Agency Conflict Essay

777 Words 4 Pages
Agency conflict and Agency cost
The connection which exist between the firm owners (shareholders) and the firm’s agents, usually the managers is described as agency relationship. In this relationship, principal delegate duties of running the firm businesses to the agents and to work in the best interest of the owners Jensen and Mecking (1976, p.308).
Where is the source of this conflict originating?
Agency conflict arises among the firm stakeholders (managers and shareholders) due to various incentives. Firm owners wanted the managers to work on their behalf by maximizing wealth. However, managers have opportunistic behaviours which enable them to take irrational decisions which are not representing the interest of the shareholders. Chung
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112). Management incurred these costs for instance in the cases of loss contingencies, insider trading, related party transactions, all these requires management to provide fully disclosure of certain information. There are also cases and evidences which related to agency conflicts; these involves making accounting adjustments to the financial statements, the propriety of the client’s principles and the adequacy of the financial statement disclosures, Knapp (1985, p. 202). Pierre and Anderson (1984, pp.257-262) recorded 129 court issues which constituted 334 errors filed against public accountants. 60 alleged audit errors were related to inadequate disclosure of the information which was …show more content…
Various measures have been used by the researchers to measure the audit quality, however, there is no agreement on the best measure of audit quality. Auditors gives assurance of their services as an economic goods Simunic (1980). Simunic argued that, audit quality is determined by the clienteles and auditor availability to give audit services which is determine by the incentives and competences of the client and the auditor. As discussed before in the agency relationship, audit quality demand by the clienteles arises due to conflict of interest between the managers and the shareholders. Audit quality is therefore believes to help in solving of those conflicts. These incentives are determined by agency cost and regulation and the competency of the client to meet those demands. While the quality of audit supply is affected by auditor independence which is dependence upon factors such as reputation, litigation, and regulatory concerns. Apart from that, the competency of auditor to give quality audit is determine by auditor's expertise and his engagement level during the audit periods. This differences between the client and auditor incentives and competencies contributes to variation in the quality of audit. In this regard, regulatory bodies play importance roles in shaping both the incentives and the auditor's competences which influence client demand and audit quality supply (Defond and Zang

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