This study focus on the issues affecting accounting practices in the contemporary business world. Some of the issues being addressed are the applicability and validity of the agency theory, the concept of stewardship as well as the executive compensation. The main focus is the impact of the listed factors on the relationship of different stakeholders as well as the performance of corporates. The paper is divided into three parts which each part addressing each factor listed above.
Question 1: Articles Analysis (Mitra et al. (2017) and Kuruppu et al. (2015))
- Table 3: Sri Lanka research
Besides disclosing their financial statements and reports in their online websites, the listed Sri-Lankan Companies also disclose the information of their background and the products and services they offer (Kuruppu, et al., 2015, p. 75). The information can be extracted from the Table 3, panel A and B. The companies are much interested in increasing their market share, customer base, and sales volume. The information on the products and services offered by the companies are taking the lead on the general disclosure of information followed by background details. The information explicit that companies are also interested in attracting more investors hence the disclosure of their success story. Lastly, Panel B shows the disclosure of corporate information on the online website is influenced by the level of competitiveness in the industry a company is operating
- Population and Sampling
The article by Mitra et al. (2017) used a sample of 268 Bangladesh companies while an article by Kuruppu et al. (2015) on the disclosure of financial information on the online website used the entire population of 244 listed companies. The use of sample and population in the research have their respective advantages and disadvantages. Using the entire population in a research enhance the reliability, accuracy, and credibility of the findings. Likewise, the technique ensures that the vital data is not omitted hence minimizing biases (Mitra, et al., 2017, pp. 25-30). However, application of the entire population is costly and time-consuming when collecting data. In the other hand, sampling saves time, avoid work monotony, allow collection of accurate data in lesser time, and ensure gathering detailed information. However, sampling is based on researcher’s judgment. Important data might be omitted hence reducing the accuracy level. Lastly, when improper sampling technique is selected, the whole research process is jeopardized.
- The more appropriate approach
In studying the disclosure of financial information on the corporate online website, reliability, accuracy, and credibility are fundamental. The researcher should collect detailed data within the limited research budget, time and the schedule. The information collected should be inclusive to minimize the omission of crucial data/ information. Based on these factors, the sampling method should be used over the entire population. It increases reliability, credibility, and accuracy of findings within the research schedule, time and cost (Zelenka, 2010, p. 43).
Question 2: Agency theory, stewardship, and executive compensation
- The assumptions of traditional (positive) agency theory
The agency theory addresses the existing conflicts of interests that arising from different parties who have different conflicts on the same asset. Most conflict arising from shareholders (principal) and the managers (agent) of a company. The theory is applied in solving the agency problems as well as the tolerance risks that are likely to arise on the relationship between the principals and agents (Higson, 2003, p. 67). The theory is based on three assumptions. First, the managers (agents) should always act in the interest of the shareholders (principals). Second, the interest of the principals is always morally acceptable. And third, the theory allows the managers to act unethically as far as their contract is fulfilled. Finally, it should be noted that the assumptions go contrary to the practical business ethics model. Therefore the agency theory holds that the shareholders’ interests should overrule other interests (Higson, 2003, p. 73).
- The influence of agency theory on the structuring of compensation packages
The agency theory can be used to align the divergent interests between the agents and the principals. That is, with the application of the theory, the compensation plan can be used to align the interests and goals of corporate’s stakeholders through the reduction of the agency costs (Kleiman, 2000, p. 56).
Agency theory proposes two compensation plans i.e. the outcome-oriented (profit sharing, commissions, and stock options) and behavioural-oriented (merit-oriented). According to the outcome-oriented compensation, compensation increases (decreases) when the profit goes up (goes down). Therefore, the agents would work hard to increase the profit leading to increased compensation and in return maximization of the shareholders’ wealth. Likewise, behavioural compensation plan states that the principals should invest little funds to monitor the actions of the agents (Henderson, 2003, p. 87). However, the operational risks are not transferred to the agents but the compensation package is provided based on the least probable outcome of the established objectives/ goals.
