Principal-Agent Theory Application in Accounting and Auditing Research

Abstract

The principal-agent theory comprises a crucial theoretical framework for addressing complex issues pertaining to financial reporting, and it serves as a foundational theory widely employed in a variety of research inquiries, particularly in the fields of accounting and auditing. This theory clarifies the complex relationship between the principal, who delegated authority, and the agent, who assumed responsibility, in the context of contractual arrangements, thereby highlighting the inherent conflicts of interest within the agency relationship. Despite the agent's duty to act in the proprietor's best interests, both the principal and the agent seek to maximize their own interests. However, the principal's expectations may induce the agent to engage in opportunistic behaviors that result in inaccurate financial reporting. Consequently, the principal-agent theory is of utmost importance in addressing diverse research concerns associated with financial reporting, such as the quality of financial reports, financial information disclosure, accounting policy choices, examination of managerial behaviors, and investigation of auditing dimensions. As a result, the principal-agent theory has become firmly established as a cornerstone theory in accounting and auditing research.