1 Research In Financial Reporting
It has been said that “agency theoretical literature in accounting has frequently stressed possible difficulties in pursuing stewardship and valuation usefulness simultaneously” (Kuhner & Pelger 2015, p. 397). When answering the following questions you are expected to use appropriate in-text references.a. Brieflydescribe the assumptions of traditional agency theory. b. Explain how traditional agency theory has influenced two aspects ofaccounting (do not provide an explanation about linking performance measurement and compensation; choose two other aspects of accounting that traditional agency theory has influenced). c. What influences have the assumptions of traditional agency theory had onapproaches to the compensation? d. Outlinetwo criticisms of traditional agency theory. e. Discuss one alternative theory to agency theory and explain the deficienciesin agency theory that the alternative theory attempts to overcome. f. How does a stewardship focus influence the measuring and reporting offinancial accounting information? g. How does a valuation focus influence the measuring and reporting offinancial accounting information? h. Explain the conflicting viewpoints of pursuing stewardship and valuationusefulness
2 Research In Auditing
Read the study by Agyei et al. (2013) as well as the study by Gunathilaka (2012).a. Brieflyoutline the research aims of each b. Review the research objectives in the study by Gunathilaka (2012), write aresearch hypothesis that would be suitable for the study. Use the null hypothesis c. Explain how variables are measured in each of the two studies. Commenton which study uses a more rigorous approach, stating reasons why you believe one approach is superior in its d. Explain how each study defines the population that is used for selecting Discuss the appropriateness of the choice of population to address the aims of each research study. e. Explain how each study determines the number of participants invited toparticipate in the study.Comment on the appropriateness of the number of participants chosen for each study. f. Whatinformation is provided in each study about how the questionnaires were sent/distributed to the participants? g. Definenon-response bias. h. Whathas been done in each study to address non-response bias? i. Outlinethe response rate in each study and whether you think the response rates are adequate in each j. Explain how each study goes about analysing the data that is collected andcomment on which approach you think is more rigorous, stating reasons why you believe one approach is superior in its k. Brieflyoutline two other significant flaw (not mentioned above) that you have noticed in one or both of the
1a. The traditional agency theory helps in determining the relationship that exists between the principle and agents in the business. With the help of the agency theory one can help in resolving the problem that exists in the agency relationship due to unaligned goals to risk. Through the help of the agency theory we can resolve the problem that exists in the agency relation. The most common agency relation that exists is the relation between the shareholder (principal) and company executives (agents). Through the help of the theory we can determine whether the areas are effective and where we have conflicts in the relation.Production of agency is a new assumption of agency theory which has been recently arose. The major issue in this concept is that it is expected that one person will understand the interest of the other one. Agency theory provides us information about the interest of both the parties and the point where there can be conflict of interest and how the issue could resolve.The major assumption of agency theory is that an agent frequently interacts with other agents in order to generate information about various business perspectives and without any human limitation. The major participant in an agency theory is an agent who is obliged to perform its duties with utmost care and diligence. In agency business the agent represent itself towards the third party on behalf of the principal and conducts business. They are required to act as per the interest of the parties. The agency theory works on the following assumptions which states that the interest of the principle are in line with the interest of the agent, the agent works on the self interest assumption and the agents are risk averse.b. Agency theory focuses mainly on the traditional concept of recording the transactions, presenting the same and summarizing for the company. The two aspects of agency theory which are affected by the traditional agency theory in accounting are political and professional. Accounting provides the information to the accountant about recording, analyzing and presenting the financial information. The accountant mainly deals with the professional aspect where the auditor and financial executive agree on certain procedures and assumption for measurement and disclosure. Accounting theory provides us information about the economic information and the effect of the same on the accounting procedure. Therefore accountant focuses on professional aspect in order to meet the business objectives. (Schillemans, 2013)c. The purpose of compensation is to motivate the employees, in order to retain, attract the employees towards the company. It can be defined as monetary benefits or non monetary benefits given to the employees, which is earned by them by working in the company. Compensation can be paid to employees in different ways like cash payments, or time related fixed payments like pension. And performance based pay. Agency theory cannot be excluded when studying the executive compensation (Kultys, 2016). Jenson and Meckling approach agency theory is perfect, despite the fact that many different theories and approaches are used to explain executive pay. Jenson and Meckling states that separation of ownership and control in large size organization is necessary to create a power base for executive management. If all the shares of the company are owned by the manager of the company, then the decisions made by that manager would be presumed to be those that would maximize the long run shareholder value. As per Jenson and Meckling theory, the agent performs some service on behalf of the principal. As a part of the relationship between agent and principal, the principal delegates some decision making authority to the agent.d. Traditional agency theory work on the concept of serving the needs of the principal. It is required to match conflict of interest whereby the agent has to serve the needs of the principal and the principal has to provide adequate compensation. Sometimes there can be situation where there is conflict of interest between the two. Managers when act as an agent of the shareholders have to take decision where they are required to take decision as per their needs. Agency work according to the need of the agent so it is very important that the agent has requisite knowledge to serve the principal. Principal has to check about the working of the agent and his knowledge. Another criticism of this theory is the trust between the agent and the principal and their perspective towards the risk. When both the parties have different perspective towards risk then conflict arises between the two. There can be many issues such as objectives, compensation, pattern of doing work etc. these two are the criticism related with the agency theory which need to be critically evaluated.