- An employee’s attitude to risk and their desired compensation package
The risks associated with a certain job influence the desired compensation package by an employee. Employees believe that riskier and more demanding jobs should have more pay compared to the less demanding and riskier ones. The compensation packages have a direct influence on an employee’s attitude and behaviour. If a compensation package is deemed to be fair and good for the employees then they are motivated to increase their commitment to increase the company productivity. Unless a good compensation plan is offered the employee’s turnover is high because no one would enjoy working of the company (Milkovich, 2005, p. 38). Compensation package helps in accomplishing a company’s goals as well as running effectively. A compensation package not only entails salary and wages but the fulfillment of self-actualization and psychological needs as well. Thus compensation package is meant to serve its purpose: Offer fair compensation and positively influence the employees’ behaviours and attitude towards the company (Henderson, 2003, p. 91).
- Internal problems a company might face if executive compensation is viewed as excessive
Excessive executive compensation is likely to escalate the conflict between the shareholders and the managers especially when the firm is performing poorly. The agency theory states that the shareholders’ wealth should be maximized. However, managers expect to be offered good compensation packages as an appreciation of their effect in maximizing the owners’ value. The shareholders might result to high compensation packages. However, during the hard economic times, the shareholders might result into trimming the managers’ compensation packages. The action would lead to a misunderstanding which would further affect the productivity and effecting operation of the company (Henderson, 2003, p. 109).
Likewise, non-executive employees might also demand a pay increase. When the excess compensation packages offered to the executive becomes public, other employees would feel under-compensated. They are likely to be demotivated unless their earnings are increased. Increased on the compensation packages would lead to increased expenses and reduced revenue. In the other hand, if the demand for increased pay I declined, trade union would ask their members to withdrawal their service until a mutual agreement is reached between them and the employer (Milkovich, 2005, p. 93).
- One assumption of agency theory and explain how it has been challenged
One assumption of the agency theory is that the managers (agents) should always act in the interest of the shareholders (principals). The assumption holds that the owners’ value should be maximized while the agents’ benefits minimized. However, the assumption is not realistic in the contemporary business world. The divergent goals and interests held by different stakeholders and the attitude towards operating risks make it difficult to accept the theory (Higson, 2003, p. 117).
For instance the assumption advocates for disregarding of agents’ opinion, disrespecting and distrusting the agents, ignoring the ethical aspects of running the business and overlooking solutions which are consistent with mutual needs of the principals and agents. For successful operation of an organization and resolution of the agency problems then the validity and significance of the agency theory are reduced.
- Two alternative theories ofagency theory and the deficiencies in agency theory that the alternative theories attempt to overcome.
The agency theory disregards the agents’ opinion, disrespect and distrust the agents, ignore the ethical aspects of running the business and overlook solutions which are consistent with mutual needs of the principals and agents. The shortcomings have reduced the reliability, validity, and significance of the agency theory giving an opportunity to the application of other organizational theories like contract theory and the stewardship theory.
- Contract theory
The contract theory on developing either formal or informal agreement with an aim of motivating different people with conflicting interests on the same asset or corporate. The main objective of the theory is to take mutually beneficial actions which are fair and acceptable to both parties. In simple terms, the contract theory explores the formation of contracts which are beneficial with an aim of making the stakeholders stick together for the long period. In the perspective of managing corporates, contract theory emphasizes on drawing up better contracts which shape effective performance and productivity (Higson, 2003, p. 121).
The principle of contract theory also addresses the compensation packages offered to the executives. The theory holds that the company executives should not be compensated based on their own performance but on the performance of the companies within the sector. Therefore, it addresses executive compensation of the executive which is disregarded under the agency theory.
- Stewardship theory
Stewardship theory holds that the executives or managers of firms act as stewards of the shareholders or owners and that the two groups have common goals. Contrary to the agency theory, the stewardship theory argues that the owners should not be too controlling to the managers. Likewise, the board of directors should support the management in increasing productivity and higher performance (Flynn, 2015, p. 13). According to the stewardship theory, there should be a mutual relationship between the shareholders, represented by the board, and the executives based on shared decision making, training and mentoring. The theory allows clear communication channel and governance objectives hence eliminating the confusion on who should be in charge of the operations between the board and the management/ executive (Flynn, 2015, p. 19).
