A Critical to the agency theory on financial reporting

Purpose: This paper is intended to evaluate the appropriateness of the agency theory as a guiding conceptual framework for developing a governmental regime, which is intended to reform financial reporting in public listed firms as to govern these firms to improve their social accountability. By doing such, it opens an argument what features should a theory possess in order to become a sufficient guiding conceptual framework for developing such a governmental regime. Originality: This paper critiques for the weaknesses of the agency theory in guiding a governmental regime that is aimed to reform financial reporting in public listed firms as to govern these firms to improve their social accountability. Unlike studies following the agency theory that over-emphasise investor protection as the objective of financial reporting, this paper argues for the important role of financial reporting in protecting stakeholder interest. Findings: State-sponsored governmental regimes such as the Cadbury Code (UK), the Sarbanes-Oxley Act 2001 (US) and the Corporate Law and Economic Reform Act 2004 (Australia) bear the objective to prevent the failures of large public listed firms as to protect public interest. The agency theory is seemingly adopted as the guiding theory to develop these regimes. This resulted in these regimes over-emphasising investor protection in the governance of public listed firms but paying little attention to the protection of stakeholder interest. The agency theory is not sufficient to guide these regimes to achieve their pre-set objective of public interest protection. Research limitations/implications: The agency theory cannot be considered as an appropriate conceptual framework for conducting accounting studies that investigate the effects of financial reporting on a public listed firm’s social performance. Social and practical implications: The agency theory cannot be considered as a sufficient theory to guide the development of state-sponsored governmental regimes, which are aimed to improve public listed firms’ social accountability via reforming financial reporting in these firms.