A CRITICAL PERSPECTIVE TOWARDS AGENCY THEORY

Kartika Putri Kumalasari1) Made Sudarma2)

1)Ariwiguna & Associate, Jl. Pudak No 10, Malang, 65141. 2)Brawijaya University,Jl. MT. Haryono 165, Malang, 65145 Surel: [email protected]

Abstrak: Sebuah Perspektif Kritis terhadap Agency Theory. Tujuan dari pene- litian ini adalah menjelaskan sifat, fungsi, peran dan kritik terhadap teori kea- genan. Metode kualitatif digunakan dalam penelitian ini. Keagenan didefinisi- kan sebagai proses di mana aktor secara rasional melakukan dengan intensi, rencana dan manajemen yang efektif untuk mencapai tujuan tertentu. Selain itu, teori keagenan mendiskusikan masalah ketika ada perbedaan antara kepen- tingan dan tujuan individu dengan orang lain. Jika pemilik memperoleh kuasa yang tinggi dan kemampuan untuk memerintah agen mereka, maka agen harus melaksanakan kegiatan berdasarkan kepentingan pemilik untuk memaksimal- kan kekayaan mereka sendiri.

Abstract: A Critical Perspective towards Agency Theory. The aim of this re- search is explaining the nature, function, role and critics towards agency theory. Qualitative method was employed in this research. Agency is defined as a process of rational actors to conduct intentionally an effective plan and management to achieve specific goal. In addition, the agency theory discusses problem when there is a discrepancy between interests and goals of individual with others. If the principal gains high power and capability to order their agents, then agents must conduct activities based on the principals’ interest to maximize their own wealth.

Key Words: agency theory, critics, interest, understand the organization.

