Abstract
Based on a number of researches conducted by the prior papers about audit activity, audit price and agency theory. This short paper will provide a brief review focus on whether agency theory provides a general framework for audit pricing majorly refer to the study by Nikkinen and Sahlstron (2004). Furthermore, this is short paper also try to make further discussion from personal perspective.
Literature review
The purpose of Nikkinen and Sahlstron (2004) study is to ‘investigate whether agency theory provides a general framework for audit pricing.’ Through analysing audit price in seven countries representing entirely different accounting and economics environment, they try to verify the hypothesis that audit fees are determined by agency theory (Nikkinen and Sahlstron, 2004). As suggested by the regression analysis, it confirms that there is a negative relationship between audit fees and manager ownership and a positive relationship between audit fees and free cash flow in several countries (Nikkinen and Sahlstron, 2004). As the overall R2is 0.78, which is suggested that agency theory can be used, at least to some extent, to explain audit fee (Nikkinen and Sahlstron, 2004)
Discussion
According to Jensen and Meckling (1976), agency theory derives from the financial economics literature, which postulate that firm consist of a nexus of contracts between the owners of the entities (the principles) and manager (the agents) who are charged with using and controlling
Our textbook defines an agency problem as a “conflict between the goals of a firm’s owners and its managers” (Megginson & Smart, 2009). It then defines agency costs as dollar costs that arise because of this conflict. In the corporate structure, stockholders are the owners of the firm, and they elect a board of directors to oversee the firm and help protect their investment. The board then hires the right corporate managers to run the firm with the goal of maximizing the wealth of the
John Winthrop believes in two primary aspects of liberty. These he refers to as civil and federal. Winthrop interprets civil liberty as that of free will; the ability to make one’s own decisions regardless of any repercussions. This is the purest form of liberty, immune to contamination by external influence. Federal liberty refers to liberty imposed by authority, such as a governing body. In this form of liberty, the particular form of authority is responsible for maintaining peace and order within the community. Winthrop illustrates the subjugation of women through marriage and the Christian church as prime examples of federal liberty. Some may deem Winthrop’s views on liberty as hypocritical due to his own human nature. Throughout his
This research paper analyzes the degree of an auditor's liability to clients and third parties under applicable law.
An auditor’s role in an audit is very important. An auditor must be able to collect enough evidence to supports their finding, and also be on the lookout for fraud. Company’s may or may not know the law, but it is the job to know the law, and be able to educate and report findings properly. Since the Sarbanes-Oxley Act, there have been provisions that have directly affected auditors. This paper will include the details of the Sarbanes-Oxley Act, how ethics and independence have affected auditors, as well implementation of new standards based on the Sarbanes-Oxley Act.
In 2009, the research done by Ghosh and Palewicz designnd for analyzing the auditing cost from 2000 through 2005. They collected 23,273 firm’s year observation (Ghosh and Palewicz 181) and the results indicates that the sample’s average audit fees in pre-SOX is $533,360 but after SOX it went up to $1,185,322 over two years, The increase in audit fees is $651,962 which is approximate 122 percent.(Ghosh and Palewicz 185).
Arens, A. A., Elder, R. J., & Beasley, M. S. (2006). Auditing and Assurance Services (11th Ed.). Prentice Hall, Upper Saddle River, NJ: Pearson Prestice
The cause of the agency problem is conflicts of interest between the manager (the stockholder’s agent) and the stockholders. It is also results from the separation of management and the ownership of the firm. These problems may interfere with the implementation of the firm’s goals, which is to maximize the shareholder’s wealth. For instance, a large firm may be run by professional managers who have little or no ownership in the firm. Because of this separation of the decision makers and owners, managers may make decisions that are not in line with the goal of maximization of shareholder wealth. They may approach work less energetically and attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. We can try to address these issues in several ways. Managers can be monitored by auditing financial statements and managers’ compensation
Proud, friendly, and fun, Mexicans are the people the most valuable and alive I know. The Mexican culture, full of history and diversity is without doubt the culture I connect the most with. Having the opportunity to spend a summer studying at ITESM Ciudad De Mexico with a complete immersion into the Mexican culture is a dream.
The lack of independence for external auditors will lead to the neglect of auditing risks (William R.K., 2003), which are the main reasons for the failure of certified accountants and professional accounting organizations. The consequence of the external auditors deprived of independence would be very serious. And there are many cases, which aroused by the failure of external auditors and most are related to the lack of independence. One famous example is the bankruptcy of Enron and the role played by its external auditor, Arthur Andersen (Todd, S., 2003). Arthur Andersen was once one of the biggest accounting companies in the world, and was canceled for the involvement in the Enron bankruptcy scandal.
Agency Theory is tied up with analyzing and resolving any current issues that exist between their management team and owners. In Agency theory, way of think may
The purpose of this paper is to highlight the role of external auditing in promoting good corporate governance. The role of auditors has been emphasized after the pass of the Sarbanes-Oxley Act as a response to the accounting scandal of Enron. Even though auditors are hired and paid by the company, their role is not to represent or act in favor of the company, but to watch and investigate the company’s financials to protect the public from any material misstatements that can affect their decisions. As part of this role, the auditors assess the level of the company’s adherence to its own code of ethics.
The auditing profession by nature entails a person to be as trustworthy as they can possibly be since the need to be free from “undue influence” is not only expected but should exceed all expectations. The need for an auditor to have a clear mind, free from all distractions, can be compared to a surgeon attempting to perform a high-risk surgery where his actions would ultimately determine whether the person undergoing the surgery lives or dies. Saving lives is a universal principal and almost everyone acts upon it and so we have more lives saved than lost. Similarly stakeholders’ trust that auditors will act with integrity and honesty, which will enable them to see beyond the greed of money, therefore, act in the appropriate manner that will sustain the livelihood of the stakeholders. Relating to the importance of honesty, the authors highlighted Immanuel Kant theory, ‘Kant’s first categorical imperative, the universalizability principle: ‘act so you can will the maxim of your actions to be a universal law.’ Which supports the notion that it is also in the best interest for auditors to be ethical and trustworthy in order to sustain the functions of auditing. For example, if every auditor was to engage in dishonesty and unethical practices, they run a high risk of undermining the confidence and trust that stakeholders have placed on them. Without this public trust, the whole institution of
This paper critically analyses the independence of the internal audit function through its relationship with management and the audit committee. Given the growing role of internal auditing in contemporary corporate governance and independence has gained renewed attention.
Agency problem is a potential conflict between the agent and shareholders in the interest. It is shown that ownership is separated from management. This cause not only is the divergence of ownership and control, but also the information is asymmetrical. When ownership is separated
The global market has shown exemplary contribution to the growth of the world's development until recently where financial crisis have been bombarding most economies. As a result, the cost of livelihood had been unaffordable to many who live below the dollar. The monetary crisis has led to the lowering of many currencies against the dollar, hence advancing the economy crisis to most worldwide nations. This turn of events has been attributed to the lack of exercise of business and management ethics in many multinational companies, firms and investments. Financial scandals have been the order of the past twenty years leading to the sweep over of the flourishing global market. The scandals, especially in larger companies and multinational, are spurred by inter and intra-conflicts in their organizational structures.