Agency Conflict

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Agency Conflict

Companies that separating the functions of management and ownership will be vulnerable to agency conflicts. On agency theory designed a system that involves two parties, namely the management and owners. Furthermore, management and owners make an agreement (contract) work to achieve the expected utility. Lambert (2001) states that the agreement is expected to maximize the utility owner (principal), and can satisfy as well as ensure management (agent) to receive the reward. The benefits received by both parties based on company performance. In general, the company's performance is measured by profitability (Penman, 2003). The amount of income (profit), then informed by the management to the owners through the financial statement presentation.

Ohlson (2006) states that financial accounting is important in the measurement (measurement) through approach to the balance sheet (balance sheet) or the approach income statement (income statement). At the balance sheet approach, accounting rule determine the value on the balance sheet, and leads to changes in the value of of revenue and expenses measurements. While the income statement approach is to determine directly of revenue and expenses, and it will be useful to update the balance sheet value of previous period.

In accordance with agency theory, motivation of management can be grouped into two categories: opportunistic and signaling (Beaver, 2002). In the opportunistic motivation, management through the aggressive accounting policies generate higher returns than real profits. If earnings report can not describe the real profit, it will lead to overstate earnings that resulted in profits become blur (opaque). The blurring of profit (earnings opacity) implies that the accounting profit can not describe the true economic profit. The policy was made by management, as they relate to compensation under the contract agreed upon with the owner.

In the signaling motivation, management presents financial information (particularly income) is expected to provide a signal of wealth to shareholders. Earnings reports that could provide a signal of wealth is growing and profits are relatively stable (sustainable). Penman and Zhang (2002) states that sustainable earnings are earnings that have a high quality and as an indicator of future earnings, and hereafter referred to as the persistence of earnings (Sloan, 1996; Dechow and Dichev, 2002; Francis, Lafond, Olsson and Schipper, 2004). (Sunarto)

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