Agency theory and the role of key managerial personnel

Discuss About The Accounting And Human Information Processing.

There are several factors which may positively and negatively impact the business functioning of organization. It is analyzed that uses of the agency theory, accounting methods and tools have been gaining momentum.  This report reveals the agency theory, compensation packages to key managerial person and possible issues which might be faced by the directors in the effective operiatons of the business.  In this report, explicit answers of the questions asked in this assignment have been taken into consideration.

It is evaluated that agency theory is the effective method used to set up relation between the employees and promoters of the business. As per the agency theory, employees and managers are the agents of the owners who takes all the operation and strategic decisions to run the business effectively (DeZoort, and Taylor, 2015).

It is the process to maximize the benefits of the principles or real owners. It is observed that the shareholders are the real owners of the company who invested capital in organization.  Therefore, managers work on the behalf of the real owners and make efforts to achieve the set objectives and goals. It is observed that when the salary given to key managerial persons is fixed then they are less interested to make the extraordinary efforts for the effective business functioning of organization. Therefore, proper incentive plan and establishment of the nexus between the organization growth and welfare of the key managerial person should be done. It is considered that there should be agency theory but linkage of the organization growth and economic welfare of the key managerial person plays pivotal role in the business success (DeZoort, and Taylor, 2015).

It is analyzed that there are several compensation benefits which is given to employees for their efforts. It is analyzed that the different components of the compensation packages may include several bonus plans such as efficiency linked with the performance, short term and long term efficiency performance plan which are related to the employee’s work. There are several incentives program such as bonus programs, stock options, incentive program and which may impact the employee’s performance and play pivotal role in the business success. These incentive plans includes employee stock option scheme, social security program, medical care, sick leaves and performance recognition and on-job training which may positively and negatively impact the performance of employees.

Compensation packages and their impact on business performance

However, the base salary is the amount of return given to employees so that they could deliver their work within the time. It is used as motivation part to get the work done from the employees.  There are several ways to motivate employees as per the motivational theories given. As per the Maslow theory, employees could be motivated if their basis needs are satisfied by the employers.  The best way to motivate an employee is to use proper process in which establishment of the nexus between the organization growth and welfare of the key managerial person. In short run, employees will be motivated by the salary and other incentives plans to work productively and in long run job promotion and assigning new responsibilities will work as motivation for them.

This is the practice which is used to improve the performance of employees and linked the bonuses that employees could strengthen the business performance in long run. It will assist in motivating the business in long run and create value on the investment.

There are several internal and external factors which might impact the decisions of the employees to do particular job. However, apart from these factors, compensation packages are the basic part which positively influences the employees to work in business structured program.  Employee while working in the business process has to face several risks and in order to face those risks in business, employees may want to get compensation. The salary given, incentive plans and bonus give to employees are the some of the motivation program which motivate employee to take risk in their business. The risk factors which may affect the performance employees should be managed by employees accordingly. It is analyzed that those employees who are more inclined towards the risk aversion takes less risk in their business and also get less benefits out of their investment plans. Nonetheless, employees who take less risk will always ask for the higher compensation packages as their basis salary. On the other hand, employees who are ready to take challenges are more inclined towards taking risk ask for less compensation package but ask for the incentives accordingly. Therefore, risk faced by employees and compensation given both are interlinked to each other and determined accordingly (Brusca et al. 2016).

It is analyzed that the performance based compensation program is the process which establish the relation or the nexus between the organization growth and welfare of the key managerial person (O’Dwyer, and Unerman,  2016).

Motivation and performance-based compensation plans

There are main factors that may limit the effectiveness of performance based compensation packages in motivating employees to work productively.

• Compensation benefits linkages-It is analyzed that the employees who earn more salary by increasing the product are more satisfied as compared to those employees who are inclined towards basic amount of earning and make less efforts. The compensation benefits given are an incentive to employees work as trump card to motivate employees for the better results (Brusca et al. 2016).  This organizational policy puts the glorious efforts which eventually strengthen the productivity of the employees at large.  However, at some point of time, these compensation plans may restrict the employee’s efforts if it is not consistently given to them (Brusca et al. 2016). However, in the given scenarios, it will prevent the innovation, creation and result to start depletion of the motivating level among employees. It will also result to failure of employees to put the efforts which is demanded or expected by organization from them (DeZoort, and Taylor, 2015).

