Agency Theory vs. Accounting Theory

by Eric Feigenbaum

Companies, particularly corporations, have a series of relationships with both harmonious and competing interests. Owners and stakeholders in a company rely on managers and executives -- also known as agents -- to see that their interests are served. Agency theory focuses on the nature of stakeholder -- agent relationships including where they are effective and where potential conflicts of interest and ethics lie. Accounting theory, on the other hand, is a system of principles, rules and assumptions that govern the accounting profession. Although some aspects of accounting theory touch on how to serve clients and owners, it has little in common with agency theory.

Agency Theory

Agency theory holds that company owners or shareholders hire executives, managers and employees to serve their interests. In essence, owners delegate a certain amount of control and direction over their company's operation to agents whose employment is dedicated to their company's success, which is often defined as maximizing profits. Owners try to align their interests with top managers' interests through high salaries, bonuses, profit sharing, stock options and other incentives. However, agency theory says that there is always some conflict between an agent's personal interests and those of her principals.

Debt Holders

Although some theorists disagree about whether debt holders count as principals, most definitions of agency theory acknowledge that debt holders are stakeholders whose interests are sometimes at odds with shareholders -- and therefore, agents as well. Debt holders typically want companies to repay their debts fully and as quickly as possible. They believe profits and successes should go to servicing debts before a company pursues new risks and aggressive growth. However, shareholders care most about profits and endeavors that will further their company's success. This can create a conflict between two financially interested parties, which at times puts agents in the middle.

Accounting Theory

Loyola University teaches its accounting students that accounting theory is, "a set of concepts and assumptions and related principles that explain and guide the accountant's actions in identifying, measuring and communicating economic information." In truth, accounting theory is not a singular unified principle or even a short collection of them -- but a large set of laws, rules, principles, assumptions and practices that have become the standard for financial reporting both in the United States and globally. These include concepts of the ethics and accuracy needed to produce honest documents that reflect the financial status of organizations and individuals.

Elements

Business and accounting leaders and experts place conceptual frameworks, accounting legislation, concepts, valuation models, hypotheses and theories under the umbrella of accounting theory. Because accounting is more of a practice than a science, elements of accounting theory change and adjust with the needs and circumstances of the times. Accordingly, accountants must take continuing education courses to stay abreast and to ensure they perform their jobs in accordance with legal and societal mandates.

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