Shareholder – Manager Relationship – bonus plans
             A very important issue in corporate reporting is the concept of agency costs. That is, costs associated with the relationship between the principal and the agent, most commonly found in the corporate world as the relationship between shareholders, being the owners of the firm and managers, being those acting on behalf of owners in running the general operations of the organisation. Agency costs theory states that all parties will act in their own best interests, to maximise their own wealth, and unless interests are aligned between the principal and the agent, substantial costs may be incurred.
             In order to align the interests of shareholders and managers various mechanisms may be employed by shareholders, such as bonuses, where managers are rewarded for profitable operations within the organisation, therefore aligning the interest of the manager and the firm. This alignment of interest however does raise a very important issue in corporate reporting, especially when the manager may have some influence over the accounting procedures employed by the organisation, they may have reason to manipulate the financial statements such that they maximise their own bonuses.
             Studies by Healy (1990) showed that based on the typical bonus plans where managers are rewarded for profitability within a given range of earnings within the firm (y>x>z), managers will tend to alter accounting practices based upon the earnings of the firm in conjunction with the nature of the bonus plan. If earnings fall well below the lower bound earnings threshold, making bonuses an unattainable goal, managers may tend to bring future costs forward so they can attain larger bonuses in future periods. If earnings fall within the bonus threshold, managers will tend to alter accounting practices to increase the firm's earnings and maximise their bonus in the current period. Finally if the firms earnings exceed...