Accounting Theory Report: Harvey Norman and Accounting Theories

This report delves into accounting theories, primarily focusing on the comparison between innovation theory and agency theory. It begins with an introduction to accounting theories and their role in regulating financial treatments. The report then reviews a journal article by William Lazonick, which argues for the superiority of innovation theory over agency theory, emphasizing the importance of strategic control, organizational integration, and financial commitment for successful innovation. The report then applies these theories to Harvey Norman, a multinational corporation, discussing how both innovation and agency theories could be implemented, considering the potential benefits and challenges. The conclusion summarizes the benefits of innovation theory, particularly in reducing agency costs and promoting sustainable growth, making it a valuable alternative to the agency theory for corporate entities. The report provides insights into how businesses can optimize their financial strategies.

Running head: ACCOUNTING THEORY
Accounting Theory
Name of the Student:
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Author Note

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Table of Contents
Introduction......................................................................................................................................2
Journal Review................................................................................................................................2
Applicability of the innovation theory or the agency theory to Harvey Norman............................4
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

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Introduction
Accounting theories are the theories that have been developed over time for controlling
and regulating the various accounting treatments that are incorporated in the different corporate
entities all over the world. Accounting theories generally refers to the methodologies that have
been established in order to guide the preparation of a financial report. The accounting theories
have been modified over time in order to suit the current requirements of the corporate entities
and other stakeholders of business.
The journal article that has been chosen for the purpose of analyzing this particular study
is “Innovative Enterprise Solves the Agency Problem: The Theory of the Firm, Financial Flows,
and Economic Performance” by William Lazonick.
Journal Review
The journal that has been chosen in this particular project suggests that the dominant
ideology of the corporate governance has been to earn more profits. The primary tool for the
firms for elevating the economic performance has been increasing the amounts of revenue earned
instead of maximizing the shareholder value (Bosse and Phillips 2016).
This particular journal conveys the essential idea that the agency theory should be
replaced by the innovation theory. The author further supports this statement by stating in his
journal that the public shareholders do not invest in the productive assets of the company. The
agency theory proposes the maximization of the shareholder value, which can only be achieved
by the distribution of the free cash flow to the public stakeholders. The shareholders who are
holding onto the shares will receive a part of the reaped revenue as increased stock prices can be
achieved through stock repurchases. The agency theory indicates that the shareholders extract
value due to the fact that they assume risk of contribution to the processes that lead to the
creation of value. Therefore, at the time when the companies pay back the profits, the agency
theory characterizes these distribution as the as the return of capitals to the shareholders (Hoenen
and Kostova 2015).

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The author further develops an innovation theory for the purpose of achieving the better
understanding as to how a business enterprise can work much more efficiently compared to the
previous standards. The innovation process that will be able to generate such outcomes are:
 The innovation process needs to be properly strategized. This is because when the
investments in the required technologies and the markets that are to be accessed are done
the results are unknown (Hoenen and Kostova 2015)
 The capabilities and the work performances of the different employees need to be linked
with the roles and responsibilities that these employees are delegated with. This will help
in the generation of higher quality and lower cost products (Chrisman caes at al., 2015)
 Optimum amount of financing is needed for achieving the proper establishment of the
collective learning and ensuring the proper returns from the sale of such innovative
products (Hoenen and Kostova 2015)
Therefore, the journal article leads to the identification of three social conditions that lead
to the proper management of the above listed aspects of an innovation process. These social
conditions are:
 Strategic control – The fundamental requirement for the innovation to occur is that the
management of an organization should have the optimum skills and capabilities to for
allocating the corporate resources in the form of incentives to make the entire process of
innovation strategic. The abilities of the managers or the executives depend on the fact
that how the technological investments that have been done for supporting the new
capabilities can promote and enhance the existing capabilities of the firm (Chrisman
caes at al., 2015)
 Integration of the organization – A strategy regards to innovation can only be
implemented within an organization when the different sectors of the organization are
connected with each other. This means that the integration of the employees or the staff
working in an organization into the collective and cumulative learning processes lead to
the implementation of a strategized innovation process within the organization. The
different components of a reward system like promotion, work satisfaction, benefits and
remuneration enhance the work performance by the employees and motivate them to
achieve the organizational goals (Chrisman caes at al., 2015)

