ACC8000 Research in Accounting Practice

Question 1: Research in Financial Reporting

Assumptions of Traditional Agency Theory

According to Kivistö, & Zalyevska (2015), agency theory it is assumed that the principal and the agent both are motivated by the self-interest.

Moreover, this assumption supports to offer the self-interest which enables the agency theory to motivate both the parties by the self-interest agents which are likely to pursue the self-interest objectives. It enables the agents to act in the sole interest of the principals while giving concern towards predictable inherent conflicts.

According to the assumptions of traditional agency theory, value is unobservable and this issue can be addressed through using ratios of incentive coefficients in the context of two performance measures (Kuhner & Pelger 2015, p. 397).

At the same time, it is identified that certain assumptions remain unobservable which are cancel out however there are some predictions which remains related to the absolute coefficients which supports to change the design attempts while controlling the unobservable.

In this context, Agoglia, Hatfield, & Lambert (2015) stated that there is an objection of this theory is that it only relies on the assumption of the self-interest of the agents who shows willingness towards the maximization of the personal economic wealth.

Influence of Traditional Agency Theory on Accounting Aspects

Agency theory influences the information asymmetries as different agents have different motives to principals. It is identified that different agents influence by different factors such as financial rewards, labor market opportunities, and effective relationships with other parties, etc.

Due to which, it enables to develop the agents more optimistic in the context of economic growth. At the same time, Agoglia, Hatfield, & Lambert (2015) opined that it also creates more risk averse than principals.

These differing interests create an incentive for the agents to have bias information flows. In like manner, principals also reveal the concerns towards the information asymmetries where agents possess the information that does not have access to the principals.

At the same time, Huang, Boateng, & Newman (2016) depicted that different motivations and information asymmetries increases the concern towards the reliability of information, which also impacts the level of trust that the principals have in their agents. For this purpose, mechanism of alignment use while focusing towards the role of audit. Audit enables to eliminate potential new agency problems.

Auditing use various mechanisms for the purpose of aligning the interests of the agents with principals (Kuhner, & Pelger, 2015). It supports to allow the principals to measure as well as controlling the behavior of their agents while reinforcing the trust of the agents.

Influences of the Assumptions of Traditional Agency Theory on the Compensation approaches

It is identified that traditional agency theory influences the approaches of the compensation. In the context of agency theory, it can be identified that there are two polar positions which enables to deal with the shareholder-manager agency conflicts. In this context, Duncan, & Whittington (2015) depicted that the managers of the organization get compensated on the basis of stock price changes.

So, the agency costs become low as the managers get great incentives for the purpose of maximizing the shareholder wealth. Due to this reason, hiring the talented managers under the contractual terms, affect the firm’s earnings which not remain under the managerial control.

At the same time, stockholders could also monitor every managerial action however; it remains extremely costly as well as inefficient too. In the views of Foss, & Stea (2014), the optimal solution can be gain through offering executive compensation while tying it with the performance while also giving concern towards some monitoring aspects.

In the context of monitoring, following mechanisms can undertake by the firm to encourage the managers to act in shareholders’ interests: performance-based incentive plans, direct intervention by shareholders, the threat of firing, and threat of takeover. All these strategies support to increase the managers’ interest while giving focus towards the interest of the shareholders too (Dodd, & Dyck, 2015).

Criticisms of Traditional Agency Theory

The major criticism of the traditional agency theory is as follow:

This theory depends on the human relationships and focuses towards the basis theses, i.e. human action and the human act which for which its agents responsible. In this context, Tan, & Lee (2015) depicted that people are not perfectly detached and due to this reason perfectly rational agents weigh consequences and duties while taking the ethical decisions.

Another serious criticism of this theory is that it is concerned with actions towards other people and neglects the possible moral responsibilities.

Alternative Theory to Agency Theory

Agency theory remains less focused towards ethical parameter so it is essential to give concern towards this issue. In this context, Martin, Gomez-Mejia, & Wiseman (2013) depicted that business and ethics are inseparable parameters.

All the decisions taken by the management is designed while focusing towards moral and ethical components. Due to this reason, Aristotle‘s virtue theory will remain the best alternative and relevant to address the way to offer action driving motivation for the purpose of acquiring and altering the issues while giving concern towards ethical framework.

