Audit Expectation-Performance Gap: A Case Study Analysis in Libya

research Accounting
Audit and assurance

Table of Contents
Introduction...........................................................................................................................................1
ANSWER TO QUESTION NO- 1........................................................................................................1
(a)......................................................................................................................................................1
(b)......................................................................................................................................................1
(c)......................................................................................................................................................2
(d)......................................................................................................................................................2
(e)......................................................................................................................................................3
ANSWER TO QUESTION NO- 2........................................................................................................3
(a)......................................................................................................................................................3
(b)......................................................................................................................................................4
ANSWER TO QUESTION NO- 3........................................................................................................4
(a)......................................................................................................................................................4
(b)......................................................................................................................................................4
(c)......................................................................................................................................................5
ANSWER TO QUESTION NO- 4........................................................................................................5
(a)......................................................................................................................................................5
(b) (i).................................................................................................................................................5
(b) (ii)................................................................................................................................................6
(b) (iii)...............................................................................................................................................6
(b) (iv)...............................................................................................................................................7
(c)......................................................................................................................................................7
(d)......................................................................................................................................................7
(e)......................................................................................................................................................8
(f).......................................................................................................................................................8
(g)......................................................................................................................................................8
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10

Introduction
With the increasing ramified economic changes and complexity of the business,
management accounting methods and tools have been gaining momentum throughout the
time. In this report, agency theory and compensation packages to key managerial person and
case study analysis have been discussed in effective manner. This report has revealed all the
possible issues and explicit answers of all the questions asked in the assignment.
ANSWER TO QUESTION NO- 1
(a)
As per agency theory, the employees or the managers are the agents of the principal (the
owners). They function in order to maximise the benefit of their principal, i.e. they function
to maximise the profits so that the overall shareholders’ wealth increases and the owners
enjoys a real rise in the value they receive. However, when the salaries of the employees and
managers is fixed, they are not driven by the success of the organisation. It is because no
matter how much the organisation grows due to their hard work and efforts, the pay they shall
get is fixed. They have no additional benefit in working beyond normal efficiency to increase
profits. As a result, the fixed salaries fail to motivate the employees to work productively as
per the agency theory (Chan, et al. 2018).
(b)
The possible different components of a compensation package might include the bonus that is
linked to the efficiency of performance, short term incentives that relate to the employees’
performance within a year, long term incentives in form of cash bonuses and stock options
for continues and maintainable performance over years, social security insurance, medical
care, sick leaves, leave with payment, performance recognitions, maternity leaves, on-the-job
trainings, etc. apart from the base salary (Chambers, and Odar, 2015).
The base salary is the return that the employee gets because of the time he invests in the
organisation. It can never motivate employees to work productively (Chan, et al. 2018). The
only way to motivate the employees is to recognise their efforts in front of everyone and link
their efforts with the pay they get. This way, they will try to improve the performance. Other
than performance linked bonuses, the employees shall be given the rest of benefits mentioned

above that lure them to retain themselves in the organisation and keep them motivated to
work up to expectations to achieve the desired goals (Chambers, and Odar, 2015).
(c)
Apart from all the above factors that determine the compensation package that an individual
desire, risk plays a dramatic role. The attitude towards risk determines what an individual
want as a return from the organisation for performing the tasks assigned to him that comes
along with certain degree of risk. An individual who is risk-neutral shall be unaffected by the
level of risk that job takes. He shall be indifferent in taking a job that has higher risk or lower
risk at same compensation. However, an individual who is risk averse (opposes to take risk)
shall demand a higher compensation package, if the job offered to him demands enduring
high risks. For him risk shall be a determinant factor in deciding the desired remuneration for
his work and employment (Chambers, and Odar, 2015).
(d)
The performance-based compensation packages link the remuneration of employees with
their performance. It provides the employees to earn over the base salary by increasing the
productivity by their hard work. It acts as a glorious trump card on company’s end to improve
effectiveness. Some of the factors that limit the effectiveness of performance- based
compensations packages in motivating employees are (Chambers, and Odar, 2015).
 For some employees, recognition of their work comes in priority as compared to higher
payments. Performance linked packages do reward the employees with higher pay
undoubtedly, but they miss an essential character of rewarding the employees among the
whole team. This recognition acts as a boost for many employees for whom its much
important to be recognised than to be paid more (Chan, et al. 2018).
 Performance linked packages increase the sense of competition among the employees.
Although some lot of friendly competition is necessary, but over competition leads to
breaking of harmonies and collaboration. The employees than instead of being motivated to
work for a common goal start striving to achieve their individual goals. This creates conflicts
of interest and chaos (Chan, et al. 2018).
 When the remuneration is linked to performance, the employees at times start avoiding risk
involving tasks. They try to find out the areas that takes least efforts and add to their overall
productive output. This scenario prevents innovation and start depleting the motivation level