Recognition of their work- It is analyzed that for some of the employees, recognition of their work comes as priority which they always like to take on the first and after that they takes other works. There are several performance linked packages such as incentive plans, rewards systems and increased business outcomes which may positively and negatively impact the business performed of the company.  These benefits plans play pivotal roles in the business success of organization. At this work process, this type of work program motivates employees to increase the overall outcomes and motivate employees to give their best efforts for the betterment of the organization.

Establishment of the nexus- It is analyzed that establishment of the nexus between the organization growth and welfare of the key managerial person will also strengthen the performance of key managerial person and also increase the overall outcomes in determined approach. These incentives plans will give good push to employees and will assists in break the set targets and goals in determined approach. It is analyzed that when the employees are given incentive programs then they are more inclined towards taking risk and delivering the unexpected result to organization. This work program also increases the overall performance and strengthens the working condition in determined approach.

After analysing the case, it is inferred that there are several benefits which have emerged due to the increased executive compensation program of the compensation committee which are given as below.

• The committee set up assists in reviewing and strengthening the better compensation plan for the CEP and other key managerial person.
• It improved the long term sustainability of business.
• It recommends the best possible compensation program and strengthens the work process which may positively impact the business in determined approach.

This part is accompanied with the agency theory in which the functions of the agents and owners have been discussed. Agency theory sets out the relationship of the principals and agents. As per the agency theory, agents are the directors and key managerial persons who are indulged in taking imperative decisions for the better and effective functioning of organization. It is analyzed that these persons takes all the key decisions to operate the business effectively.  These agents work on the behalf of the agents and take all the key imperative decisions. In business, real owners are the persons who invested capital in business. However, these investors have less amount of financial knowledge and they cannot take imperative business decisions. In this case, all the decisions are taken by the key manager persons who have been appointed in organization by the key manager person.  Nonetheless, all the key imperative information is disclosed to shareholder by using the proper financial statement analysis. These financial statements are prepared by the directors and managers to disclose all the key information with shareholders.

Factors influencing the effectiveness of performance-based compensation plans

As per the agency theory, all the agents who work in the business are the key business driver who takes all the key imperative decisions for the effective running of the business. The real owners of the company are shareholders. It is evaluated that the transactions reported by the agents in the accounts are the true and fair and disclosed to shareholders with a view to maintain the transparency of the business.

However, in order to evaluate the true and fair view of assets, audit report performance is done by audit firm to determine whether the firm is disclosing the fair view of assets or not.

The audit procedure comes in picture to strengthen the reporting frameworks which increases the overall quality of the reporting framework in determined approach.

The audit process is used to evaluate the business risk and financial risk that could be faced by organization in recording of the financial data of company

It is evaluated that governance is the procedure to strengthen the legal compliance program of company. If the governance program of company is effective then it will render company more complied with the all the rules and regulation. The governance program is accompanied with the accountability, transparency and fairness of the financial accounts which may increase the overall outcomes and efficiency of the reporting frameworks in determined approach.

It involves the continuing monitoring program of polices of the organization management. With the ramified economic changes, organization needs to establish the proper harmonization in the international accounting standards and domestic accounting standards which will strengthen the reporting framework of company (Brusca et al. 2016).

It is evaluated that agency theory reflects that the agents work for the profit motivates of the real owners. However, in case of non-profit organization, the main motivate of agent is to increase the overall welfare of the persons who gets affected by the organization. The agency theory does not emphasis upon the appropriate governance structure of the organization (Chan, and Vasarhelyi, 2018). Therefore, due to its less inclination toward the government compliance, agency theory should not be used as single theory to study governance in Non-profit organization.

The governance aspects and compliance program will be managed by the managers who will take all the imperative decisions to make the effective reporting frameworks. However, if company fails to comply with the applicable rules then they will also be liable for the failure of the same.

It is evaluated that there is another theory apart from the agency theory which may be used to strengthen the governance program named as Stewardship theory.

The theory contradicts that managers do acts for the self-interest and not for the interest of the shareholders (Chan, and Vasarhelyi, 2018).

As per the Stewardship theory, it is evaluated that if managers are kept free then they takes the decisions in the best interest of the organization.  They take all the decisions in the best interest of organization and put efforts increase the overall output of the business.

 It is evaluated that the method used by Najeb Masoud was audit expectation in the case of Libya”. It was conducted to analysis the gap and risk involved in the reporting frameworks.

 The structured questionnaire and interview have also been used to analysis the case and identify the associated risk of the business.