(Nyberg, et. al.,2010)e. The agency theory is realistic in nature and unique. In addition to the agency theory other multiple theories can be used. One such theory is shareholder theory. The company states its objectives in its annual reports, such objectives are maximizing the profit, shareholder value, producing high quality products, employee satisfaction but the main objective of the company is to maximize the long run total value of firm. In order to survive, companies can’t ignore the shareholders value. The primary responsibility of executives and directors is to maximize the shareholder value. Stakeholder loyalty is the crucial factor for the success of the organization. Walker and Marr, they both indentify the two dimensions that should be taken into account in the power of stakeholders: their feelings, either positive or negative, towards the organization and their support, towards the organization.f. Stewardship refers to the term where a person is appointed in order to manage the affairs of the entity so that the operations can be conducted in a smooth manner. It works as an agent on behalf of the employees and only difference is that it is not bounded by the geographical boundaries of the organization. in accounting the term stewardship has its different meaning which separates itself from entity and from those charged with governance in the management. Stewardship provides the assistance by improving the administration and conservation of resources. They also provide the services by safeguarding of asset and custodianship of the asset towards the organization. The term stewardship is provided in the accounting standard provided under IFRS and FASB. It also provides the responsibility of the stewardship for the efficient administration of the organization and the responsibility of steward for the same. On behalf of the employees as an agent the steward takes the responsibility of accounting as well as finance, property and other affairs.(Fayezi, et. al., 2012)g. Valuation is the process of determining the present values of the assets. Valuation is needed in business for number of reasons like merger and acquisitions, capital budgeting decisions or investment decisions. Valuations can be done on assets like investments made in securities like shares, stocks, options etc. Valuation is also needed for determining the tax liability i.e. helps in determining the taxable events in an organization. There is different valuation models like- Absolute value model, relative value model, option pricing models (Venkatesh, 2012). Absolute model is used to determine the present value of future cash flows. Relative model is used for determining the value based on observations of market prices of similar assets. Option pricing models are used for certain types of financial assets for example put options, call options, warrants, employee stock option etc. Business valuation is done at the time of merger and acquisitions in order to determine the value of business. Valuation is required for many reasons like bookkeeping and accounting, business analysis. Valuations are done on a specific date like on end of the accounting year or end of the month. Valuation of derivatives can be done by using different methods like black schools method, risk neutralization method etc. Tangible and intangible assets are also valued. Valuation is important for determine the correct value of the assets. Correct values to be disclosed in financial statements so as it disclose true and fair view.h. Stewardship and valuation are different in their perspective and nature. Basic fundamental of accounting is to provide correct information to the users of the financial statement. It will help in evaluating the actual worth of the entity which can be communicated to its various stakeholders such as creditors, investors etc. Valuation helps to assess the correct value of the stewardship responsibility to provide information about the usage of the resources by the steward towards the organization. Valuation process helps in performing the stewardship responsibility through valuation process. It also provides us about the management communication to the stakeholders. The stewardship provides the organization same services as that of agency.2a. Fundamental motive behind conducting this research was to ascertain the knowledge about the audit expectation gap. There is always a difference between the society consisting of the interested people of financial statement and the auditor responsibility and reliability towards the audit function performed during audit assurance procedure. This research focuses on the major reasons behind gap in audit expectation. This not only reduces the effectiveness of the audit report but also compromise with the expectation of the society with the duties of the auditor. This research has been conducted to find the method by which the opinion of the interested people of the society could be taken in order to fill the gap.b. Researcher Gunathilaka focuses on the reasons behind the audit expectation Gap and the methods through which this gap can be filled. The objective of this study is to remove the litigation and criticism against the credibility of the auditors. The study describe that the expectation of the society and its participants is more than the scope of performance of the auditor. Therefore the researcher makes the use of the statistical methods in order to generate the knowledge about the perspective of the people towards the company and its financial statements. The outcome of this research will come out to with the reasons and the solutions to resolve the issue related with the auditors responsibility and the areas of actions needed by the auditor to provide true and fair report on the financial statement. (Salehi, 2016)c. The research in both the study focuses on the alternatives through which information could be generated about how the information could be collected from the users about their expectation. The researcher in conducting research on the audit expectation in Sri Lanka focuses on collection of information by the participant and using the information by using sampling method. For taking sampling method a questionnaire is being prepared and forwarded to the participant and they are supposed to fill the questionnaire using bipolar five point scale. This will provide the information about the degree of agreement of the participant with the question mentioned. Upon receiving the answers the researcher evaluates the expectation of the participant from the auditor about the responsibility and duties.Another researcher Agyei conducted research on the same issue to ascertain the