Relationship between Shareholders and Management Considering Earnings Management Issues Faced by Companies

Running head: RELATIONSHIP BETWEEN SHAREHOLDERS AND MANAGEMENT
Relationship between Shareholders and Management Considering Earnings Management Issues
Faced by Companies
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1RELATIONSHIP BETWEEN SHAREHOLDERS AND MANAGEMENT
Executive Summary
The relationship between the management and shareholders can be well explained through
observing various issues related to earnings management faced by most organizations. In
explaining the relationship application of the agency theory and positive accounting theory is
also considered within the report. It was gathered from the report that PAT focuses on predicting
along with explaining accounting methods used by companies along with centring on
relationships between certain individuals and the ways in which accounting is employed in
assisting the functioning of such relationships. Moreover, it was also elucidated from the report
that Agents or the management have the incentive to report financial statements in a manner that
entertains best results from them within the contracts. Principals are aware of such concern
related with earnings management and for this reason they need financial reports to be audited in
offering an extra monitoring layer.

2RELATIONSHIP BETWEEN SHAREHOLDERS AND MANAGEMENT
Table of Contents
Introduction......................................................................................................................................3
Relationship between Shareholders and Management Considering Earnings Management Issues
Faced By Companies.......................................................................................................................3
Positive Accounting Theory............................................................................................................5
Agency Theory................................................................................................................................6
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

3RELATIONSHIP BETWEEN SHAREHOLDERS AND MANAGEMENT
Introduction
Effective management of relationship between the management and the shareholders is
relied on resolving the issues faced by the organizations in its earnings management. This is
considered to be agency relationship at the time a principal appoints an agent to conduct any duty
and the conflict taking place between the management and the shareholders is considered to be
issues in needs of principal and agency referred as agency problem (Xue and Hong 2016). The
objective of the report is to analyse the relationship between the stakeholders and the
management in consideration to the issues related with earnings management faced by the
organizations. In explaining the relationship application of the agency theory and positive
accounting theory is also considered within the report.
Relationship between Shareholders and Management Considering Earnings Management
Issues Faced By Companies
The relationship between the management and shareholders can be well explained
through observing various issues related to earnings management faced by most organizations. It
has been observed that earnings management takes place where the management intervenes
within the process of earnings management in order ton attain certain private gain (Almadi and
Lazic 2016). Financial statements can be observed to be the medium of information between the
management of a specific organization and the shareholders. The relationship between the
managers and shareholders within the business word is considered to be the Agency Theory.
They are dependent on one another and there also exist certain interest conflict between these
two parties. For instance, the shareholders exert increased trust to the agency through
contributing an increased amount in the form of paid up capital. This is such that the agency can