Communication within an Agency Relationship: A study on Bostadsbolaget and the ‘Deferred Revenues’

Abstract: Background and problem: The purpose of financial reporting is to supply information to users of the financial statements. The information can include complex accounting items such as ‘deferred revenues’, which need to be communicated from a subsidiary (agent) to an owner (principal). In order to reduce the complexity of accounting items, the information must be communicated, so that both agent and principal gain a deeper understanding of the accounting items and the economic events from which they arise. Purpose: The purpose of the study is to investigate the role of communication within an agency relationship between a municipality and a municipally owned real estate entity. The research will show how communication is reducing the complexity of accounting items in such a relationship. Method: This study examines the communication within an agency relationship through a case study on a municipally owned real estate entity, investigating the accounting item ‘deferred revenues’. The empirical data is gathered through archival research and semi-structured interviews. Analysis and conclusion: The analysis shows how the three communication channels (information groups, common intranet and internal reporting system), reducing the complexity of ‘deferred revenues’, are linked to the matrix of communication. Furthermore, it shows the communication channels’ relation to the assumptions of information asymmetry and information as a commodity within agency theory. This study proves that communicating information reduces the complexity of accounting items within an agency relationship.