Resolving Principal–Agent Conflicts: Revisiting Agency Theory Through the Lens of Internal Audit

How can internal audit help reduce the conflicts that arise when managers control more information than owners, boards and other stakeholders?

The paper approaches this question through agency theory, which examines the relationship between principals who delegate authority and agents who exercise it.

Managers naturally possess more detailed information about operations than those responsible for oversight. This information advantage can weaken monitoring, delay the escalation of problems and make it harder to determine whether decisions serve the organisation as a whole.

These monitoring difficulties create agency costs: the resources spent supervising management, providing assurance and addressing the consequences of misaligned decisions.

Internal audit acts as an independent information mechanism. It evaluates management representations, tests controls and communicates an evidence-based view to the board and senior leadership.

Its contribution depends on organisational independence, professional competence, access to records and people, and the authority to report significant matters without interference.

Boards should assess internal audit by the quality of insight it provides and the action that follows—not simply by the number of reviews completed.

A strong internal audit function supports better decisions, clearer accountability and greater stakeholder confidence by reducing uncertainty about the true condition of the organisation.