Therefore, both the contract and stewardship theories are more reliable, governance-oriented, and significant as compared to the agency theory.
- Stewardship and the reporting that is required for stewardship changed over time?
According to the Stewardship concept, the stewards (agents) have the obligation to offer financial reports with regards to the company which they govern but have no ownership rights on. In the contemporary business world, the concept of stewardship is closely associated with the accountability principle both to the internal and external stakeholders. Stewards have the responsibility to appraise the past performance of the company as well as controlling the managerial actions in the future (Financial Reporting Council, 2011, p. 29).
According to the IASB/ FASB guidelines, the application of stewardship differs from one country/ organization to another. For instance, private firms do not broadly comply with the principle of stewardship as compared to the nonprofit and public organizations. All in all, stewardship is expected to play a broader role decision-usefulness objective (Podrug, 2010, p. 57).
Changes in the Importance of Stewardship over Time
In July 2005, the IASB/ FASB ruled that the concept of stewardship should be included as an objective of financial reporting. Prior to the announcement, stewardship would play a minor role as objectives of financial reporting. The decision by the accounting body states that the objective of financial reporting has become less important to the users, preparers, regulators and standard setters over time. Lastly, the role of decision-usefulness as required under the concept of stewardship have been downgraded over time (O’Connell, 2007, p. 81).
- The article by Kangarluie and Aalizadeh (2017).
- Introduction and literature
The article is based on an ongoing discussion on the existing performance gap in auditing. The introduction states that both the public and auditors hold different views on the responsibilities of the auditors while preparing or disclosing an audit report. The report gains more spotlight after the collapse the Anderson Consulting Corporation while the implication being laced squarely on the auditors.
There is a clear review of the existing literature on the top. The authors acknowledged that there existed a gap between the expectations from the auditors based on the researchers conducted in different geographical locations. The study not only relied on the previous literature but also incorporated the views of accounting professionals, users, regulators, and preparers. Based on the literature review, the article was focused on conducting an empirical study on the audit expectation gap on the Iranian private Companies (Zelenka, 2010, p. 61).
The article followed an elaborate methodology to arrive at the results. The population (N) of 1389 was classified into two groups that are the management of private firms and auditing officials. The study clearly outlines the formula that was used to arrive at a sample size (n) of 318. A questionnaire comprising of 32 questions was used to collect data. The questions were further divided into two groups, that is, 25 questions addressing the role and responsibilities of the auditors while the remaining 7 addressed the independence of the auditors. Lastly, the Kolmogorov-Smirnov test was used to investigate whether or not the data and results were distributed normally (Kangarluie & Aalizadeh, 2017).
The researcher has clearly stated the hypotheses of the study based on the objectives. The articles outline two positive hypotheses. One, the research assumed that there existed a meaningful difference in perception and view held by the auditors and the management on the roles and responsibility of the auditors. And two, the research assumed that there existed a meaningful difference in perception and views held by the auditors and the management on the independence of the auditors. The article was meant to either propose or oppose the two hypotheses based on the findings at the end (Kangarluie & Aalizadeh, 2017).
The results have clearly tested the two hypotheses by examining the role and responsibility and the independence of the auditors as help by two groups of the respondents. In testing the first hypothesis, the results confirmed that indeed there existed meaningful difference on how both the management and the auditors perceived the roles and responsibilities of the latter. Likewise, the results also confirmed that there did not exist a meaningful difference on the perception held by the management and the auditors on the independence of the latter. The mean of the views held by the managers and auditors was 3.37 and 3.35 respectively. Which showed an insignificant difference.
Generally, a conclusion always entails a summarized version of the entire research. The study was focused on the empirical investigation of the existing gap between the audit expectation. With a case study of the Iranian private firms. The population of the study was grouped into two i.e. auditors and the management. Using the survey data collection and technique, data was obtained and analyzed so as to test the two hypotheses. The study confirmed the first hypotheses while rejected the second one.
The appraisal shows that all the researchers followed the standard research outline and requirement in arriving at the results. The research elements of introduction/ background, research problem, research objective, research topic, literature review, methodology, and results have been exhaustively addressed.
