Critically discuss any five of the following theories as applied in accounting, highlighting

the proponents, the propositions and critics of each theory.

a) Agency theory

b) Regulatory capture theory

c) Residual equity theory

d) Entity theory

e) Proprietary theory

f) Commander theory

g) Clean surplus theory

Agency Theory : 

Proponents and Propositions : 

• It deals with the conflicts between the owner and the management
• It specifies the responsibilities of both parties and their alignment
• It states the responsibilities of the agent to its principals
• It is a solution to information asymmetry between managers and shareholders.
• The cost of preventing and monitoring the agents (managers) to work against the interest of principal (shareholders) is known as agency cost

Critics : 

• Sometimes, it misleads to the separation of power and duties from managers
• It includes simplistic assumptions about individual risk preferences 
• It does not acknowledge the social context in which the principal-agent contract resides

Residual Equity theory : 

• It claims that real terms of equity mean "residual equity"
• Residual equity means only the common equity, Residual equity = Assets - Liabilities - Preferred Stock.
• It consider that for common equity shareholders, the preferred shareholders are an internal creditor and preferred capital as liability
• It is given by George Staubus at the University of California, Berkeley, and proposed this theory for making the decision-useful for investment purposes.

Critics : 

• This residual claim diminishes the importance of preferred stocks.
• It creates confusion with some GAAP and FASB principles.
• Preferred dividends would be treated as a liability for common shareholders

Proprietary theory 

• This theory claims that there is no separate legal entity in the firm for accounting purpose
• This emphasized the loyalty of information presentation to owners.
• Overall, it states that the proprietor of the company is the key person and reporting should be according to him.
• It focuses on determining and evaluating the owner's net worth.

Critics : 

• Owners are personally liable for their debts
• It is not suitable for the corporate form of business
• It is also not suitable for a closed and mixed economy.

Entity theory : 

• This theory claims that there should be a separate legal entity in the firms
• Common shareholders are not personally liable for the debts of the company
• This theory personify the company into a legal person that it can make a contract and sue on its capacity
• In this theory, Assets = Liabilities + Shareholder's Equity

Critics : 

• Not appropriate for sole proprietorship form of business
• Creditors have insecurity as owners are not personally liable for debts.
• It is not recognized worldwide yet, as it is in existence for many years
• Sometimes, a separate legal entity of the company is used by owners as a source which they use for reaping profits

 Regulatory capture theory :

• It is an economic theory that claims the capturing of regulatory agencies by industries or interests which are being regulated.
• If this happens, the agency starts acting for the benefit if industries not in the interest of its stakeholders (public)
• To influence regulators, industries use to bribe or indirect methods of bribing
• Because the public spends a limited resource to advocate for their rights while industries can spend a lot more.

Critics : 

• It decreases the viability and goodwill of regulation authority
• It sets the rigid parameter for all types of regulation whether concerned or not.