1. apply agency theory to management control, show links between management control and agency problem.

the answer I have prepared my teacher said was' Points are okay. What is important is a discussion with a literature review'.

 

1. What is the 'Agency Theory'
The agency theory is a supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals and agents of the principals. The two problems that agency theory addresses are; first, the problems that arise when the desires or goals of the principal and agent are in conflict, and the principal is unable to verify what the agent is actually doing; secondly,  the problems that arise when the principal and agent have different attitudes towards risk. Because of different risk tolerances, the principal and agent may each be inclined to take different actions.

2. Agency theory and management accounting and control
According to Sharma (1997), various management accounting systems and procedures can be understood as systems of ‘monitoring’ and incentive systems to mitigate the agency problem. Moreover, Lambert (2001) stated that agency theory has been deployed in management accounting research to address two fundamental questions; how do features of information, accounting and compensation systems affect the agency problem? And how does the existence of the agency problem affect the design and structure of information, accounting and compensation systems? Furthermore, for Walker (1989), agency theory has been given two complementary interpretations in accounting research: as a normative theory of accounting, on the one hand; and as a positive theory on the other. As a normative theory, it has been deployed to determine economically efficient accounting practices: that is, determination of accounting practices which would mitigate the agency problem and help firms achieve optimality in production and resource allocation. As a positive theory, on the other hand, it has been employed to test the optimality of empirically observed contractual arrangements, or to test the empirical validity of the presumptions of the agency model in the light of empirical observations.