An Evaluation of the Degree to which the use of Accounting Software can help promote Corporate Governance and Transparency

by

Table of Contents

CHAPTER 1: INTRODUCTION1

Background of the Study1

The Influence of Governance and IT on Organizational Performance4

IT Can Mitigate Governance Problems6

Purpose of the Study8

Research Questions8

CHAPTER 2: LITERATURE REVIEW9

Measuring Firm Performance9

Information Technology and Firm Performance11

Success and Failure with Information Technology13

Accounting, Information Technology and Corporate Governance15

Corporate Governance and Transparency19

CHAPTER 3: METHODOLOGY23

Confidentiality25

Reliability25

Research Validity26

Ethical Considerations26

REFERENCES28

CHAPTER 1: INTRODUCTION

Background of the Study

A study of corporate governance requires an understanding of its foundations in agency theory, brought forth by Adam Smith in his landmark work, The Wealth of Nations (1776). Smith suggested that a manager (i.e., an agent) with no direct ownership of a company would not make the same decisions, nor exercise the same care as would an owner (i.e., a principal) of that company. The agency problem in such a relationship results when the agent seeks to maximize personal utility by acting in self-interest which is not always in the best interests of the principal (Jensen & Meckling, 1976). One form of agency problem, known as adverse selection, can occur if the agent misrepresents his ability to perform the functions assigned. Moral hazard, another form of agency problem, occurs if the agent shirks responsibilities or otherwise underperforms through lack of sufficient dedication to the assigned duties.

Additionally, a risk of underperformance results in a residual cost to the principal, even if the agent acts in the best interest of the principal and is appropriately qualified to undertake the assigned responsibilities. In order to mitigate agency costs, a principal will establish controls and reporting processes to monitor agent behaviour and to evaluate agent performance outcomes (Fama, 1980; Jensen & Meckling, 1976; Petersen, 1993). Agency costs can also be reduced by aligning the interests of the agent with those of the principal, most often accomplished through compensation plans (Eisenhardt, 1989; Fama, 1980; Jensen & Meckling, 1976). A degree of information asymmetry between principal and agent is always present however, implying that effective controls, reporting processes and compensation plans to reduce agency costs hinge on the availability of information to the principal (Petersen, 1993).

Agents always know their own qualifications, what tasks are undertaken and completed, and what results are actually achieved. The principal must close the information gap regarding qualifications, tasks, and results. To accomplish this, the principal establishes processes to gather data, measure, analyze and report. Over the past several years, interest in corporate governance has increased. The high profile collapse of Enron in the United States, and the massive loss in value of the Canadian telecommunications firm Nortel, illustrate extreme examples of corporate governance failures that have captured the attention of the public and researchers alike. It is worthy of note that prior to Enron's collapse, Fortune Magazine had ranked it as one of the best run companies in the United States (Stein, 2000), illustrating that journalists can be fooled and that investors are helpless without valid information on which they can ...