(a) Agency theory and Stakcholder Accountability theory provide two very differe

Question

(a) Agency theory and Stakcholder Accountability theory provide two very different perspectives on accounting and accountability Required: Discuss the key differences between these two theories. Use the following two headings in your answer What is the purpose of business (i.e. why do businesses exist)? (ii) Who isshould business be accountable to? (8 marks) (b) The following diagram from KiwiRail's 2016 Annual Report depicts their accountability relationships with different users of accounting information. KiwiRail Their report also states: "The relationships we have with customers, logistics partners, unions, Govemment agencies and communities are central to the commercial success of our business ) Which of the two theories from Part A do you think KiwiRail is conveying through their diagram and quote? Explain why (4 marks) ACCY 111 Page 5 of 10 (i) What users or stakeholder groups do you think might be missing from KiwiRail's diagram? (3 marks)

Explanation / Answer

Answer (a) Key differences between agency theory and stakeholder theory

Part (i): What is the purpose of business? Or why do businesses exist?

According to the agency theory the business exists because of alignment of goals between the principal (business owner) and the agent (company executives). According to this theory only business owners or shareholders are important.

According to the stakeholder theory, businesses exist due to various stakeholders such as financiers, suppliers, government, customers, employers etc. This theory postulates that all the stakeholders are in some way or the other involved in running the business profitably.

Part (ii): Who is/ should business be accountable to?

According to the agency theory, the business should be accountable to the principal i.e. the business owner/ the shareholders as they have invested money in the company. The agents i.e. the company executives, suppliers, contractors should be accountable to the main principal.

But, according to the stakeholder theory, business should be accountable to various stakeholders such as customers, employees, trade associations, political groups, competitors and cater to their needs as well as they have the capacity to affect the firm and its stakeholders.

Answer (b)

Part (i): KiwiRail is conveying stakeholder theory from the above diagram as it considers various stakeholders such as employees, customers, unions, contractors, suppliers, community, governmental agencies, shareholders etc as depicted in the diagram to be central to the success of the business.

Part (ii): Stakeholder groups that might be missing fro KiwiRail’s diagram are: Financiers, competitors, political groups, business combinations etc.

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