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 Financial Commitment – The flow of optimum capital for the successful implementation
of an innovation process within the organization is also necessary. This can be the
potential sources like retained earnings, debt capital etc (Madison caes et al., 2016)
The author further states that the agency theory should be replaced by the innovation
theory because the proper scrutiny of the operation and performance of the economy can be
carried out with the help of the innovation theory. In spite of the existence of the agency theory,
instances like the concentration of wealth in the hands of the rich households and the exploitation
of the middle class employment opportunities cannot be explained. Thus, it can be evidently
deduced that the shareholder maximization theory that is promoted by the agency theorists have
worsened the performance by the employees instead of promoting them (Madison caes et al.,
2016).
Applicability of the innovation theory or the agency theory to Harvey Norman
Harvey Norman is a large conglomerate based out of Australia and deals in furniture,
bedding, computers and consumer electrical products. Being a multinational and a listed
organization, the company will in all probabilities, follow the agency theory that is the
management of the organization will be striving towards the maximization of the shareholder
value. However, there are certain advantages that the multinational corporation may derive by
the implementation of the innovation theory (Abhayawansa and Guthrie 2014). These are as
follows:
 The implementation of the innovation theory inside the organization will result in the
expansion of the targeted market which will increase the projected revenues of the
organization and in turn ensure the maximization of the returns to the shareholders
 The implementation of the innovation theory can also lead to the reduction of the costs in
the providence of the goods or services which will further increase the revenues obtained
 However, it should be looked after by the management of the corporation that the
implementation of too much technology will shift the entire workforce from labor to a
machine dominated workforce which may lead to the employees feel insecure
 The initial capital needed for the implementation of the required innovation in the
products is also high

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Thus, the management of all these factors will lead to the successful implementation of
the innovation theory in the organization of Harvey Norman.
Conclusion
Thus, as it can be concluded from the discussion in the preceding paragraphs, the
substitution of the agency theory by the innovation appears to be a beneficial proposal for the big
corporate entities. This is because the implementation of the agency theory as the potential
accounting theory leads to the firms being more prone to agency costs. This means that the
public shareholders never in reality invest in the value creation capabilities of the company.
Moreover, the agency theorists lead to the senior executives of the firm gaining a major portion
of the revenue that is incurred by the firms. Therefore, in order to resolve such a issue the
necessity for an innovative enterprise is inevitable. Nevertheless, the techniques adopted by an
innovative enterprise to allocate the resources and returns for the growth of the organization as
well as the economy make the particular theory beneficial for the stakeholders of the firms and
lead to reduced agency costs.

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References
Abhayawansa, S. and Guthrie, J., 2014. Importance of intellectual capital information: a study of
Australian analyst reports. Australian Accounting Review, 24(1), pp.66-83.
Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of
Management Review, 41(2), pp.276-297.
Bruton, G., Khavul, S., Siegel, D. and Wright, M., 2015. New financial alternatives in seeding
entrepreneurship: Microfinance, crowdfunding, and peer‐to‐peer innovations. Entrepreneurship
Theory and Practice, 39(1), pp.9-26.
Chrisman, J.J., Chua, J.H., De Massis, A., Frattini, F. and Wright, M., 2015. The ability and
willingness paradox in family firm innovation. Journal of Product Innovation Management,
32(3), pp.310-318.
De Massis, A., Frattini, F., Pizzurno, E. and Cassia, L., 2015. Product innovation in family
versus nonfamily firms: An exploratory analysis. Journal of Small Business Management, 53(1),
pp.1-36.
Hoenen, A.K. and Kostova, T., 2015. Utilizing the broader agency perspective for studying
headquarters–subsidiary relations in multinational companies. Journal of International Business
Studies, 46(1), pp.104-113.
Madison, K., Holt, D.T., Kellermanns, F.W. and Ranft, A.L., 2016. Viewing family firm
behavior and governance through the lens of agency and stewardship theories. Family Business
Review, 29(1), pp.65-93.
Oxford, R.L., 2016. Teaching and researching language learning strategies: Self-regulation in
context. Taylor & Francis.
Payne, M., 2015. Modern social work theory. Oxford University Press.
Ritzer, G. and Stepnisky, J., 2017. Modern sociological theory. SAGE Publications.