Doctoral Research Study Business Problem Managers (‘Agents’) of U.S. publicly traded companies are responsible for making decisions and carrying out business activities to generate the best possible outcome for the Shareholders (‘Principals’). Business managers directly influence the selection of independent auditors and the results of those audits to improve operations and financial reporting, which is used by analysts to influence share market value. Additionally, business managers directly influence the decision to issue dividends. Dividends and share market value are key components of total shareholder return, and many business managers are shareholders of the companies they lead. In business practice, managers may not allocate sufficient, proportionate resources for independent audits thereby risking shareholder returns in opposition to their fiduciary responsibility under the Agency Theory (Mitnik, 2021). The conflicting nature of this business relationship generates considerable concern since independent audits serve as a vital mechanism to test the accuracy of the purported financial outcomes of management’s actions, and the purported return to shareholders. When financial statements are presented fairly, the principal shareholder benefits from stock analysts and the public trust in the operating results. Yet, on the contrary, financial statement errors, and more so fraud, impose significant harm to shareholders. The general business problem that prompted me to search the literature is that insufficient independent audit service fees in relation to firm size negatively impacts total shareholder return. The specific business problem is that some business managers of U.S. publicly traded companies do not recognize the relationship between sufficient independent audit service fees relative to firm size and total shareholder return in a post-SOX era. Significance of Business Problem with Scholarly Support Tanyi and Cathey (2020) conducted a qualitative study to explore why foreign cross-listed U.S. public companies seek voluntary shareholder ratification of the independent audit firm and activities. The researchers examined the factors that increase or decrease the likelihood of shareholders becoming involved in the appointment of independent auditors among publicly traded U.S. companies. The study concluded that significant factors such as bank financing, the location of the audit firm, and the degree (e.g. cost) to which the audit firm provided non-audit services were associated with a higher probability of shareholders participating in the ratification of the independent auditor. As a result of rampant financial fraud and public company auditor failures, SOX legislation placed restrictions on the types of services auditors could provide and still be considered independent. This research is relevant to my study because it provides evidence that shareholders of U.S. public companies are concerned with the selection of the independent auditor as well as the additional non-audit activities provided by the firm and that shareholder ratification improves the quality of the independent audit and confidence in the public company’s financial performance, a key component of total shareholder return. Amin et al. (2021) explored how corporate governance practices can increase firm performance in various stages of the organizational life cycle. The purpose of the study was to draw the attention of business leaders to the need to assess the current level of the regulatory environment and the competitive development of their industries and countries to generate complementary corporate governance practices. This research is relevant to my study since the pressure to generate positive firm performance can be magnified relative to the position of the organization in its business life cycle is a practical example of the Agency Theory, while corporate governance practices serve to protect the best interests of the organization and its shareholders by creating oversight for corporate activities. The study concluded that there is a multitude of co-occurring corporate governance practices, such as independent audits, that exist among firms that achieve high firm performance, guiding global business leaders. Promoting Positive Social Change This study is significant in that the research findings may help managers of publicly traded companies in the decision-making process to allocate sufficient, proportionate resources for independent audits as an effective strategy to generate increased total shareholder returns while also addressing any potential Agency-Principal imbalance. Additionally, practitioners may benefit from gaining an understanding of the important correlational relationship between independent audit service fees and firm size, as well as the necessary relationship between independent audit activities impacting corporate shareholder performance. The implication for positive social change is that this study could improve the public’s trust in independent auditors’ credibility as well as the public’s trust in corporate financial statement reporting, which has been plagued by substantial fraud in recent years, resulting in significant harm to societal members. When public company financial statements are reliable and verifiable, society and shareholders benefit from increased development of the economy as well as corporate contributions to social programs such as schools, housing, roads, and other critical human service needs. Furthermore, public companies could voluntarily expand the scope of the independent audit to include an examination and verification of the companies’ Corporate Social Responsibility (CSR) reporting. CSR arose in response to stakeholder pressure to pursue the ‘double bottom line’, whereby the company earns a profit and simultaneously addresses a societal need (Luke & Chu, 2013). For example, the Bombas sock company gives away one pair of socks to the needy for every pair it sells. References Amin, H. M., Mohamed, E. K. A., & Hussain, M. M. (2021). Corporate governance practices and firm performance: a configurational analysis across corporate life cycles. International Journal of Accounting & Information Management, 29(5), 669-697https://doi.org/10.1108/IJAIM-11-2020-0186Links to an external site. Luke, B., & Chu, V. (2013). Social enterprise versus social entrepreneurship: An examination of the ‘why’ and ‘how’ in pursuing social change. International Small Business Journal, 31(7), 764-784. https://www.doi.org/10.1177/0266242612462598Links to an external site. Mitnick, B. M. (2021). The theory of agency redux. Academy of Management Discoveries, 7(2), 171-179. https://doi.org/10.5465/amd.2019.0136Links to an external site. Tanyi, P., & Cathey, J. (2020). Why do firms seek shareholders ratification of the independent audit function? The case of foreign cross‐listed companies in the United States. International Journal of Auditing, 24(1), 24-36. https://doi.org/10.1111/ijau.12175 Respond your colleagues’ postings in one or more of the following ways: Address a colleague’s analysis and evaluation of the topic(s). Expand or remark upon a colleague’s integration of relevant resources. Answer question(s) posed by your colleague(s) for further discussion. Link a colleague’s posting to other postings or to course materials and concepts, where appropriate and relevant. Extend or constructively challenge your colleagues’ work. include a minimum of one appropriately cited scholarly reference.
