In achieving the goals of an organization, we often hear of various obstacles. What causes these obstacles, namely, due to a mismatch between the goals of the agent and the principal, both between shareholders and management and between superiors and subordinates in an organization. This can be explained through agency theory. Agency theory provides the theoretical foundations for many studies in economics, management, marketing, finance, accounting and information systems. This theory has had the greatest influence on underlying research in the field of corporate governance and management control systems in the western world. (Ekanayake 2004).

One of the hypotheses in agency theory is that management will try to maximize its own welfare by minimizing agency costs. This hypothesis is not the same as the hypothesis which states that management tries to maximize the value of the firm (value of the frim). Therefore, management is assumed to choose accounting principles that are in accordance with its objective of maximizing its interests. The approach in agency theory can be inductive or deductive. Agency theory approach is not finance or economics but psychology and sociology.1

Based on the description above, the researchers are interested in taking research with the title “Agency Theory in Management Accounting

 In achieving the goals of an organization, we often hear of various obstacles. What causes these obstacles, namely, due to a mismatch between the goals of the agent and the principal, both between shareholders and management and between superiors and subordinates in an organization.

This can be explained through agency theory. Agency theory provides the theoretical foundations for many studies in economics, management, marketing, finance, accounting and information systems. This theory has had the greatest influence on underlying research in the field of corporate governance and management control systems in the western world. (Ekanayake 2004).

One of the hypotheses in agency theory is that management will try to maximize its own welfare by minimizing agency costs. This hypothesis is not the same as the hypothesis which states that management tries to maximize the value of the firm (value of the frim). Therefore, management is assumed to choose accounting principles that are in accordance with its objective of maximizing its interests. The approach in agency theory can be inductive or deductive. Agency theory approach is not finance or economics but psychology and sociology.1

Based on the description above, the researchers are interested in taking research with the title “Agency Theory in Management Accounting

Agency theory is the principle used to explain and solve problems in the relationship between business people and their agents. Most commonly, that relationship is the relationship between shareholders, as principals, and company executives, as agents.2

 

Agency theory proposed by Jensen and Meckling (1976) is a theory which suggests that the separation between owners and managers of a company can cause agency problems. The agency problem in question, among others, is the occurrence of asymmetric information (not the same) between those owned by the owner and manager. With the unequal ownership of information, the management (agent) of the company tends to carry out moral hazard and adverse selection. Managers do have an obligation to maximize the welfare of shareholders. But on the other hand managers also have an interest in maximizing their welfare. The unification of the interests of these parties often creates a problem called the agency problem.

The worsening condition of agency problems is also caused even though managers get compensation from their work, but in reality the change in the wealth of managers is much smaller when compared to changes in the prosperity of shareholders or owners (Midiastuty and Machfoedz 2003). Reporting from the educational article, agency theory provides an important role for accounting, especially in providing information after an event which is referred to as the post-decision role. This role is often associated with the accounting stewardship role, where an agent reports to the principal about past events. This is what gives accounting its feedback value in addition to its predictive value.

According to Eisenhardt (1989) because what is analyzed is the contract that regulates the relationship between the principal and agent, the focus in this theory is on determining the most efficient contract, agency theory is based on three assumptions, namely:

  1. Assumptions about human nature
    Assumptions about humans emphasize that humans have the nature to be selfish (self interest), have limited rationality (bounded rationality) and do not like risk (risk aversion).
  1. Assumptions about organization
    Organizational assumptions are the existence of conflicts between members of the organization, efficiency as a productivity criterion, and the existence of asymmetric information between principals and agents.
  1. Assumptions about information
    The assumption about information is that information is seen as a commodity that is traded.

Agency theory that is starting to develop refers to the fulfillment of the main goal of financial management, namely maximizing shareholder wealth. This wealth maximization is carried out by management called agents. The inability or reluctance of managers to increase shareholder wealth creates what is called the agency problem. Several studies that expand the concept of principal-agent relationship to the second type are the relationship between superior-subordinate, employer-employee, manager-worker.

Management control systems (MCS) have the important task of managing these relationships optimally in an effort to achieve organizational goals. The agency perspective can provide a direct explanation of the MCS aspects of an organization (Ekanayake 2004). These aspects include information systems and information processes, internal control and audits, performance measurement and evaluation, compensation and incentives.

As shown above, it can be concluded that the definition of agency theory is the relationship between the principal (owner/shareholder) and agent (manager). And in the agency relationship there is a contract where the principal authorizes the agent to manage his business and make the best decisions for the principal.

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