audit expectation gap in country Ghana on which a similar strategy was used in order to collect the information about the views of the participant about the responsibilities. As it is difficult to measure and make changes constantly to the audit procedure to be applied by the auditor. Therefore it is necessary to collect information about the views of the public and users towards the auditors duties towards the audit procedure. The research also includes the sampling method collecting information through questionnaire. The research procedure covered in Sri Lanka conducted by researcher has taken more rigorous method as compared to the research conducted in Ghana. (Cohen, et. al., 2015)d. Extensive approach has been used in both the researches as the population has been selected on the basis of sampling method. Population has been selected by selecting the participant among the user group such as chartered accountants, management student and stock brokers. The questions asked in the questionnaire are close ended. The population selected for the population to whom the questionnaire has to be forwarded is analyzed on the basis of study, skill and prior knowledge. The stock brokers are chosen from different backgrounds from the list of brokerage companies. Non probability sampling method was used for selecting the class of population for conducting the research. The sample was collected from the population from Greater Accra Region.Another research conducted in Sri Lanka selects the population on the basis of sampling method selected and by forwarding the questionnaire to the selected participant. The population who sends the questionnaire back is analyzed by the researcher to evaluate the view adopted in total by the population. This approach has adopted the method of collecting the information through demographic approach. As these participant are in complete information with the companies so they possess all the information related to making decision about the deviation in audit expectation. Population selected was on the basis of extensive study so they provide useful information which makes the whole research and study informative. The survey instrument was sent to the participant randomly from among the selected participant.e. The participant selected for conducting the research was sent on random basis. The result was evaluated to ascertain the actual facts and figures. The participant such as chartered accountant, professional accounting firm, stock brokers, investors and management students. Also the management students who possess the knowledge about the company are also included as participant. The sampling is followed by calculation of mean and other test in order to ascertain the sample population for conducting the questionnaire. Apart from calculation of mean the population was tested by T-Test. This test helps in ascertaining the best possible population size to conduct the study on the population size. The test was significantly tested by Levens test which makes it more effective. (Kamau, 2013)f. The questionnaire was sent to the population on the sample basis after conducting test. The questionnaire gives the information about what are the expectation of the public and the users towards the auditors and its duties. As the duties and responsibilities of the auditor are difficult to calculate. Therefore the questionnaire provides the duties which are to be furnished in order to provide true and fair view of financial statement so that detection of fraud is possible within minimum duration. Therefore the selection instrument is sent to different classes of participants so that different perception could be received about the information which is to be provided by the auditor and the procedure which is to be followed in order report the fraud committed by the organization. (Ruhnke, Schmidt, 2014)g. Non response bias is the scenarios where the response is not received from the participant to whom the questionnaire is sent within the time duration which leads to lack of information which can be reduce the effectiveness of research. Sometimes there is situation where the response received is contrary to the response received from other respondents which lead to difficulty in decision making.h. The researcher has to take steps in order to remove the non response bias by evaluating the response from the respondents so as to ascertain the true facts and figures. For gaining the true facts and making knowledgeable decision the researcher assess the respondents from whose the response is not received and communicating them through other methods and procedures to collect time bound information. ( Ojo, et. al., 2016)i. It has been seen that the response rate in conducting the research from the respondents was less as compared to the questionnaire sent to the respondents. The response received where divided into the number of males and females. The responses which are not received from the respondents were taken by other methods and are evaluated to take decisions. The response and non responses include the questionnaire sent to the chartered accountant, stock brokers, professional client and management student. The responses received in both researches were used in an effective manner so as to ascertain the major reasons behind the audit expectation gap in an organization and in conducting audit procedure. Therefore we can say that the response rate in each study was adequate and proper and information could be taken.j. Both the studies were conducted efficiently and effectively but the research procedure adopted by the researcher Gunathilaka was more rigorous as it efficiently and effectively uses the information about the questionnaire received by the respondents. The research conducted in Sri Lanka uses sampling along with other test so as to get a more affirmative result from the views of the participants. In the study the researcher uses a more detailed method by adopting T-Test and Levenes test so as to get more detailed information. The responses received from the respondent were divided in to responses received from males as well as females and also bifurcated into age wise distribution of the people. Further the responses were also distributed on the basis of experience possessed by the individual. Therefore we can say that the approach adopted by the research conducted in Sri Lanka was done in detailed manner and more rigorous approach was adopted.k. Some of the flaws can be seen in the study conducted by the researcher which may have affected the result of the study conducted by the researcher. One flaw in the research was that a more procedural method of sending selection instrument could be used in order to receive the response. This has lead to delay or non response of the participant against the questionnaire sent. Another flaw in the research was that the more number of selection instrument should be sent to professional entities who have knowledge about the company and the major reasons about the audit expectation gap. (Adeyemi, Uadiale, 2011)
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