This theory remains assistive towards maximizing the wealth of the shareholder however, also focused to offer distributive justice and ordinary decency (Arcas-Lario, Martín-Ugedo, & Mínguez-Vera, 2014).

Stewardship and the Measuring and Reporting of Financial Accounting Information

Stewardship is linked to agency theory and it offers a broader notion than just resource allocation. This accountability focuses on the past performance as well as gives deep understanding regarding the entity and its position for the future.

Due to this reason, Stewardship should be retained as a separate objective in the context of financial reporting which enables to ensure that Stewardship enables to achieve the objective of financial reporting (Kuhner, & Pelger, 2015).

Under this, huge focus is given towards the company performance however it also gives concern towards potential future cash flows.

Stewardship has implications for financial reporting which supports to develop a common conceptual framework which enables the board team of the organization to develop new accounting standards while revising the accounting standards (Soliño, 2015).

Harris, Johnson, & Souder (2013) stated that when the markets are not perfect then it is stewardship. Large firms focus towards entrust the assets and decisions to the managers as the managers have informational advantages which enables them to use the assets in an appropriate manner.

For this purpose, accounting data is used to eliminate the situation of negative effects of manager’s private information which enables to enhance the firm value. For this purpose, array of literature is used in accounting and finance which supports to examine the issues.

Valuation focus

Valuation focus influences the measuring and reporting of the financial accounting information. Harris, Johnson, & Souder (2013) stated that valuation is the process of determining the present value of an asset such as investments in marketable securities as stocks, business enterprises, etc.

It also includes the investment in intangible assets, like patents or trademarks or on any liabilities, like bonds, etc. Valuations support to investment analysis, capital budgeting and merger or acquisition transactions.

Moreover, it supports the firm to develop financial reporting as well as taxable events which enables to determine the proper tax liability. So, valuation focus plays vital role in measuring and reporting of financial accounting information (Tourish, 2014).

Conflicting Viewpoints of Stewardship and Valuation Usefulness

It is identified that there is a conflict between the usefulness of valuation and stewardship as the information systems rank very differently in both these accountability. However, from the empirical evidence it is evaluated that as a practical matter, the conflict between stewardship and valuation usefulness is not highly significant importance (Wirtz, 2015).

In this context, strong and positive association between the compensation and valuation earnings coefficients also reflects the similar results by providing the evidence regarding the practical value relevance and pay-performance sensitivity of earnings and cash cows which are positively associated.

At the same time, Duncan, & Whittington (2015) depicted that both the studies show strong link between the two properties of accounting constructs in practice. Both of them offer relatively simple and straightforward economic model and offer optimal stewardship and valuation properties of accrual accounting.

Question 2: Research in Auditing

Research Aims of the study

The aim of ‘An assessment of audit expectation gap in Ghana’ is to evaluate the audit expectation gap between the public expectations from the auditors and the service delivered by the auditors (Agyei et al., 2013).

On the other hand, the research aims of ‘Audit expectation gap in Sri Lanka: the role of policy makers’ is to identify the expectation differences among auditors and society while focusing towards auditor responsibility, reliability of audit function and usefulness of audit Gunathilaka (2012).

Research Objectives and Research Hypothesis in the Study by Gunathilaka (2012)

Research objective of this study is to examine the expectation differences among the auditors as well as society in terms of auditor responsibility (Gunathilaka, 2012). At the same time, the objective of this study is to evaluate the reliability of audit function and usefulness of audit. Research hypothesis of this study are:

H0: Public awareness and enhancement of auditor performance should be focused of policy makers for the improvement of public trust and confidence.

H01: Public awareness and enhancement of auditor performance should not be focused of policy makers for the improvement of public trust and confidence.

Measurement of Variables

In the study of Agyei et al., (2013), variables related to auditor expectation gap are measured in terms of responsibility of the auditor in detecting and preventing frauds, and soundness of internal control structure of the audited entity. On the other hand,

In the research of Gunathilaka, (2012), auditor expectation gaps are measured in terms of responsibility for frauds detection and prevention; preparation and presentation of financial statements; assurance on financial statements; objectivity of auditors; and auditor independence.

