Costing Assignment Approaches

Stakeholder Perception of Earnings Management and Its Influence on the Quality of Accounting Information

“…Therefore, managers do not always act in accordance with what they should and can cause agency problems which ultimately lead to agency costs. Eisenhart (1989) in Triyuwono (2018) suggested that the contract between the principal (owner) and the agent (manager) raises two main problems, namely moral hazard and adverse selection. Moral hazard occurs if the agent does not carry out agreed actions (negligence) while the adverse selection occurs because the agent has complete information, so that he / she can choose the information presented to the owner, which on the other hand, the owner cannot fully verify.…”

“…The focus of the agency theory is on determining the most efficient contract that regulates the relationship between owners and agents (managers) based on three assumptions, namely: (1) Assumptions about human nature -emphasizing that humans have a tendency to selfishness, has bounded rationality, and risk aversion; (2) Assumptions about organization -suggest the existence of conflict between members of the organization, the efficiency as a criterion of productivity, and the existence of information asymmetry between principals and agents; (3) Assumptions about information -suggest that information is seen as a commodity that can be traded. Watts and Zimmerman (1986) in Triyuwono (2018) suggested that contracts will not reduce the agency costs unless there is a breach of contract, because it needs to be monitored through accounting numbers. For example, debt agreements between company managers and banks often require companies to maintain interest-rate ratios above a certain level, and bonus compensation schemes for executive compensation are generally based on accounting income.…”