Current issue in Financial Accounting Essay Example


Current issue in Financial Accounting

Current Issues in Financial Accounting

Question 1: From an agency theory perspective, provide an explanation for having a “good” corporate governance structure. 

In modern financial issues, control and management of companies has greatly intensified separation from ownership, as it is consistent with the Agency theory which outlines the significance of a good corporate governance structure. The Agency theory points out the importance of disconnecting the corporate management from the owners to the managers. A good governance structure refers to the management that is done by professional agents who are able to create effective and efficiency running of the company as the Agency theory suggests (Monks & Nell, 2004). The Agency theorists are responsible for designing the most cost effective information system which is able to create a smooth running of every activity in the company/corporation. This mostly happens when the CEOs of the public companies have the responsibility to work as the agents for the owners who seek to acquire information and come up with incentive systems to make sure there is an agent action in the owner’s interests.

According to the Agency theory, a good corporate governance system is able to minimize the dysfunctional behaviours such as the existence of gaps between the managers and the outside stakeholders. This is done by considering the fact that the managers are professionally trained individuals in running business than the outsiders who do not have time and resources to supervise the behaviours within the managerial field (Allison, 2006). The managers are as well able to take actions that may seem undesirable to the shareholders. Moreover, the corporations may provide some misleading information to the shareholders to cover true performance operation. Therefore, the Agency theory has played a very significant role in minimizing the bad behaviours of corporation structures.

Question 2: It is argued that the separation of ownership from control in corporations allows shareholders to avoid full costs associated with the benefits that they receive. First, briefly explain how this situation occurs. Second, discuss the implications of this situation for society at large.

The shareholders are responsible for electing the directors who in turn appoints the managers. The directors are as well responsible for standing for the interests of the shareholders and to find out the wide policies carried out by the managers. This makes the shareholders to remain as beneficiaries but play a very minor role in running their corporations thus having enough time to run their other functions (Mark, 1999). The extensive group of professional management who work as permanent runners of large firms must be issues with wide powers of making decisions. It is clear that their decisions cannot be supervised to details though their decisions are evaluated from time to time. This is what makes the shareholders to avoid full costs linked to the benefits they receives as they do not play significant roles in managing their own corporations. It is also because the shareholders are independent from the managers and their separation does not matter.

This situation greatly benefits the society because the shareholders are able to move on doing other investments other than concentrating on the initial corporation (Jensen, 2001). By doing so, the society will massively benefit since there will be new developments made and the individuals in the community will have job opportunities to both the initial firm which is able to expand or enlarge and the new corporation that may be developed by the shareholders. The shareholders are also able to maintain their good relationships and maintain peace and harmony in the society.


Stephen G. Mark, (1999). The Separation of Ownership and Control. Boston University school of Law.

Monks, Robert A.G. and Minow, Nell, (2004). Corporate Governance. Blackwell. ISBN

Garrett, Allison, (2006) «Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets,» 32 Denv. J. Int’l L. & Pol’y).

Jensen, E. F. (2001). Separation of Ownership and Control.
Journal of Law and Economics , 325.