TITLE:
Auditing and Weak Bonding Function in Relation to the Agents of Zaibatsu (Large, Family-Owned Industrial Conglomerates) in Japan during 1930s
AUTHORS:
Ichirou Shiobara
KEYWORDS:
Zaibatsu, Governance, Agency Theory, Principal, Agent, Internal Control, Internal Auditing, External Statutory Audit by Professionals, Monitoring, Bonding
JOURNAL NAME:
American Journal of Industrial and Business Management,
Vol.4 No.6,
June
19,
2014
ABSTRACT: This paper has been inspired by the paper
issued by Evans, and the title of which is “Auditing and Audit Firms in Germany
before 1931” in 2003 on Accounting Historians Journal [1]. Although some
academics in the field of international accounting refer to accounting events
during 1930s in some specific nations in the world as the main subject in their
research, it seems to be rare to make allusion to events surrounding external
statutory audit by professionals (ESAP, hereafter) in the world during 1930s,
the decade characterized as the inter-war period, collectively. Under such a
situation Evans Lisa tried to shed light on the comparatively slow development
of the statutory audit in Germany, examine the different attitudes to the legal
and organizational forms of audit firms, and to analyze the development of
German auditing and audit firms prior to their statutory regulation in 1931.
Evans’ work, however, has the other aspect of developing the critique of agency
theory assumptions in historical contexts. In this aspect, this paper shall
rely on the agency theory as the framework of searching the reasons of Japan’s
specialty in relation to introducing the external statutory audit by professionals
during the decade when EVANS referred to, especially focusing on the monitoring
and bonding mechanism of ZAIBATSU. In literature, many papers on agency
theories focus on monitoring and the way of incentives by principals. In this
respect, the development of German ESAP justifies EVANS’ approach. On the
contrary, in reaching the profound reasons that underlie the behaviors of
related parties in relation to introducing ESAP, it’s important to pay
attention to the conducts of managements that are agents, especially their
bonding manner. According to Jensen and Mecling, there is no difference that
actually makes the monitoring expenditures and also it will pay the
owner-manager to engage in bonding activities and to write contracts which
allow monitoring as long as the marginal benefits of each are greater than
their marginal cost. If so, generally we can say that the balance of monitoring
and bonding might be beneficial to both principals and agents. And also we can
expect the situation in which too strong monitoring by the principals might
lesson the bonding efforts by the agents. In this paper, I would like to deepen
the understanding of the roles and places of managements of ZAIBATSU during
1930s in addition to the situation of Japanese modern big companies, especially
those of which occupied the status of followers of ZAIBATSU.