Approach for measuring the variables taken by Gunathilaka, (2012) can be said superior in its rigor because it includes more measurements and provides a holistic view by considering different aspects of the auditor expectation gaps.

The major reasons of auditor expectations gap are auditor independence and preparation of financial statement and fraud detection. However, the study of Agyei et al., (2013) also considers internal control measures and fraud detection as major measurements of variables.

But, internal control measures are not only responsible for causing audit expectation gap. There are other factors that should be considered while measuring the expectations of the audit.

Selection of Participants

In the study of (Agyei et al. (2013) sample size of twenty auditors and twenty stockbrokers have taken by the researcher while focusing towards convenient and purposive sampling techniques. In this study, survey questionnaire method is used by the researcher for the purpose of data collection.

This method has supported towards identifying the existing expectation gap in Ghana, while concerning towards auditor responsibility related to fraud detection as well as prevention. It has supported to offer soundness of internal control structure for audited entity.

For selecting the participants, business managers and investors are selected by utilizing probability method. For this purpose, survey questionnaire method is used by applying five-point Likert scale. Moreover, this analysis has taken place on 252 respondents by utilizing independent sample t-tests which indicate significant perceptual differences (Gunathilaka, 2012).

This primary data collection method has supported to evaluate the views and opinions of the business managers as well as investors. It has supported to get detailed understanding regarding the research topic.

Number of Participants Invited

In the study of Agyei et al. (2013) the number of participants was invited through telephonic conversation for the spurpose of responding towards the survey. However, in the study of Gunathilaka (2012) respondents were invited through e-mail. Both the methods are appropriate in their place.

Although, telephonic conversation enables to direct interact with the respondents which enables to increase their interest however, email supports to minimize the time framework as it enables to interact with the whole population at a single point of time.

In the context of Agyei et al. (2013), there is a small sample size so it was relevant to take telephonic conversation but at the same time, Gunathilaka (2012) has taken large sample size so in that case, it isdifficult to conduct the survey over phone.

Non-response Bias

In survey sampling, it is identified that sometimes, individuals who are chosen as the sample remain unwilling or unable to participate. Non-response bias is the biasness which takes place when the respondents that differs from non-respondents.

Non-response biasness majorly occurs in statistical surveys where the answers of respondents show difference from the potential answers. It occurs due to several factors. Kelfve, Thorslund, & Lennartsson (2013) stated that non-response biasness is often seen in the e-mail surveys as it mostly shows lower response rate.

Addressing Non-response Bias

In the study of Agyei et al. (2013), researcher has ensured the respondents in the context of confidentiality as well as reminders are sent to the respondents before the survey has taken place.

In like manner, researcher has avoided short term data collection and data is collected while giving concern towards various parameters. Apart from this, the questions in survey were designed in a simpler way that could be understandable for each participant.

The easiness of the questions in understanding helped the researcher to avoid the non-response bias in the study. In the study of Gunathilaka (2012) researcher has firstly invited the respondents for survey and the respondents who has shown eagerness for the survey only those participants are selected for the survey method.

Moreover, researcher has thoroughly pretest the survey mediums. A pre-consent mail was sent to the survey participants before involving them into the survey. Pre-consent mail helped to get the full consent of the participants for responding the questions. It helped to decrease non-response bias in the research.

Response Rate

In the context of Agyei et al. (2013), the response rate is higher as in this study researcher has taken small sample size while utilizing non-probability method. However in the contrary, in Gunathilaka (2012) researcher has taken large sample size by utilizing probability method.

Due to this reason, the response rate in Agyei et al. (2013) is higher than Gunathilaka (2012). However the response rates are adequate in each study.

Data analysis of the studies

In Gunathilaka (2012), five-point Likert scale survey questionnaire method is used by the researcher and has focused towards representing the data graphically by utilizing various graphs and charts which has supported to represent the data in a statistical manner.

So, this approach remained more rigorous and has supported to increase the reliability and relevancy of the study. In this study, primary research outcome has correlated with the secondary findings which have enables to interpret the research outcome in an effective manner. In Gunathilaka (2012) study,

statistical analysis method was used that was effective to statistically measure the outcomes of the respondents and enhance the quality of research outcomes. Apart from this, the use of t-tests enabled the researcher to determine the significance value and prove or reject hypotheses in the research to enhance the validity and reliability of the research outcomes.

