Problem Identification Research Objectives

12 will harm the principal or to ensure that the principal will be compensated if he does take such actions. However, it is generally impossible for the principal or the agent at zero cost to ensure that the agent will make optimal decisions from the princ ipal’s viewpoint. In most agency relationships, the principal and the agent will incur positive monitoring and bonding costs non- pecuniary as well as pecuniary, and in addition, there will be some divergence between the age nt’s decisions and those decisions which would maximize the welfare of the principal. The dollar equivalent of the reduction in welfare experienced by the principal as a result of this divergence is also a cost of the agency relationship, and we refer to this latter cost as the “residual loss”. In reality, managers will know more about internal information and the companys prospects in the future than shareholders. Therefore, managers should always give a signal about the condition of the company to the shareholder. The signal can be given by the manager through the disclosure of accounting information such as financial report. The financial report is a very important thing for the external users because these entities are in the greatest condition of uncertainty Ali, 2002. Imbalance knowledge of information will lead to the emergence of a condition known as information asymmetry. With the existence of information asymmetry between management and the shareholder will 13 give the opportunity to the manager to do earning management, so that it will mislead shareholders about the companys economic performance. Corporate governance is a concept based on agency theory that is expected to serve as a tool to provide assurance to investors that they will receive a return on the funds they had invested. Corporate governance is closely related to how to make the investors believe that managers will give benefit to them, by believing in that the manager will not misuse the invested fund to the illegal projects. Besides that, corporate governance also relates to how the investors control the managers Siallagan and Machfoedz, 2006. Special authority in every region in Indonesia in implementing corporate governance is based on Law no. 5 of 1974 on the Principles of Governance in the Region, as well as explaining the relationship between central and local government. After the implementation of policies to implement regional autonomy in Indonesia through Law no. 22 of 1999 as amended by Law no. 32 of 2004 on Regional Government has change a paradigm and a very basic structure, especially the local government relations Executive with the Regional Representatives CouncilDPRD Legislative. In this relationship, the Legislative delegates authority to run the government to the executive.