Contemporary Accounting Issue for Agency Theory- myassignmenthelp

Question: Discuss about theContemporary Accounting Issue for Agency Theory. Answer: Introduction Agency theory attempts to explain the nature of association between two different parties that necessarily include a principal and an agent in which the principal essentially delegates tasks to the agent who performs that work under a specific agreement. This current segment can help in understanding and identifying different issues that might be associated to the principal and agent relationship owing to conflicting objectives and difficulties for the principal to substantiate what the agent is actually doing and to whether the agent has behaved appropriately. Thereafter, the current study explains the reason why the identified issue is important to different parties lets say, accountants, managers, regulators as well as general public. Moving further, this study also presents an overview of factors pertinent to the study and shows the way in which this research can contribute to the existing theory. In addition to this, this paper also critically analyses the prior academic literat ure that can help in understanding the identified issue, relationship between two different variables along with strengths and limitations of the research. Practical Motivation The current study identifies the problem of climatic change in the business environment. Essentially, climatic change reflects a clear picture of the risks associated to the natural resources that again carry potential economic costs (Agoglia et al. 2015). The limited characteristics of resources essentially physical, financial, human as well as natural resources calls for the need of careful decisions as regards trade off and potential value of investments in the future in climate change adjustment. In essence, organizations are the principal source of carbon emissions and this in turn brings about considerable risks for corporations and affects the value of investment of shareholders of the firm (Beattie 2014). Therefore, the management of firms carries out cost-benefit analysis of specific scenarios to characterize different economic advantages of adaptation. Evaluating both the incentives as well as the disincentives that are essentially facing the principal and the agent can hel p all the decision makes to detect and at the same time address diverse underlying barriers to adaptation of climatic factors. Therefore, it is important for the accountants of the firm to understand different economic aspects of climatic change brought about by the carbon emissions and the importance of undertaking strategies for addressing this issue. Therefore, accountants of the firm can undertake cost and benefit analysis of the exercises undertaken to counter the effect of climatic pollution caused by the operations of the firm. Thus, accountants of the firm can carry out audit and financial analysis and serve a fundamental purpose in endorsing confidence as well as reinforcing trust in different financial information. Auditors can play the role of agents to the principals of the company at the time of performing audit. The principal-agent association as presented in the agency theory is important in understanding the way audit of financial information has developed (Blome et al. 2016). In this case, operations of the organization might have carbon footprint that can invariably affect the environment in which the business operates adversely. This in turn can affect the share price of the firm and subsequently the shareholder of the corporation. Therefore, accountants might check the effect of the climatic impact of the carbon emissions and analyze the effect of the same on the financial statements of the firm. In this case, the accountants might audit the financial assertions and become the agents and the board of directors and the entire management of the firm might be regarded as the principal (Carmona et al. 2016). Accountants also need to be audited by external auditors for substantiation of the trustworthiness of the pecuniary statements. Theoretical Motivation As such, the influence of both targets as well as incentives can be studied in the context of both financial as well as non-financial performance. Business concerns can perform majority of the actions at the time of establishing targets. Nevertheless, there are certain actions for example, comprehending variation in the discussion along with the agreement of plan of action that seen to be completely ignored during the process of setting specific targets. The targets set as per the expectations of the stakeholders can help the organization to progress and achieve the interests of the stakeholders. Again, incentive plans can also motivate people to work harder towards achievement of the goals/ targets set by the corporation. Therefore, the targets can be set by the management of the firm to reduce the carbon footprint as per the expectations of the stakeholders of the firm in the business environment (Hribar and Yang 2016). However, this reduction of the carbon footprint for achieving sustainability of operations might involve costs on the part of the company. Therefore, this can be judged using the financial assertions of the firm. However, comprehending the effects of targets for specific environmental performance is essentially interesting owing to information asymmetry as regards the environmental performance (James and Prout 2015). However, target needs to be achievable. Literature Review As rightly indicated by Luger et al. (2015) agency theory helps in explaining nature of association that is existent between two different parties that is the principal and agent. In essence, agency theory is primarily concerned with addressing two different issues that can occur in the association between principal and the agent. Essentially, the principal and the agent might have conflicting interests as well as objectives and it might become difficult for the principal to check what the agent is doing. Moral hazard also occurs that refers to the probable lack of effort of the agent in undertaking different delegated tasks. It also becomes difficult for the principal to analyze the level of effort that the agent has actually utilized (Pepper and Gore 2015). In addition to this, diverse risks arise essentially from diverse uncertainties that in turn can affect the result of the association. Essentially, this attitude of risk of two different parties might also differ, and a problem might occur at the time when they oppose the process of allocation of the risk. However, as correctly indicated by Shi et al. (2017), the principal can essentially counteract the problem of moral hazard by closely monitoring the activities of the agent. Therefore, in this case of climatic change, the management comprising of the board of directors (principal) can assess the works of the accountants by carrying out audit and thereby monitor the actions of the agents (that is the accountants). Shogren et al. (2017) asserts that both the parties necessarily incur diverse types of cost and this essentially rely upon the results of the consequences that again can be influenced by different types of uncertainties, gathering information, tracking and assessing and fi nally administering the agreement. Again, this can refers to different means by means of which the principle can effectively motivate as well as influence the behavior of the agent. Again, these incentives can be both positive or else negative. In addition to this, the overall result of the association might get affected by different uncertainties and the two different parties might have different information to undertake evaluation of different uncertainties. Williams (2014) mentions that adverse selection points out towards the agent mis-reflecting the competence to undertake the tasks and the principal might be unable to verify the same before deciding to select and hire them. Again, another way this can be averted is that the principal can contact specific people for whom the agent has earlier delivered service. Furthermore, another important factor is this is the contract. The main factor in the association between the principal and the agent is necessarily the contract that sp ecifies what, when and the way certain task needs to undertaken. This also includes diverse incentives along with penalties for the specific agent. However, this agreement needs to be developed after taking into consideration all the issues that are involved (Williams 2014). As rightly indicated by Pepper and Gore (2015), an agency model recommends that as a consequence of information asymmetries along with self interest, different principals also lack the reasons to trust agents and can seek to address the identified concerns by using mechanisms. These mechanisms can help in aligning interests of different agents with different principals and diminish the scope for diverse information asymmetries along with opportunistic actions. Fundamentally, agents might have diverse types of motives than that of the principals. Again, they might also be influenced by diverse factors, for instance, financial rewards, different labor market opportunities and the association with different other parties who are not directly pertinent to specific principals. However, varying motivations with information asymmetries might lead to concern regarding the reliability of information that influences the level of trust that the principal might have with particular agents. In th is case, it can be said that remuneration packages as well as incentives or the agents can deliver an effective mechanism for implementing corporate control, hiring together with firing by different board of directors (Luger et al. 2015). Hypotheses The hypotheses designed for the present study are hereby presented below: Hypothesis 1: Target slack will be greater in the first year in which targets are set. Hypothesis 2: Target slack will be greater in the presence of performance based incentives. 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