Agency concept is just not pals to use their authority towards clearly defined yet. It requires fur- their agents to achieve their goals. ther processes and meets certain People have been misguided to criteria to be classified as a theory. treat the agency as a theory not Those undefined concepts can al- as a concept in their way of think- ways be used in the non-empirical ing and not as the real condition sense, only if they were implicitly of agency itself. Afterwards, their defined concepts. Thus, the use of misleading thought will embed in undefined concept will definitely their action. This action may influ- destroy the empirical character of ence the interaction in the society. system. For those who have strong interest How does agency concept af- and power, they will tend to de- fect reality nowadays? People feel ceive the powerless society class. that agency concept is sufficient However, this fenomena is not yet enough as reference to make con- taken into a consideration. tract without looking back again Concept is less scientific than at the history of agency. At least, theory. Theory is a contempla- those who are related to the cre- tive and rational type of abstract ation of contract should under- or generalized thought, or the re- Jurnal Akuntansi Multiparadigma JAMAL stand the nature, function, and sults of such thinking. Depending Volume 4 Nomor 2 how agency works. Because, in on the context, the results may for Halaman 165-329 Malang, Agustus 2013 reality, agency theory has power example include generalized expla- ISSN 2086-7603 e-ISSN 2089-5879 if it were the authority that sup- nations of how nature works. The ports the capability of the princi- term "theory" refers to scientific 269 270 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285 theories, a well-confirmed type of explana- Point ’b’ until ‘d’ are not fulfilled yet, tion of nature, made in a way consistent with because there are still extra assumptions scientific method, and fulfilling the criteria in agency theory. Meaning that agency as required by modern science. Such theories a theory is not sufficient enough to explain are described in such a way that any scien- a certain condition. Caldwell (2006) critizes tist in the field is in a position to understand the concept of agency. It shows that from and either provide empirical support ("veri- the nineteenth until twentieth century, the fy") or empirically contradict ("falsify") it. agency was not fixed as theory yet. But, Popper (1951: 71) says that theoretical most people use agency as theory to solve system may be said to be axiomatized if a set their problem and they already use it in in- of statements, the axioms that have been for- terdisciplinary knowledge. During my study mulated match with the following four fun- for obtaining bachelor degree in accounting. damental requirements: I never found agency theory in one chapter a. The system of axioms must be from con- that fully and merely discussed about agency tradictions (self contradiction or mutual theory. It always appears as supporting ex- contradictions). planation for the other theories. Logically, if b. The system must be independent; it must people see it is important and already in the not contain any axiom deducible from the form of theory, it should be discussed as one remaining axioms. main topic at least in one chapter of books c. Sufficient for the deduction of all state- related to accounting. The chapter should ments belonging to the theory which is to be able to explain very well about agency it- be axiomatized. self for example what agency is including its d. Necessary, for the same purpose, which function and its impact for the principal and means that they should contain no extra the agent,the reason why there are subjects assumptions. called as principal and agent, how it works As classically conceived, an axiom is an and then discuss it based on a discipline. In evident premise to be accepted as true with- this case, the explanation should be based out any disagreement. Referring to those ex- on the accounting perspectives. planations, from point ‘a’, agency is might be It is the unique insight of agency. Agen- classified as theory. In accounting, agency is cy relationship exists in daily life. It has also well-known theory to solve agency problem. been described clearly in professional work- Auditing is one of subject matter in account- ing area such as: accounting, economics, fi- ing that uses agency theory. Thus, it sup- nance, marketing, political science, organiza- ports the ‘a’ point. tional behavior, and sociology. Based on that Back to he classical nineteenth-centu- reason, there is a more danger effect when ry, entrepreneurs had little need for an ac- we accept premises too hastily (Droage and countant as in the modern sense; they were Spiller 2009:42). When theory becomes em- accountable to the law of the land and their bedded in the scholarly literature, its premis- own conscience, but beyond that they were es often become it is widely accepted. We can sole judge of their own performance whether fail to recognize situations where a theory’s it was good or bad. robustness may be compromised and leads The expanding influence of the audit- to inaccurate application. ing in general is derived from two sources: Based on the circumtances mentioned (1) the increasing complexity of the modern above, agency serves as the main topic of this industrial world and its greater emphasis on study. This study is a basic research which accountability, meaning that the need of in- employs literature review as the technique dividuals refers about his or her actions one for analysis. The basic research is conducted man is to refer his actions to judgment by to investigate issues relevant to the confir- standards he or she shares with other men mation or disconfirmation of theoretical or (Carmichael and Willingham 1985:9). (2) empirical position of the agency theory (Bor- There was a different interest between the dens and Abbot 2005: 19). Critical approach is used to understand and answer the issue. owner or principal and also with agent. The Macionis (2007:39) says that critical sociol- contradiction was started from the interac- ogy is the study of society that focuses on the tion between two or more subjects (agents need for social change. Keesey (2003:3) ex- and principal), therefore auditor is needed to plains that to study criticism systematically, check the agent’s performance. we need to make the arguments explicit. A Kumalasari, Sudarma, A Critical Perspective Towards...271 conceptual scheme or organizing metaphor be able to give practitioner understanding on is needed to define,analyze and compare the some control situation. various contexts in which all particular inter- The research contributions are (1) to pretations are made. I use types of criticism find and discern the objective meeting point that see the author’s conscious and uncon- between the nature of idealism and nature scious intentions and beyond these,his or her of realism from agency theory, by then the entire social,political and intellectual mileu theory can be applicable for user or practi- are used as the determiners of the research’s tioner, (2) as an addition to collection and meaning. The concern is to investigate the enlarge perspective of agency from sociolo- causal contexts of the work, and their repre- gist’s for students or others who has inter- sentation based on historical criticism. est to learn more about it. Accountant, audi- The criticism approach employed in tor, manager are parts of sociologists andIt this study concerns with the conventionality is beneficial to broaden the perspective from of all literatures and argues that any work others for understanding the whole story a must be understood by making an analogy whole understanding of theory, (3)giving con- with other works that employ similiar con- sideration for government or other party who ventions. This approach is called ‘intertex- have responsibility to create and establish tual’ criticism. Additional explanations, lit- policy for formulating obligations and rights erary words’ or ‘literary structure’ are given of employees or citizens. At least, it can mini- for the circumtances requires more practi- mize the expectation gap from the owner and cal and less ambigous terms. Literary text is employee or employee to employee or govern- employed because the main concern of this ment to citizens by decreasing asymmetry study is with the printed page, although the information. researcher should take into a consideration that some researchers have existed for cen- METHOD turies in purely oral form and that recita- The paradigm of this research is quali- tions are not quite the same as written text. tative-exsploratory. Critical Theory based on Based on sociology perspectives, critics Miles and Huberman (2000:280) is stressing is not just to reach the social world but to the importance of emancipatory that makes change it in the direction of democracy and people aware about inequitable or oppressed social justice. Sociologists use the critical ori- positions and empowers them through cor- entation to change both the society and the rective actions. Exploratory studies are un- research character itself. They often identify dertaken when relatively little is known personally with their research subjects and about something, perhaps because of its encourage them to decide what to study and “deviant” character or its novelty (Singleton how to work. The researchers and subjects and Straits 2005:69). When trying to explore use their findings to provide a voice for less a topic or phenomenon about which one is known a little bit knows very little, it is need- powerful people and to advance the political ed to begin with a general description of the goal of a more equal society. Equal society phenomenon. Literatures is a unit of analy- means that all humans are equal in funda- sis. Secondary data are used as the source of mental worth or social status. the data type. Literature review is as a tech- The objective of this research is to falsi- nique to collect the data (Bordens and Ab- fy the nature of agency theory. It is assumed bot 2005:60). After that I need to do coding that if the nature of agency has been already (Strauss and Corbin 1990:97) and memoing known,thus its function can be understood to storage the data (Babbie 2005:397). Next, because the nature of theory is to describe I use content analysis to analysis the data history, function, benefits, and etc. The na- (Babbie 2005:328). Data verification uses ture of agency theory deals with the basic internal, construct and external validity form of agency itself. Then, impact towards (Creswell 1994:157; Singleton and Straits principal and agent is given as critics agency 2005:100). Here is the explanation of the re- theory. It is important to reveal the truth and search method. where other people have clear understanding Qualitative research is discrete field of in using the utility of agency theory. Based question that encompasses both micro- and on the literature, agency theory has a role to macro analysis drawing on historical, com- accommodate the self-interest between the parative, structural, observational and inter- principal and agent. It is important to enable actional ways of knowing (Biber and Leavy prediction and explanation of behavior. To 272 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285

2004:1). Creswell (1994:1) designed it to be groupings such as families, organizations, consistent with the assumption of a quality and cities; as well as various social artifacts paradigm. This study is defined as an inquiry such as books, periodicals, documents, and process of understanding a social human or even buildings. Actually, the unit of analysis human problem, based on building a com- is easily identified. In this research, the unit plex, holistic picture, formed with words, of analysis is a theory that is agency theory. reporting detailed views of informants, and In this research, researcher uses sec- conducted in a natural setting. ondary data (archaival data) as sources to Subsequently, I attempts to derive a be ready to manage and borne the useful in- theory by using multiple stages of data col- formation. Bordens and Abbot (2005:61) ex- lection and the modification and interrela- plain that primary source is one containing tionship of categories of information (Strauss the full research report, including all details and Corbin1990:1) There are two primary necessary to duplicate the study. Secondary characteristic of this design that are con- source is one that summarizes information stant comparison of data with emerging cat- from primary sources. For example review egories, and theoretical sampling of different papers and theoretical articles that briefly groups to maximize the similarities and the describe studies and results, as well as de- differences of information. scriptions of research found in text books, Theory is an idea or a set of ideas in- popular magazines, newspapers, television tended to explain something about life or the programs, films, or lecturer, financial report, world, especially one that has not yet been meeting report,articles, etc. It is important for proven to be true (Longman 2007:1648). The me as researcher to understand this source theory should provide clear enough catego- of data to make sure that data is valid and ries and hypothesis so that crucial ones can able to be used in research. be verified in present and future research; The steps of data collection involve setting they must be clear enough categories and the boundaries for the study, collecting in- hypotheses. The purpose of this research is formation by doing collecting through docu- exploratory. Exploratory studies are under- ments. I use literature survey as a technique taken when relatively little is known about to collect the data. something, perhaps because of its “deviant” Although standing in the midst of all character or its newness. When trying to ex- this activity, I make sure that there is noth- plore a topic or phenomenon about which ing that can disrupt the activity. Based on one knows very little, one necessarily begins this reason, watch the proceeds and keeps with a general description of the phenome- the track of everyone and everything. It is non. For these reasons, I decide to use in the important to monitor the quality, timing of exploratory study which is more open than research, and researcher respond and satis- in other kinds of research. faction. That is how information gathering is I use archival study to support my data conducted. collection, storaging, and analyzing step. After that, from possessed a growing This study deals with the theoritical founda- mass of data and need to be classified or tions of archival science, in an effort to show categorized individual piece of data, coupled that they are hardly objective. All sciences as with that some kinds of reclamation sys- interdiciplinary and as part of what it calls tem, this process is called as coding (Bab- the universal field of research which con- bie 2005:394). These procedures allow to re- nects the sciences with each other through cover material and to strengthen the result ideas, knowledge and methods. Lovblad by using open coding. Researcher needs to (2003:134) explains that the management of initial classification and labeling concepts in physical record in archaival study: selection qualitative data analysis. In open coding, the and appraisal,retention and preservation, ar- codes are suggested by the researchers ex- rangement and description and access and amination and questioning the data (Strauss use. and Corbin 1990:61) In social research the entities (objects Then another steps that researcher has or events) under study are referred as a unit done was memoing. In the critical perspec- of analysis (Singleton and Straits 2005:45). tive method, the coding process involves Social scientists study a variety of units, more than simply categorizing mass of text. these include individual people; social roles, As researcher codes data, researcher apply positions, and relationships; a wide social technique of memoing that refers to writing Kumalasari, Sudarma, A Critical Perspective Towards...273

Table1. Critics Definition Based on Formal Work Criticism

No Formal Work Criticism Focus Definition 1 Historical Critisism Author I use to intrepretation the meaning (relatively stable and unchanging through time) and critic the significance (which may change from reader to reader and from period to period).

2 Reader-Response Criticism Audience Critics are most often concerned with the represent audience. In this critics I put my little interest in authors or intended meaning.

3 Intertextual Criticism Literature I try to see what meaning could be discovered in works of literature from their context in literature. This primary meaning was called the”literal”meaning, a phrase with a luxuriant growth of semantic tangels around the words. Critics is laying on the question of what the proper subjects were that criticism ought to depend on. memos or notes to myself as researcher and ters) in a text. Conceptual analysis analyze others involved in the project. Some of what and interpretes text by coding the text into during analysis may end up in final report manageable content categories. Relational I made concept mapping to clear the analysis builds on conceptual analysis by ex- qualitative data analysts that spend a lot of amining the relationships among concepts in time committing thoughts to paper, but this a text (Sekaran and Bougie 2010:386). process is not limited to text alone. Often we Critical Theory that based on Miles and can think out relationships among concept Huberman (2000: 280) is stressing the im- more clearly by putting concepts in graphical portance of emancipatory that makes people format (Babbie 2005: 399). aware about inequitable or oppressed posi- I apply content analysis that is a study tions and empowers them through correc- of recorded human communications, such as tive actions. Denzin and Lincoln (2011:121) books, web sites, paintings and laws. Con- have an idea that critical intelligence being tent analysis requires a thoughtful handling defined as the capacity to engage in moral of the”what” that is being communicated in critique. Keesey (2003:3): the literature resources and start to analyze I use literature as intertextual criticism by using “why” and “with what effect” (Babbie to explore the meaning and critic the signifi- 2005:329) After that, I did conceptual analy- cance of agency theory. I felt that no critic sis establishes the existence and ferquency had given his full attention of criticism: try- of concepts (such as words, themes, or chap- ing to see what meaning could be discovered

Figure 1. Analytical Critic Process: Formal Work Criticism 274 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285 in works of literature from their context in lit- my literature analysis. Historical criticism erature. All meaning in literature seemed to focuses on the meaning that is relatively sta- be reffered first operation of all to the context ble and unchanging through time. I use the of intentional meaning, always a secondary this to see the author’s intention and beyond and sometimes the wrong context. That is, these, his or her entire social, political and the primary meaning that a prose paraphrase intellectual milleu as the determiners of the could represent. The text should speak to us. researcher’s meaning. As I said before on the However, a text can not be made speak to us introduction that I concerned to investigate until what it says has been understood. the causal contexts of the work, and these Since the meaning represented by a text represents forms of historical criticism. is that of another, the intepreter can never be Next, I use reader – response criticism certain that my reading is correct. The read- also to see whether this issue still relevant ers must realize verbal meaning by his own to do inquiry now. It is concerned with the subjective acts (no one can do that for them) represent audience. It means that some se- but if they remember that his job is to con- mantics are fond in people, not in words, and strue the authors meaning, they will attempt many theories of interpretation are based on to exclude their own predipositions and to belief that we must look either to the author impose those of authors (Keesey 2003:24). or to audience if we are to understand the The intrepreter’s goal is simply to show that meaning of literary text. Both historical and a given reading is more probable than others. reader-response criticism are able to support That is why Keesey (2003:24) explains the me for doing literature criticism and decrease criteria to chosse the right literatures based bias on my data. on form of language, they are: I use clarification of researcher bias 1. Legitimacy, the reading must be per- (Creswell 1994:168) that explaining the re- missable within the public norms of the searcher’s role toward the research. Here, I language in which the text was com- am as the researcher who falsifies the history posed. For example: books and articles. of agency theory to get the history tree. Be- 2. Correspondence, the reading must ac- sides that, I concern to observe the consisten- count for each linguistic component in cy data based on the literatures. All at once, the text. clarification and consistency are important 3. Generic Appropriateness, if the text fol- to examine internal validity; construct valid- lows the conventions of a scientific es- ity, external validity and reliability as that re- say, for example, it is in an appropriate sult in data verification. Measurement valid- to construe the kind of allusive meaning ity refers to congruence or “goodness and fit” found in causal conversation. in the researcher as instrument. Also, I use historical and reader-re- As mentioned in Creswell (1990:159) sponse criticism to verification the result of internal validity is needed to describe how Kumalasari, Sudarma, A Critical Perspective Towards...275

Figure 2. Discussion Framework

the study will address and the accuracy of RESULT AND DISCUSSION the information and whether it matches with Nature is a character of something that reality. Validity discusses an informant and explains particular events to happen without research process to be authenticated and doing anything to change the result and has trustworthiness. Construct validity empha- greater effect (Longman 2007: 1060). The key sizes the meaning of the responses to one’s word mentioned in the definition of nature measurement instrument. How are they to is character which means that the character be interpreted? Is the instrument measur- is naturally given and has a greater effect, ing the intended concept (or construct)? This without doing anything to change (gift), and kind of validity bases an accumulation or re- has greater effect. Then, chapter II deals with search evidence and not mere appearances. the nature of agency. It explains the agency Back to Creswell (1990:158) that external from ontologically. Ontological view of agency validation refers to discuss the limited gener- is defined by providing the basic form and alizability of findings from study. The intent characteristic of agency. The basic form is of qualitative research is not to generalize the simplest part of agency, and the charac- findings, but to from unique interpretation of teristic refers to the particular combination event. One of the example is in manuscript- of qualities that makes agency as a particu- ing process. In manuscripting process, I start lar kind of concept. to write a sentence or sentences to describe History of agency can be described in the contents of each chapters. I realize that the conduct of sociology. The formative pe- it is important to ease the undertanding for riod in the history of agency is a wide range my research. Since I write in narrative way. It of social activities that are conveniently in- can increase the external validity. cluded under its rubrics, although it is not essentially related to the theory, for exam-

25 276 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285 ple the history and technique of charities Hegel and Marx point out the impor- and corrections, and the whole institutional tance of control and this idea is supported by structure built up to deal with them. Char- other scientists meaning that the idea trav- acteristic in this entire field is the association els through time and space. Since Hegel and of scientific inquiry with social action. The Hegel has observed that the process of evolu- typical procedure is to understand it, and in- tion occurs beyond the control of people and vetigate of a concrete situation. their activities. In any case, people seem to The hardest part in sociology is estab- move towards a greater consciousness of the lishing the precise date when sociological the- world as they could be, they seem to move ory began. People have been thinking about, into the desired in the ”desired” direction. and developing theories of social life since the Desire refers to a high degree of want or hope early history. Moreover sociologists or even I for something. (Longman American Diction- will not go back to the seventeenth century. ary 2003:432). Based on that reason, com- This is not because people in that era did not munism or socialism needs to be controlled have sociologically relevant ideas, however to decrease the conflict because desire with- because the return on people investment in out any control can lead human to be greedy. time would be small, people would spend a A person act is based on his or her wants not lot of time getting very few ideas that are rel- by his or her needs that will lead to exploi- evant to modern sociology. In some cases, tation. A want can not be stopped because there is no limitation. none of the thinkers associated with those The term of principal and agent has eras are considered as sociologists. They are been known since Hegel (1770-1831) and classical sociological thinkers. First, the so- Marx (1818-1883). By that time, principal is ciological perspective will be given by exam- well known as people who have has money ining the main social and intellectual forces but do not have enough energy and skill to that shaped their ideas. do production. Furthermore, agent is labor Sociology is a descriptive, historical, who has skill and energy to do production and explanatory account of society viewed but do not have money. These premises are as concrete reality Giddings in the Timasheff summaryy of agency problems during Hegel’s (1967:84). Thus, sociology is the description and Marx’s life. of a unique, non-recurrent process, though Agency can be occured in the relation- its element may be recurring. I am not try- ship, interaction and communication. When ing to force a particular theory but attempt- agent has relationship with other societies ing to visualize the process of development of and has interaction in a defined territory and theory in sociology manifested in the appear- shared culture (Macionis 2007:667). Dur- ance, struggle, and disappearance or sur- ing culture sharing and interaction agent vival of agency. This section mainly concerns use communication to deliver the message. itself principally with the history of agency. Communicating assertively is needed to de- The purpose is to provide the filiations and scribe and mention how the problem affects opposition of ideas, to put in order for the somebody, solution purposes, to confirm un- invention, to find out in the earlier theories derstanding, and reflect somebody assertive- origin or anticipation of the later, and to dis- ness (Devito 2007:341). cover the advance of truth through the clash Agency is a process of interest (need, in- of opinions. terest, and intention) of rational actors who Agency happens inside of agents. The intentionally conduct an effective planand most difficult part is agency happened in- management for achieving their goals. The side or, latent. It cannot be seen directly. But process, in addition, supports the communi- agency has power to act and change things. cation to understand the interest of rational It is the unique insight of agency. The basic actors. Communication has a role to make nature of agency comes from every individu- distinct conduct of effective plan and man- alis coming from each people to decide what agement for reaching the goals, as common they are going to do. Agency has two roles elements of communication comprise are in- as principal and agent. Where principal gives cluding people, messages, channels, noise, certains instructions to gain get more profit context, feedback, and effect. Communica- and agent performs based on the order from tion is a process of transferring thoughts and principal. Everyone has these two roles in ideas from one person to another. It is a pro- their selves to survive in this universe world. cess of people sharing thoughts, ideas, and feelings with each other in commonly under- Kumalasari, Sudarma, A Critical Perspective Towards...277

Figure 3. Individual Process of Rationalization standable ways (Ariwiguna 2012).Caldwell that creates conflict. 2006. Ritzer and Goodman (2004a, 2004b, Thirdly, agency can be found in inter- 2004c). action and relationship. In the interaction Secondly, agency becomes a problem and relationship, the deeds are easy to be when there is a divergence between inter- observed by other individuals (Margaret and ests and goals between one individual with Taylor 2006:23). When the deeds already from one individu to others. It called as agen- have been observed, then the agency process cy problem. The agency problem can eas- is able to be explored. It is explained clearly ily cause conflict. Here, communication also that deeds (actions) is as the result of agency. take part in the conflict. Because there is a Agency concerns with the system of trouble in the communication process then manner which sustains hierarchies of organi- the message is not delivered or achieved in zational power. The agency theorists assume understandable ways. Conflict can be hap- that rational utility maximizes maximazing pened within the individual in interperson- the behaviour of all individuals. They assert al relationship and in small interpersonal, that individuals may be described in objec- small group and public (larger scope of small tive manner and independently in social con- group). Communication has two roles in text. Figure process of agency and conflict agency both as supporter (to make the pro- explains the reason why agency is suitable cess of agency become clear) and as agritator for solving the problem in the society.

Figure 4. Process of Communication 278 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285

Figure 5. Process of Agency and Conflict

Function means the purpose that some- authority to the agent (Kivisto 2005:1).While thing has or the job that someone or some- agents are individuals who perform some thing does (Longman 2007:656). If one thing services on the behalf of principal (Hunt III is a function of another, thus it is produced and Hogler 1990:443). by or changed according to the other thing. The organizational association between In addition, if something has functioned, it principal and agent is also called as agency means that it works correctly or in particular relationship. Hunt III and Hogler (1990:443) way. Chapter III deals with the purpose that states that agency relationship is as a con- agency has and how it works. The informa- tract under which one (or more persons) the tion given in this chapter started with where principals engage with another person. This the agency can be implemented what is the formal engagement between principal and function of agency in accounting, why agen- agent need a contract to visualize the formal cy is so important to be studied, and explain form. Contract is important to analyze imbal- how agency can do all those things. ance of power inherent in the social context Agency is important for organization of an organizations. Also, serving primarily to manage it to be better (Hunt III and Ho- is to legitimate a particular form of economic gler 1990:437; Kivisto 2005:1; Eisenhardt organization. Contract appears as the con- 1989:57). Because organization has a role sequences of wholly voluntary interactions as interplay of technology, social structure, among many private persons, of all who are culture and physical structure, embedded in free in their nature and equal to one another. contributing to environment (Hatch 1997:15). For that reasons, contract should de- Western society is frequently referred to as termine the most efficient governing agree- an organizational society; it is certainly true ment and giving assumption about people that most of our daily activities take place (self interest, risk aversion, and bounded ra- within organization, such as companies, tionality), organization (goal conflict among government departments, schools, hospitals, members) and information (information as a universities, political parties, family, and so commodity which can be purchased). More- on. It shows that organizations give their over, contract is as a means to control the uniqueness among collectivities, includes: firm just as the firm which controls the work- impersonality, hierarchy, size, goals, concern er. Arranging and governing the contract is for efficiency, boundaries, control and nature needed to make effective contract. During of work (Gabriel 1999:82). the arranging and governing contract the re- In organization, the relationships look lationship is appeared again, because the like complicated. There are people and system process involves another individual and sys- which are integrated to run the organization. tem to embed the contract. For example is internal organizational rela- Contractual relations are the essence tionship between the principals and agents. of the organization, not only with employees Principals are individual who delegate work but also with suppliers, customers, creditors, to another party and some decisions making and so on. The problem of agency costs and Kumalasari, Sudarma, A Critical Perspective Towards...279

Figure 6. The Nature of Agency monitoring exists for all of these contracts, the organization which can generally be sold independent of whether there is joint pro- without permission of the other contracting duction in their sense. Joint production can individuals. Based on that reason, nexus explain only a small fraction of the behav- of contract is as alternative to minimize the ior of individuals associated with organiza- agency cost (Hunt III and Hogler 1990:449). tion. The classical capitalist organization as So, there are a requirements for creating the a contractual organization of inputs in which contract: (1) there must be some potential there is (a) joint input production, (b) several divergence of interests among the parties of input owners, (c) one party who is common to the contract , (2) the principal should have all the contracts of the joint inputs, (d) who at least some difficulties in determining the has rights to renegotiate any input’s contract capabilities of the actions of the agents. independently of contracts with other input After creating the contract for the orga- owners, (e) who holds the residual claim, and nization, then there are organizational strat- (f) who has the right to sell his contractual egies which provide expectations and struc- residual status. ture of our behavior while we are engaged in Creating contract needs cost that is that role. Because we cannot do act random- not cheap. Because, contract is not for free. ly in organization (Keyton 2005:2). Organiza- Then, principal creates the nexus of contract tions are purposive system in which mem- to self-regulating, autonomous and economi- bers behave as if their organizations have cally efficient. Jensen and Meckling (1976:8) goals, although individual participants might says that it is important to recognize that personally feel indifferent toward those goals most organizations are simply legal fictions or even alienated from them (Aldrich 1999:3). which serve as a nexus for a set of contract- Goal set by the owners or leaders must take ing relationships among individuals. By le- into account potential conflict of interest with gal fiction, it means the artificial construct other or other organizations and individu- under the law which allows certain organiza- als supplying their resources. The strate- tions to be treated as individuals. The pri- gies can be implemented if there is structure vate corporation or firm is one of the example there to make sure that the strategies can of legal fiction which serves as a nexus for be run well. Therefore, there is organization contracting relationships and which is also structure as policies and symbols serving to characterized by the existence of divisible re- support the behavior and attitude consid- sidual claims on the assets and cash flows of ered appropriate, thus placing constrain on 280 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285 the range of available impression manage- to permanently employed public officials ment behavior (Gadot and Drory 2006: 78). and has been applied as an instrument of In addition, organization actually has a role critique towards this state power. to manage agency (agency structure) to self b. Group of officials: bureaucracy can de- interest and self setting at microlevel setting. note a group of individuals who carry out It is as a cooperative behavior to align goals administrative tasks or an administra- toward risk. Strategies and structure in or- tion carried out by persons who are em- ganization influence new subject to learn is ployed specifically for this type of job, re- management behavior. Organizational be- gardless of whether it is public or private. havior is highly responsive to the interper- c. Administrative autocracy: an administra- sonal cues and social aspects of the situation tion in which the officials exert power to (Gadot and Drory 2996:78). implement their own interests. Abrahamsson (1993:xvi) asserts that Bureaucracy is used, and has been organizational theory has three major prob- used as a label for a multitude of fenomena lem areas. The first is the question of how that have very few components in common. the organization can be made efficient. The It only signifies that a group of fenomena is second is how it can be representative and some way related. Bureaucracy it is analyzed how its activities can satisfy the interests on this abstract level (the concepts of man- and realize the goals of its mandator. In term datory and executive) represents a tendency of improving the organization’s efficiency, within an organization’s administration to the mandator appoints an executive group disengage itself from thoseexceptionally in- that is entrusted with the responsibility of terests that are supposed to work for the in- working for his or her goals and interests. terest of those persons who are officials legit- Here, where the demands for efficiency and imate of the administration. Administration representativeness intersect, a new problem means those organization officials who are area emerges: the problem of administrative responsible for the implementation of daily groups that work for their own goals rath- decisions and rules to which they are sub- er than those of their masters (often citing jected or that they are expected to follow. It greater efficiency as the reason) and gradu- is common for almost all conceptualizations ally becoming the lower representatives of which are used for the analysis of the task their mandatory interests. This is the prob- execution for serving some persons or group lem with bureaucracy. of persons. Again, the administrative system Furthermore, organization needs to is the concrete dimension of bureaucracy in have bureaucracy to control between subjec- the sense that it can be described through tive (personal desires) to be objective (to pro- the use of various statistical and sociologi- tect within the bureaucracy from domination cal methods of measurement. Organizational and to ensure the interest of constituents) rationality, expressed in terms of the princi- (Hunt III and Hogler 1990:449). Bureaucracy ples of bureaucracy, is taken as a guarantee must have attempt to accommodate personal against discrimination premised on particu- laristic aspects of identity, such as ethnic- expression and self fulfillment to describe all ity, gender, age, religion, and sexuality (Clegg forms of organizational rationales. Then why 1992:4). is bureaucracy so important? It is important Agency is discourse or rhetoric embed- to attempt and define, distinguish and ren- ded in collective behavior, social practice or der mutually compatible the subjective and political ideology that undermine the teleo- objective aspect of life. Conflict in organiza- logical and normative possibilities of indi- tions may not be interpreted in a meaning- vidual’s rational action. Furthermore, agen- ful way until we have an understanding of cy has power and knowledge which express the battle field in which these conflicts may the underlying prejudgements or bias within be resolved. Abrahamsson (1993:4) explains discourses or knowledge that undermine the that bureaucracy as it is used in political sci- possibility of objectivity and create a symbio- ence and sociology gives us an impressive sis between expertise and power. Moreover, number of applications of the terms from agency reminds the government to have co- which to choose: ercive power process to manage the country, a. State administration: bureaucracy has because all behaviours are motivated by eco- been used for denoting the prominent po- nomic rationality. Adam Smith’s view toward sition given by the centralized state power the political economy is based on the pos- Kumalasari, Sudarma, A Critical Perspective Towards...281 tulate of homo economicus: a simplified set in the organization because organizations of assumptions about human action, seen share their feature of socially constructed as the result of the behavior of isolated in- boundaries with other types of collectivities. dividuals, each of their own interests and If there is any concentration of power in the making free and rational choices after hav- contributions not only to the attainment of ing calculated the prospective costs and ben- large-scale goals, but also some of the most efits (Martinelli and Smelser 1990:2). Then, troublesome actions affecting us (Aldrich accounting is born. 1999:7). Some of the negative consequences Accounting needs a person to run its of organized action arise as by products in system from identification process until the normal course of business, whereas oth- reporting. Every person has his or her own ers are the result of callous disregard of the interests. Then it is important to search in- public interest. Figure 3.3 support the expla- dependent outsider of the organization to nation that agency can solve the problem of review the performance there. This situation the organizations. is already happened in classical era. Back Agency has process and system. The into classical nineteenth-century, entrepre- process focuses more on changing the or- neurs had little need for an accountant com- ganization because process is temporal and pared to modern era. They were accountable emergent, contextual and patterning of inter- to the law of the land and their own con- action between individual and groups within sience, but beyond that they were sole judge and across internal and external organiza- of their performance wheter it was good or tion boundaries. System puts attention on bad. The expanding influence of the audit- the stability of the organization. As system ing is derived in general from two sources: as the system concerning with human socio (1) the increasing complexity of the modern behaviour, action is defined as coherent or industrial world and its greater emphasis on stable slef organizing patterns of recursive accountability, meaning that the need of in- or iterative, reproductive,interaction which dividual refer to his or her actions. One man can be conceived as forming entities/object is referred to is actions to be judgeded y the that can be classified and examined in terms standards he or she shares with others (Car- of their hypothetical properties, boundaries michael and Willingham 1985:9). (2) There level, interrelationship and continuity over was different interest between the owner or time. principal and agent. The contradiction was Critics in this chapter are firstly given started from the interaction between two or by giving with serve the information of what more subjects (agents and principal), there- are the effects of agency theory toward the fore that is why they need auditor to check principal and agent. Revealing information agent’s performance. about effects for both parties can support Auditing is a systematic an objective- this research to come to the critics toward process in obtaining and evaluating evidence agency theory. Critic means one who forms regarding assertions about economic actions and expresses judgments on the merit faults, and events to determine the degree of cor- value, or both matters. respondence between the assertions and Effects exist as the consequence of a established criteria and communicating the cause of something else. Here, agency theory results to interested users (Louwers et.al. appearance has effect for the principal and 2008:4). Auditing is an independent investi- agent. The power of the empirical research gation of some particular activity. The situ- on agency theory to explain organizational ation below explains more about auditing in fenomena is important to assess, particular- the organization. ly in light of the criticism that agency theory In this case, the role of auditor is to is "hard subject to be tested empirically since determine whether the reports prepared by subject to empirical test since it rarely tries to the manager conform to the contract’s pro- explain actual events" (Eisenhardt 1989:58). vision (Messier et.al. 2006: 7). So, the audi- While principal and agent are the actors who tor’s verification of the financial information perform their job based on agency theory in improve credibility to the report and reduces term of achieving their goals. Jensen and information risk, potentially benefiting both Meckling define an agency relationship as “a the owner and the manager (Brink and Witt contract under which one or more persons 1982: 3). (the principal(s)) engage another person (the Thus, agency relationship can be seen agent) to perform some service on their be- 282 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285

Figure 7. The Function of Agency half which involves delegating some decision leaders who can drive change. Thus, agency making authority to the agent (Jensen and (when it turns to be theory) should treat the Meckling 1976:5). principal and agent fairly. Agency is a process of interest creation inside human’s mind where everyone has it CONCLUSION in their selves. Agency is not directly con- Agency is as a concept. Based on the nected with the behavior, because behavior theory formulated by Popper, agency is is the result of agency process. Agency really merely fulfilled the first requirements that is supports the human’s development and or- the system of axioms must be derived from ganizational growth. However, if researcher contradictions (self contradiction or mutual and other users of agency are only focus on contradictions). Agency has been a contra- the function without inquiring the nature diction since 1770-1831 (W.F.Hegel). How- then it will have bad effect for the one or both ever, agency cannot fulfill the other three re- parties. It can be the agents or principals, quirements. Agency is a process of interest but mostly the agents are as the victims. It of rational actors (need, interest, and inten- does not always mean that agent is wrong or tion) which is intentionally to conduct effec- incapable to do their works. Also, it is often tive plan and management for achieving goal. false if the principals are right,they should Its process also supports the communication be obeyed that principal is right and should for understanding the interest of rational ac- obey by their agents. Because both of them tors. In addition, the agency faces problem are humans who have their own interest, ca- when there is a discrepancy between inter- pabilities, and goal. Also, nobody is perfect. ests and goals of an individual with others. If the principals want to be better than they The effect leads to conflict. Because there is should treat their workers better. Agents a trouble in the communication process then or workers also do the same thing to their the message is not delivered or achieved in principals. Basically agency explains how to understandable ways. Here, communication learn to be better agents and organization has two roles in agency both as supporter that can form a transformative agent and to make the process of agency becomes clear Kumalasari, Sudarma, A Critical Perspective Towards...283 and as agrigator that creates conflict. Well, Validity is the extent to which a measuring agency is definetely able to find in interaction instrument measures what it was designed and relationship. Agency is discourse or re- to measure (Bordens and Abbot 2005: G-11). thoric embedded in collective behavior, social It is quiet difficult to decide the reliability practice or political ideology that undermine and validity of qualitatve research. Miles and the teleological and normative possibilities Hubberman (1994:2) states that the reliabil- of individual’s rational action. Furthermore, ity and validity of qualitatively derived find- And agency has power and knowledge which ings can be seriously in doubt. There is no express the underlying prejudgments or bias certain validity for qualitative, that is why within discourses or knowledge that under- bias in qualitative cannot be dismissed. At the mine the possibility of objectivity and create beginning, there was an obstacle in reporting a symbiosis between expertise and power. the manuscript due to the large scope of data Therefore, based on that reason, agency is based on the years, authors, and object. So useful for organization because organizations that another difficulty emerged when naming share their features of socially constructed and selecting the appropriate words to repre- boundaries with other types of collectivities. sent the real condition. Presenting the report That is why agency is often seen in the or- of this research needs efforts on organizing ganization. Agency has two roles, once as a the important main point and supporting de- conflict maker and as a means for problem tails effectively and efficiently so that the ex- solving. Thus, a lot of subjects are born by ternal validity of this research is high. agency for organization. The instance are ac- This study is a basic research which counting, management behavior, organiza- employs literature review as the technique tional behavior and so on. The effect of agen- for analysis. Qualitative paradigm needs to cy towards the principal is if the principals analyze the issues. That is why the data is gain higher power and capability to order massive (the clear reasons have been pro- their agents (and the agents must conduct vided in research limitation). Then, if other based on the principal’s interest to maximize researchers have willingness to use the same their own wealth. It is like principals have purpose, technique, paradigm or event the been bought agent’s behavior so agent does topic, it is better to design the research in not have any other choice anymore, instead detail to decrease the bias in data and in- of obeying their principals’ wants. Then, the crease the validity (internal and external va- effect of agency towards agent is that often lidity. The next esearcher can read the article agents oppressed by the principal. They are of Lovblad (2003) to expand the knowledge starting to move to struggle their rights by about archival science in qualitative then critizing their obligation. The organization they might not do the same mistakes for data is too strict for them, they cannot carry out management. Afterwards, creating the proto- their own interests so that their creativity is col to support the research since qualitative limited, also they cannot fulfill their needs requires long process (local groundedness, and interest. Agent is treated as an asset richness and holism, sustain period, asses which is important only for the ease of the causality and flexible to reveal the meaning) operational production in the organization. to run the research. It will be easier for the re- Then, agent is only valued as asset or ma- searchers to manage and create manuscript chine where principal can measure the how the report and also help to increase the va- much the costs to predict how much the in- lidity. Researcher also needs to understand come that they can earn. If the agent is not the research question because it will help useful anymore (based on principal’s view) to present the research to the user. Lovblad then the agent may be dismissed and re- (2003: 131-134) asserts that science should placed by other agent. The most important be explicit, relevant, and expansive. In oth- thing is whether principal and agent are hu- er words, he considers that the findings not man not treated as asset, machine, etc. Both only clarify one’s own paradigm-its ontologi- of them are basically have the same role in cal, epistemological and value foundations this world to build better life for everyone. but also its application. Explanations are It was hard to manage the data ob- seen in cultural patterns and the individual tained from the literatures due to the exten- conception of the world. That is why agency sive amount data and literatures concerning needs further inquiry to review its role as with agency. After accomplishing the data concept and how to make it as a theory. It management the data are further validated. needs more explanation to sets its position, 284 Jurnal Akuntansi Multiparadigma, Volume 4, Nomor 2, Agustus 2013, Hlm 269-285 then it can increase the using of agency in son Education,Inc. Boston. organizational life. Basically, agency is useful Eisenhardt, K.M. 1989. “Agency Theory: An for people to harmonize their life. It is already Assessment and Review”. Academy of proved that agency is important as problem Management Review.Vol. 14, No. 1, pp solving for agency problem. Agency problem 57-74. is easy to find in the human’s life and it is Gadot, E.V. and A. Drory. 2006. Handbook of presented in the organization. That is why Organizational Politicus. Edward Elgar if people have interest to study the agency Publishing Limited. Northampthon. then it should be started from the right side. Hatch, M.J. 1997. Organization Theory Mod- The next researcher needs to inquiry from ern Symbolic and Postmodern Perspec- the nature after that goes to the function and tive. Oxford University Press.New York. sees how is its effect in people’s life. So, it Hunt III, G. Herbert and R.L. Hogler. 1990. will give clear information for user of agency “Agency Theory as Ideology: A Compar- and not give equal position for the principal ative Analysis Based On Critical Legal and agent. Because the function of agency is Theory and Radical Accounting”. Ac- not strengthening the principal and weaken- counting Organizations and Society. Vol ing the agent, but it deals more with how to 15, pp. 437-454. harmonize the interaction and relationship Jensen, M.C., and W.H. Meckling. 1976. between one agent to another agent. Every “Theory of The Firm: Managerial Be- individual is as agent and principal for their havior, Agency Costs and Ownership own life. That is why the next researcher can Structure”. 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