Brief summary- Najeb Masoud has identified the group of persons who will conduct the financial audit program.

 The four groups has been selected by Masoud in order to conduct the interview

• Auditor
• Financial managers
• Financial communities and departments
• Non-financial departments

These persons directly and indirectly impacted by the reporting and audit programs undertaken (Chan, and Vasarhelyi, 2018).

Masoud interviewed total respondents of 988 participants accompanied with the 145 auditors, 320 audited, 238 financial communities and 285 financial communities.  It includes financial managers, financial institutions and other key person. The sample survey test was related to the population that seems reasonable to denote the results.

. This case study reflected that Masoud followed proper strategic program and survey method to collect the data.

Masoud used the methodology to support the quantitative approach along with the descriptive and inferential statistics regarding the population (Christensen, et al. 2016).

The qualitative study assists in understanding the non-financial aspects that led to gap in audit. This kind of analysis seems appropriate in the scenario where these are lack of in expectation. . In case of Libya, auditors needs to analysis whether the true and faire view of assists reported to stakeholders to make business more transparent (Cohen, Krishnamoorthy, and Wright., 2017).

In the report, Masoud have evaluated qualitative flaws that existed, and the recommendations have also given for the further studies (Cohen, and Simnett, 2014).

The audit expectations are not giving the clear notes to mind of the stakeholders as many of the auditors evaluate the financial statements as per the auditing standards (Edgley, Jones, and Atkins, 2015.)

The auditors need to detect the fraud and error in audit reporting framework.

All the data were properly cited with the examples of the finding of Masoud.

If proper assertion test is used by auditors then they could easily identify the inherent risk (Feroz, Park and Pastena, 2011).

It is analyzed that before evaluating the carrying out strategy, Masoud researched other studies and others were trying to understand the pattern followed by them

Afterward, pilot survey was conducted before any formal survey which could be conducted.

The survey was prepared in English language and then was converted to Arabic language.

These all the steps enabled Masoud to successfully draw the methodology.

This will make them to make more informed decisions (Goodwin, and Wu, 2016).

In this case, questionnaire has been used by Salifu and Mahama is divided into two sections. It is analyzed that section focused on collecting demographic information from the respondents while section B asked for the management and auditors responsibilities.  In this questionnaire, marks have been given 1 to 5 to questions where all the results are undertaken accordingly while; Masoud’s questionnaire includes both academic and emerging economic issues (Gul, Chen, and Tsui, 2013).

The questionnaire highlights the Masoud’s trick had over the Salifu and Mahama’s investigation because it is involved for the options. The agreement and disagreement is based on the decisions given by Masoud’s trick (Kogan, Sudit, and Vasarhelyi, 2018).

It is analyzed that the investigation follows the same set of writing the finding. It will include in the results the outcomes of the study and recommendation they opine the scenario.

 Salifu and Mahama’s report reveals the much detailed outcomes and two segmented questionnaire being the respondents asked for the demographic parts and audit expectation part. It is analyzed due the non-effective results the audit program recommendation was presented. It is analyzed that Salifu and Mahama’s research may seem much appropriate when determining the causes of the implemented action plan (Libby,  2017).

mailing questionnaire which is very low and respondents who do not pay much attention when they are asked from the distance regarding the asked questions in questionnaire.  It is analyzed that the better alternative that could have been undertaken the personal interviews even if the undertaken work is accompanied with the lesser respondents. This provides higher responses (O’Keefe, Simunic, and Stein, 2014).

In this case study, the problem that existed in Salifu and Mahama’s approach is related to the poorly designed sample size. This study has been considered for the 150 respondents which reduced its investigation to 135 turns out to be very small for drawing conclusion for the group.  The reason was based on motivate to reduce the excessive travelling costs. This probe as restrictive factors as there could have been more thoughtful results with a larger group being surveyed. However, investigators have no assertive test on the investigated assets  (Zadek, Evans, and Pruzan,  2013).

Conclusion 

After evaluating all the detail and case questions, it could be inferred that audit program and agency theory are the main part and play pivotal role in the business success of organization. These are responsible for the strengthening the reporting framework and implement the effective strategic decision making in determined approach. There are several other case study of data orientated analyst, the Salifu and Mahama’s research were identified  when it comes to the findings, as they have played a huge effort in reporting the result dividing it significantly among appropriate groups.  It could be inferred that company needs to establish the harmonization in its reporting frameworks if it wants to avoid the possible issues in determined approach.

References

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