In the dynamic world of corporate governance, the relationship between business managers and shareholders in publicly traded U.S. companies is a subject of profound importance. Managers, often referred to as ‘Agents,’ play a pivotal role in making critical decisions that directly affect the interests of shareholders, known as ‘Principals.’ The allocation of resources for independent audits, the selection of auditors, and the results of these audits all influence a company’s operations, financial reporting, and, consequently, its share market value. However, an intricate web of conflicts and interests surrounds this relationship, potentially jeopardizing shareholder returns, in direct opposition to the principles of the Agency Theory (Mitnik, 2021).
This essay delves into a specific business problem: the failure of some business managers in U.S. publicly traded companies to recognize the relationship between adequate independent audit service fees relative to firm size and the total shareholder return, particularly in the post-SOX (Sarbanes-Oxley Act) era. The overarching issue at hand is that insufficient allocation of resources for independent audits concerning firm size has a negative impact on total shareholder return. This problem is not only prevalent but also poses a significant risk to the interests of shareholders.
Significance of the Business Problem:
The importance of addressing this business problem cannot be overstated. The consequences of managers’ decisions regarding independent audit fees and activities extend far beyond the boardroom. It touches upon the trust and credibility of financial reporting, which is a cornerstone of modern financial markets. Several scholarly works have highlighted the significance of this problem.
Tanyi and Cathey’s (2020) study examined why foreign cross-listed U.S. public companies seek voluntary shareholder ratification of independent audit firms and their activities. The research underscored the fact that shareholders are deeply concerned with the selection of independent auditors and their additional non-audit services. This participation improves the quality of independent audits and enhances confidence in a company’s financial performance. Moreover, it reinforces the idea that shareholders are active agents in corporate governance and oversight.
Amin et al.’s (2021) research explored how corporate governance practices can influence firm performance across different stages of an organization’s life cycle. The study emphasized that corporate governance practices, including independent audits, play a crucial role in safeguarding the interests of both the organization and its shareholders. It corroborates the notion that corporate governance is not a one-size-fits-all solution but a nuanced practice tailored to the specific needs of an organization.
The implications of addressing this business problem go beyond the realm of corporate governance. The trustworthiness of independent audits and financial reporting has been marred by financial fraud and corporate scandals in recent years, resulting in significant harm to society. When financial statements are reliable and verifiable, society and shareholders benefit from an improved economic environment and corporate contributions to social programs, such as education, housing, and infrastructure.
Additionally, this study can encourage public companies to expand the scope of independent audits to include the verification of Corporate Social Responsibility (CSR) reporting. CSR has gained prominence as a response to stakeholder pressure for companies to pursue a ‘double bottom line’ – profit and societal benefit. By ensuring the accuracy of CSR reports, companies can bolster their commitment to societal needs, contributing positively to social change.
In conclusion, the inadequate allocation of resources for independent audits in relation to firm size is a pressing issue in corporate governance. The influence of business managers on this aspect and its subsequent impact on total shareholder return cannot be understated. By addressing this problem, we can enhance trust in financial reporting, boost shareholder returns, and contribute to positive social change. The significance of this issue is corroborated by existing scholarly research, emphasizing the need for a comprehensive study that sheds light on the intricacies of this critical aspect of corporate governance. This research has the potential to benefit managers, practitioners, and society as a whole by creating a more transparent and responsible corporate environment.
Through this essay, we have provided a comprehensive overview of the problem, its significance, and the potential implications of addressing it. This analysis serves as a foundation for future research in this domain, offering a pathway toward better corporate governance and a brighter future for shareholders and society at large.
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