Blackwell Reference Online

Extract

Concerns over managerial accountability and the manipulation of financial statement information have long been key issues for policy makers, regulators, and accounting academics. Recently, however, gross accounting scandals such as Enron in the US, Ahold in the Netherlands, and Parmlat in Italy have brought these issues to the attention of society more generally. Such events serve as timely reminders that debates over financial reporting and governance quality are not just matters of high finance reserved for corporate boardrooms. Instead, these are issues that impact on all aspects of our lives, whether as investors, suppliers, employees, or consumers. Large‐scale business activity is characterized by separation of the management and financing functions ( Fama and Jensen, 1983 ). Entrepreneurs with technical expertise manage day‐to‐day operations aimed at identifying and exploiting profitable investment opportunities, while investors with specialist risk bearing capabilities provide the finance to support these activities. An unavoidable consequence of this separation is that those responsible for the management function have incentives to take actions to increase their own utility at the expense of maximizing returns on the capital provided by the financiers. This so‐called “agency problem” manifests itself in numerous ways, including direct wealth transfers from financiers to ... log in or subscribe to read full text