On the other hand, in the research of Agyei et al. (2013), descriptive statistics was used including mean, mode and standard deviation with frequency tables and graphs. However, it was also effective to provide better analysis but it does not include tests that reduces its effectiveness in terms of analyzing the data.

Significant Flaws

Major flaws found in Agyei et al. (2013) are that there is a small sample size has taken in this study which has limited the research outcome. The use of small sample size restricts the researcher to collect the large data to interpret and provide the generalized views on the research issue.

Lack of generalization reduces the validity and reliability of the research outcomes in perspective of auditor expectations gap. Moreover, in this paper, researcher has utilized telephonic interview method which has decreased the relevancy of the research and also it is a time consuming process.

For increasing the relevancy researcher should increase the sample size and utilizing face-to-face interaction will remain more relevant as compared to telephonic conversation. Telephonic interview may cause confusion among the respondents regarding the questions that may affect the quality of the responses provided by the research participants.


Agoglia, C. P., Hatfield, R. C., & Lambert, T. A. (2015). Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society, 44, 1-14.

Agyei, A, Aye, BK & Owusu-Yeboah, E. (2013) An assessment of audit  expectation gap inGhana. International Journal of Academic Research in accounting, Finance and Management Sciences, 3(4), pp. 112-8.

Arcas-Lario, N., Martín-Ugedo, J. F., & Mínguez-Vera, A. (2014). Farmers’ satisfaction with fresh fruit and vegetable marketing Spanish cooperatives: an explanation from agency theory. International Food and Agribusiness Management Review, 17(1), 127-146.

Dodd, S. D., & Dyck, B. (2015). Agency, stewardship, and the universal-family firm: A qualitative historical analysis. Family Business Review, 28(4), 312-331.

Duncan, B., & Whittington, M. (2015). Company Management Approaches—Stewardship or Agency: Which Promotes Better Security in Cloud Ecosystems?. Cloud Comput, 1-6.

Foss, N., & Stea, D. (2014). Putting a Realistic Theory of Mind into Agency Theory: Implications for Reward Design and Management in Principal‐Agent Relations. European Management Review, 11(1), 101-116.

Gunathilaka, A. (2012) Audit expectation gap in Sri Lanka: the role of policy makers. International Journal of Multidisciplinary Research, 2(10), pp. 1-12.

Harris, J. D., Johnson, S. G., & Souder, D. (2013). Model-theoretic knowledge accumulation: The case of agency theory and incentive alignment. Academy of Management Review, 38(3), 442-454.

Huang, W., Boateng, A., & Newman, A. (2016). Capital structure of Chinese listed SMEs: an agency theory perspective. Small Business Economics, 47(2), 535-550.

Kelfve, S., Thorslund, M., & Lennartsson, C. (2013). Sampling and non-response bias on health-outcomes in surveys of the oldest old. European Journal of Ageing10(3), 237-245.

Kivistö, J., & Zalyevska, I. (2015). Agency Theory as a Framework for Higher Education Governance. In The Palgrave International Handbook of Higher Education Policy and Governance (pp. 132-151). Palgrave Macmillan UK.

Kuhner, C. & Pelger, C. (2015). On the relationship of stewardship and valuation—an analytical viewpoint’, Abacus, 51(3), pp. 379-411.

Martin, G. P., Gomez-Mejia, L. R., & Wiseman, R. M. (2013). Executive stock options as mixed gambles: Revisiting the behavioral agency model. Academy of Management Journal, 56(2), 451-472.

Soliño, A. S. (2015). Optimizing performance-based mechanisms in road management: an agency theory approach. EJTIR, 15(4), 465-481.

Tan, J. C. K., & Lee, R. (2015). An agency theory scale for financial services. Journal of Services Marketing, 29(5), 393-405.

Tourish, D. (2014). Leadership, more or less? A processual, communication perspective on the role of agency in leadership theory. Leadership, 10(1), 79-98.

Wirtz, P. (2015). Entrepreneurial Finance and the Creation of Value: Agency Costs vs. Cognitive Value. In Handbook of Research on Global Competitive Advantage through Innovation and Entrepreneurship (pp. 552-568). IGI Global.

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