Servicio

An agency relationship is established when there is a separation between ownership and management. The principal engages the agent to perform some service on their behalf which involves delegating decision making authority to the agent (Jensen and Meckling, 1976). However, when both the principal and agent aim at maximizing his or her own benefits, it is possible that the self-interested agent will not always act in the best interests of the principal. This is known as the agency problem.

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The agency problem may also apply to mandatory IFRS adoption. Since IFRS is a set of principle-based standards which allow a certain amount of discretion to managers on how to report financial performance and positions, self-interest managers may not have strong reporting incentives when adopting IFRS. Whether reporting under IFRS, or any other standard, is done in full disclosure with transparency or with cosmetic adoption without the intention to reduce information asymmetry will determine the quality of the “Output”. Reporting incentives are an integral element for managers to commit to the mandatory IFRS adoption process. To incorporate the concept of Rahman et al. (2002), reporting incentives and accounting regulations (from mandatory IFRS adoption) will become the “Influence” on how managers process their financial reports. This study stresses that without such incentives, accounting standards alone are not sufficient to exercise strong influence in the IFRS adoption process. In turn, good quality of financial output will not be possible. As a consequence, the desired capital market outcome is not achievable.

Due to the requirements of more and greater disclosures and the use of fair value accounting, mandatory IFRS adoption may be considered higher quality reporting. However, it is questionable as to whether the mere adoption from domestic GAAP to IFRS will necessarily lead to improved financial reporting quality (i.e. better output) with the subsequent desired capital market benefits (i.e. better outcome). Extant literature still debate on if the actual financial reporting outcomes are in part or mainly shaped by reporting incentives (e.g. Leuz et al., 2003, Ball et al., 2003). The IPOO model provides a framework for understanding the drivers of improved financial reporting quality that distinguishes the internal and external factors that contribute to a better output.

A key issue within this framework is that the reporting discretion that underpins IFRS Principles means managers and their auditors have to exercise their professional judgements (e.g. decision in determining the required impairment of goodwill and property, plant and equipment). Hence, this research study explores if such reporting discretion is shaped by reporting incentives that are influenced substantially by different internal and external factors. This research study argues that such influences include both individual and joint effects of firm-specific (CBF and ICG) and country level institutions (IEF). These feed into the IPOO framework to drive the observable

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outcome, which is measured in the case of this study, through a reduction in firms’ cost of equity.

Even though Agency Theory dominates the paradigm that managers interests diverge from that of the principal’s, there are alternative interpretations of the relationship. Stewardship theory argues that the assumptions in agency theory about individual benefit maximization may not hold for all managers (Davis, et al., 1997). It puts forward the proposition that, in contrast to the agent’s self-interest orientation, some managers may become the stewards who are motivated to act in the best interests of their

principals (Donaldson & Davis, 1991). Davis, et al. (1997) find distinct differences between the two theories of management behavior and these are summarized in Table 2

TABLE 3-2

Comparison of Agency Theory and Stewardship Theory

Agency Theory Stewardship Theory

Model of Man Economic man Sell-actualizing man

Behavior Self-serving Collective serving

Psychological Mechanisms

Motivation Lower order/economic Higher order needs (growth,

needs (physiological, achievement, security, economic) self-actualization)

Extrinsic Intrinsic

Social Comparison Identification

Other managers Low value commitment

Principal

High value commitment

Power Institutional (legitimate, coercive,

reward)

Personal (expert, referent)

Management Philosophy Control oriented Involvement oriented

Risk orientation Control mechanisms Trust Time frame

Objective

Cultural Differences

Short term Cost control Individualism

High power distance

Long Term

Performance Enhancement Collectivism

Low power distance

What Table 2 demonstrates is that when managers are stewards, they will see that given specific firm-specific company business factor (CBF) the firm will benefit from

adopting IFRS. For instance, if managers are aware that business growth will be benefitted by using equity financing for such projects, there will be a greater need for external communications with outside equity investors about the company’s financial

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performance and position (Ball et al., 2003). Since mandatory IFRS adoption promotes greater and better disclosures, managers may align the needs of equity financing with substantive efforts in fully comply with mandatory IFRS adoption. Therefore, a particular set of firm-specific characteristics will become the CBF that may be positively associated with reporting incentives in IFRS adoption.

However, such strong reporting incentives may be challenged by managers’ self- interested behavior. Because of the room for professional judgement under IFRS, managers may use the flexibility provided by the standards to undertake opportunistic behavior in order to maximize their own benefits rather than maximising the firms’ CBF. As a result, mandatory IFRS adoption may become simply a label-type of reporting standard which has little or even negative impact on the firm (Daske et al., 2008). To resolve this issue, the board of directors who represent the interests of shareholders may need to implement effective internal corporate governance (ICG) mechanisms to mitigate the agency problem. The extant literature argues that the board of directors is important in controlling and regulating managers’ commitment in

mandatory IFRS adoption so that managers will implement such accounting regulation seriously (Daske et al., 2008).

In addition, users of financial information at the institution level may also play a role in influencing reporting incentives in mandatory IFRS adoption. In British origin (BO) firms, most users of financial reporting are domiciled in Anglo Saxon market-based economic environment; therefore, such users will demand substantial disclosure from IFRS adoption. On the other hand, the French origin (FO)’s government-based; German origin (GO)’s tax-based and Scandinavian origin (SO)’s socialist-based economy may differentiate their needs for the level of disclosures in IFRS-based financial reports. Therefore, it is possible that differences in legal origins within the EU may exert different influences on reporting incentives in mandatory IFRS adoption.