- b) The article by Adeyemi and Olowookere (2011)
The study focused on investigating the existing the auditing performance gap in Nigeria. The study specifically focused on the different perception held by the auditors and the users’ officers of the financial reports. The appraisal evaluates different aspects of the study as shown below;
- Defining of the population
In the context of research, the population is defined as a collection of objects or people who are the main focus in a scientific query such as a research or empirical investigation. However, a research population must be well-defined and constitute of the objects or people with similar and binging attributes/ characteristics. However, it would be time-consuming and too expensive to conduct a research of the entire population considering the limited resources and time. Hence, most studies rely on sampling techniques to arrive at a justifiable sample size (Manly, 2012, p. 118).
For the purpose of this study, the users of the financial statements in Nigeria were chosen as the population of the study. The users of the financial information are well-defined and have common and binding characteristics to the financial statements. Therefore, the requirement for the selection of a population in a scientific study has been met. However, it should be acknowledged that there are millions of users of financial statements in Nigeria alone. Leave alone the whole of Nigeria, even the population of users in Lagos (study area) could not be covered in totality (Adeyemi & Olowookere, 2011). Using the purposive sampling, the sample size of 250 respondents were arrived at. The respondents were narrowed down to auditors and users such as bankers, accountants, students, stockbrokers, and investors.
- Validation of research instrument
The research instrument should ensure that the data is precise and valid. Validity should ensure that findings of the study would not be factually flawed or biased. Pilot testing is commonly used to examine the validity of research instruments like questionnaires and interviews among others.
To establish the validity of the questionnaire used in the study, the pilot test was conducted on 10 respondents within the target population. The instrument was assessed by two accounting experts who gave their views on the questionnaire. Necessary changes were made based on their recommendations and subsequent pre-test was conducted once again. After expressing their satisfaction with the final version of the questionnaire, it was administered to the respondents.
- How well do be research questions and hypotheses link together?
The research questions refer to the questions which the research study seeks to answer. In the other hand, a hypothesis refers to a statement which establishes the relationship between two or more variables in a study. It should be noted that research hypotheses are formulated based on the research questions. Therefore, the two should be linked.
The study has two research questions:
- What are the roles of external auditors in Nigeria?
- What is the perception of the users of financial statements to audit expectation performance-gap in Nigeria?
Likewise, the hypotheses were:
- Ho1: The perceived audit performance gap does not significantly affect the credibility of the auditing profession in Nigeria.
- Ho2: Auditing standards issued by the Institute of Chartered Accountants of Nigeria do not always guarantee that the external auditor would issue credible assurance reports.
Clearly, both the research questions and the research hypotheses were not linked. The latter were not formulated based on the former.
- Reword the research questions, so that they align with the Hypotheses
To align the two elements, the research questions should be rewritten as below;
- Does the perceived audit performance significantly affect the credibility of the auditing profession in Nigeria?
- Do the Auditing standards issued by the Institute of Chartered Accountants of Nigeria always guarantee that the external auditor would issue credible assurance reports?
Adeyemi, S. & Olowookere, J. K., 2011. Stakeholders' perception of audit performance gap in Nigeria. International Journal of Accounting and Financial Reporting, 1(1), pp. 152-72.
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Available at: https://yourbusiness.azcentral.com/stewardship-theory-corporate-governance-29164.html
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Higson, A., 2003. Corporate Financial Reporting: Theory and Practice. 1 ed. New Jersey: SAGE.
Kangarluie, S. & Aalizadeh, A., 2017. The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Kleiman, L. S., 2000. Human Resource Management: A Tool for Competitive Advantage. Cincinnati, OH: South-Western College Publishing.
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Mitra, R., Hossain, D. & Mazumder , M., 2017. Web-based corporate reporting: an exploratory study on the Bangladeshi companies. Middle East Journal of Business, 12(3), pp. 25-30.
O’Connell, V., 2007. Re?ections on Stewardship Reporting. Accounting Horizons, 21(2), pp. 215-227.
Podrug, N., 2010. Stewardship Relations Within Management Hierarchy in Large Croatian Companies. Doctoral dissertation. Faculty of economics and business Zagreb.
Zelenka, A., 2010. Experimental and quasi-experimental research designs, New Jersey: Wiley.