biasness and non-response, it is crucial to have an idea of the impact of non-response if the size of the non-respondents is significant.
Audit expectation gap in Sri Lanka: The research had overall 252 responses that reveal the response rate of 45.8%. The respondents involved sample of 52 chartered accountants, 58 business managers, 121 bachelor degree holder, 88 company’s stock holder, and 54 from the others (Gunathilaka 2012).
An assessment of Audit Expectation Gap in Ghana: Out of the 50 questionnaires, 35 questionnaire were returned back by stockbrokers and 30 questionnaire were returned back by auditors and out of total returned, 20 usable questionnaires again send to each of the groups of stockbroker as well as auditors for filling-up (Agyei, Aye and Owusu-Yeboah 2013).
Audit expectation gap in Sri Lanka: variables of this research were measured through allocating the score one for strong disagreement and the score five for strong agreement. For the research, the management students, investors, chartered accountants and investors were selected as respondents (Gunathilaka 2012).
An assessment of Audit Expectation Gap in Ghana: variables of this research were measured through allocating the score one for strong disagreement and the score five for strong agreement. For the research, the management students, investors, chartered accountants and investors were selected as respondents (Agyei, Aye and Owusu-Yeboah 2013).
- Non-probability method of sampling was used for this research. Both purposive as well as convenient methods were utilized. The purposive approach was used for the financial statement users like investors, creditors and shareholders’ whereas, the convenient methods used for the respondents of the research survey.
- Questions were close-ended that means, it put the limitation on the expression of views of the respondents and they were obliged to answer only in form of ‘Yes’ or ‘No’. This type of questions can also manipulate the view of the view of the respondents and limit it to the preference of the surveyor.
Reference
Agyei, A, Aye, BK and Owusu-Yeboah, E 2013, ‘An assessment of audit expectation gap in Ghana’, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3, no. 4, pp. 112-8.
Cavanagh, A., Freeman, S., Kalfadellis, P. and Tamer Cavusgil, S., 2016. How do subsidiaries assume autonomy? A refined application of agency theory within the subsidiary?headquarters context. Global Strategy Journal.
Cordery, C.J. and Sinclair, R., 2016. Decision-Usefulness and Stewardship As Conceptual Framework Objectives: Continuing Challenges.
Drymiotes, G. and Hemmer, T., 2013. On the stewardship and valuation implications of accrual accounting systems. Journal of Accounting Research, 51(2), pp.281-334.
Farkas, G., 2016. Agent-Principal Problem, Stewardship Theory And Behavioural Agency Model In The Explanation Of Family Business Performance. In Conference Proceedings DOKBAT (p. 135).
Frias?Aceituno, J.V., Rodríguez?Ariza, L. and Garcia?Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), pp.56-72.
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Hashimoto, S., Kawado, M., Kawamura, T. and Nakamura, Y., 2016. Effect of non-response bias on estimates of the numbers of patients with intractable diseases based on nationwide epidemiological surveys of Japan. Fujita Medical Journal, 2(3), pp.55-58.
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Mitnick, B.M., 2015. Agency theory. Wiley Encyclopedia of Management.
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Studer, J., Baggio, S., Mohler-Kuo, M., Dermota, P., Gaume, J., Bertholet, N., Daeppen, J.B. and Gmel, G., 2013. Examining non-response bias in substance use research—are late respondents proxies for non-respondents?. Drug and alcohol dependence, 132(1), pp.316-323.
Sztompka, P., 2014. Evolving focus on human agency in contemporary social theory. Agency and structure: reorienting social theory. Londres: Routledge, pp.25-60.
Thalberg, I., 2014. Enigmas of agency: Studies in the philosophy of human action (Vol. 87). Routledge.
Welsh, D.H., Memili, E., Rosplock, K., Roure, J. and Segurado, J.L., 2013. Perceptions of entrepreneurship across generations in family offices: A stewardship theory perspective. Journal of Family Business Strategy, 4(3), pp.213-226.
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