Managers can work for shareholders yet they themselves are significant shareholders. This happens when managers exercise their rights for employee stock options. Due to lack of transparency, managers may have conflict interest in the onset especially if their shares have significant voting rights to direct the corporate strategy in the future. Agency and principal compact should be guarded by corporations to prevent adverse scenarios of diluting agent’s (e.g. managers) responsibilities by giving them the probability to be principals (e.g. stockholders). When this happens, managers can have sub-optimal effort in managing the company because part of his time, strategic contribution and money are diverted to being a stockholder. As a general rule, stockholders are the risk-takers while managers are the agents that will assure the former from being under success.
Write-off applied to stock option-related expenses that loosen the pressure of costs being deducted to revenues. As a result, the profit of the company especially the whole income statement has the incentive to mitigate any losses or even look as profitable. Due to this, Dunlap’s previous use of writing-off option-related costs enables its losses to be minimized in terms of revenue reduction. The argument of Dunlap against Sun Beam also gained ground because writing-off mitigated the loss.
The hiring of auditors and bond companies to evaluate corporation’s financial statements can have negative and positive effects for the public. The former can induce collusion in which other auditing functions can be affected by the profit being derived from the additional work. As a result, corporations can collude to minimize reporting standards or favor few misapplications of required disclosures. Also, this situation can give corporations unnecessary incentive to model their financial statements according to the liking of auditors and bond companies. In effect, they can lead to getting their positive thinking of the corporation and then submit the real intention of getting funds or colluding to by-pass financial statement requirements. On the contrary, such situation is positive when the relationship blooms in minimizing transaction costs of auditing because at the planning stage of designing the reports intervention is already applied. Financial markets can have efficiency in managing resources and capital.
In view of the positive and negative side of this ideal, it is suggested that potential clients should be applied with restrictions regarding the extent of opinions that auditing offices and bond agencies can apply. Those accounts that relating to additional income of the contractors should not be communicated and the design or content per se of the statements should be focused. Auditors should not also have relatives in the client’s company to avoid personal biases in evaluating the financial statements. Government standards may also include additional disclosures in the financial statements about the extent of preview and opinion that auditing and bond agencies have been made. In these recommendations, the public may be assured that negative collusion will ensue and their best interests are protected in both investing and evaluation areas.
Credit:ivythesis.typepad.com
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