Page 47 - Encyclopedia of Business and Finance

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Aggregate Income

standards of output are not demanding; it would be pos- BIBLIOGRAPHY
sible to readily achieve higher levels of output—which Bowie, Norman E., and Freeman, R. Edward (Eds.) (1992).
seems a good idea because the demand for the product is Ethics and agency theory: An introduction. New York: Oxford
greater than current production. The manager, however, University Press.
perceives no incentive to increase the level of activity, since Brousseau, Eric, and Glachant, Jean-Michel (Eds.) (2002). The
economics of contracts: Theories and applications. New York:
just meeting the standards is the critical basis for evalua-
Cambridge University Press.
tion and determination of the next year’s salary for the
Dees, J. Gregory (1992). Principals, agents, and ethics. In Nor-
manager. The manager has decided to keep “the job easy,”
man E. Bowie and R. Edward Freeman (Eds.), Ethics and
rather than inform a supervisor that a higher level of pro- agency theory: An introduction (p. 25). New York: Oxford
ductivity is reasonable and would aid in meeting the University Press.
unmet demand for the product. Gutner, Tamar L. (2005, May). Explaining the gaps between man-
date and performance: agency theory and world bank environ-
mental reform. Cambridge: The Center for Strategic and
THE REALITY OF CONTEMPORARY
International Studies and the Massachusetts Institute of Tech-
PRINCIPAL/AGENT EFFECTIVENESS
nology. Retrieved July 25, 2005 from LexisNexis.
Financial accounting scandals in U.S. companies reflect Jensen, M., and Meckling, W. (1976, October). Theory of the
the ineffectiveness of principal/agent relationships and the firm: managerial behavior, agency costs and ownership struc-
insufficiency of current agency theoretical efforts. As a ture. Journal of Financial Economics. (3)4, pp. 305–360.
result of the cascade of scandals in the decade prior to Karake-Shalhoub, Zeinab (2002). Trust and loyalty in electronic
2002, the U.S. Congress enacted the Sarbanes-Oxley Act commerce: An agency theory perspective. Westport, CT: Quo-
of 2002, which imposed new regulations on public com- rum Books.
panies and their auditors. Such rules are assumed to be
effective in ensuring that executives fulfill their obliga-
Mary Ellen Oliverio
tions. Such rules affect a hierarchy of principal/agent rela-
tionships: Shareholders are principals of public companies
and their immediate agents are boards of directors. Boards
of directors are principals; their agents are the executives AGGREGATE INCOME
selected to carry out policies and the independent auditors
they engage to audit the financial statements of the com- SEE Income
pany. The principal/agent relationships continue to lower
levels of organizations.
Many opportunities exist within publicly owned
companies for less than optimum effectiveness in princi- AMERICAN INSTITUTE
pal/agent relationships. Such opportunities are predicted OF CERTIFIED PUBLIC
to decline with successful implementation of the new ACCOUNTANTS
rules and regulations. Even with new rules and regula-
The American Institute of Certified Public Accountants
tions, however, there is an awareness that the knowledge
(AICPA) is a leading national organization for certified
of how equilibrium (where both the principal and agent public accountants (CPAs) in the United States. It traces
are optimally behaving for both the interests of the entity its origin to a meeting of accountants in 1887. The
and of the personal executive or employee) can be pre- AICPA’s Web site (http://www.aicpa.org), offers the pub-
dicted continues to be insufficient.
lic a comprehensive source of information about the pro-
fession.
SUMMARY
The need for increasing understanding of the
MEMBERSHIP
principal/agent relationship continues. While attention to
As of 2005, AICPA membership included more than
agency theory began in the field of economics—including
327,000 CPAs. Approximately 43 percent worked in
the practical fields of finance and accounting—interest in business and industry, nearly 40 percent worked in pub-
the subject has developed among some political scientists, lic accounting firms, and others were employed by gov-
historians, sociologists, psychologists, and ethicists. Con- ernment bodies and agencies and educational and other
siderable empirical investigations, as well as refinements at not-for-profit institutions. In addition, some members
the theoretical level, are needed. Studying and thinking
worked in the legal profession, offering consulting serv-
are continuing.
ices. Some were retired. The membership includes associ-
SEE ALSO Contracts ates (those who have passed the Uniform CPA Exam and

24 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION