An Overview on Contracting Theory and Agency Theory: Determinants of Voluntary Public Accounting Firms Switching
Abstract
The objective of this literature study is to explore factors affecting voluntary Public Accounting Firm (PAF) switching according to contract theory associated and agency theory of Watts & Zimmerman (1986). PAF switching may occur due to regulations that require a company to do PAF switching, called as mandatory replacement, and due to the company’s own wishes, called as voluntary PAF switching. The result of this study shows that 23.9% of companies voluntarily change their PAF because of managerial changes, financial distress, PAF Size, changes on Return on Assets, client size, and auditor’s opinion. Contracting theory may explain researches in the field of auditing practices, such as auditor or PAF, related to auditor’s reputation, professionalism, auditor environment, PAF size, and industry specialization. Large PAF has a brand image of having a better reputation than small PAF [36]. This is also supported by De Angelo (1981), who stated that large PAFs are preferred by clients because they are considered to be more independent than small PAFs. Agency Theory is often used in research in the field of auditing because information asymmetry is information gap between the interests of agents and principals. Therefore, an independent third party is needed, and the role of the auditor is only as the monitoring party.
Keywords: contracting theory, agency theory, Public Accounting Firm switching
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