Dynamic Business environment

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Table of Contents
1. Introduction 3
2. Two Management theories 3
3. Analysis of Internal and External Factors 4
4. Analyzing two internal and external factors that impact how organizations operate in the
accounting and financial sector …………………………………………………………………………………….…………..6
5. Supporting factors with examples ……………….…………………………………………………………………………….8

6. Conclusion 10

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Introduction
This assignment explores the complex forces behind the operations of the organizations in the
contemporary accounting and finance industry. It distinguishes between technological
infrastructure and employee competencies as the internal factors and economic and regulatory
forces as external ones. By viewing the trends set by leaders in industry such as JPMorgan Chase
and Ernst & Young, it becomes clear how much importance is given to the technology
investment and employee training in terms of operational excellence. Operational strategies are
determined by external factors such as macroeconomic factors and government policies.
Particularly, the events such as Lehman Brothers collapsed in 2008 and GDPR implementation
identify how there should be a balance between operational decision-making and risk
management. These internal and external factors are highly interdependent and, therefore,
necessary for organizations operating in the dynamic field of finances. In a dynamic world with
constant changes in the regulations, it is essential to become a compliant and resilient entity for
sustainable success (Krummaker, 2016).

Two prominent management theories that are highly relevant to the accounting and
financial sector today are:

1. Transaction Cost Theory:

According to Williamson’s Transaction Cost Theory, organizations purpose to come up with
specific governance structures that are aimed at minimizing the costs of producing and selling
goods. The cost covers an information-acquisition, bargaining and enforcement cost. For
instance, Transaction Cost Theory applies to the accounting and financial sector mostly where
arbitrage agreements dictate dealings. For example, the financial institutions may choose to have
in-house auditing functioning that would help them cut the costs of outsourcing. As a result of
transaction cost theory, this theory therefore helps organizations in determining whether it will
be better to retain some functions in the company or outsourcing service providers (Steinman &
Updegraff, 2015).
2. Agency Theory:

Agency Theory talks about principal-agent structure in the organizations. It suggests differences
might arise from different goals between the principal and agents. The agent is supposed to align
these interests in such a way that the agent then acts on behalf of the principal. As a theory,
Agency Theory is very crucial in the financial industry in framing a relationship between the
shareholders and the executives. For example, executive compensation methods are aimed at
making executive and shareholder interests compatible; this works to limit agency conflicts. This
theory enables organizations to form incentive structures and governance frameworks which help

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the latter carry out policies that could prevent anticipatory conflicts and promote the necessary
alignment of interests (Romano, 2020).
Examples:
Transaction Cost Theory in Risk Management: In financial institutions, the risk management
teams are mostly based in their place of work; risks such as credit a market risks are withdrawn
by such employees so that they can control and ponder over every move that will result into any
form of monetary losses. Internalization allows organizations to reduce, in terms of the costs
related to giving the outside world risk-based information and communicative-coordination
(Steinman & Updegraff, 2015).
Agency Theory in Executive Compensation: Analysis of executive compensation in large
financial firms identified stock options and performance based bonuses engineered to align
management executives’ interests with those held by the shareholders. This Agency Theory
application can, therefore, help reduce the effect of executives working for their private purposes
rather than the profits they create for the shareholders (Romano, 2020).
Analysis of Internal and External Factors:
Internal Factors: The Transaction Cost Theory makes the decision on outside to outsource any
function in different financial institutions. For example, the decision to outsource, or not to
outsource, used for the case of evaluation of the overall audit services against the complications
and cost implications involved with some specific core transactions (Burke et al., 2013).
External Factors: The regulatory environment will also play an important role in setting up how
both Transaction Cost Theory and Agency theory apply. The more robust ethical standards of the
financial industry cause organizations to alter their regulatory functions in shaping and forming
governance mechanisms such as accountability.
In general, Transaction Cost Theory and the Agency theory give a good insight on the decision-
making processes in the accounting and financial sector, as well as on the understanding
governance structures. Applying these theories, organizations can understand how to adequately
manage complicated inner and outsider environments surrounding transaction cost and interest
alignment for harmonious global practices (Gharpure et al., 2020).

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1. Transaction Cost Theory in Risk Management:

Example: In the case of Jensen and Meckling (1976), their study focused on the risk
management functions processes among financial firms. The investigation revealed that firms
which carried out a greater number of complex transactions, for instance competitive investment
banks avoided externalization of risk management activities in order to reduce transaction costs.
The organizations that have an internal risk management team tend to interact less frequently,
which means fewer negotiations and coordination with outsiders; this corresponds with the
principles of TCT.

Implication: The proposed findings indicate that financial institutions develop their risk
management in a way that reflects the situation on the complexity and frequency of deals. This is
in line with Transaction Cost Theory attention to minimize costs of interactions and coordination
outside an entity.

2. Agency Theory in Executive Compensation:

Example: Fama and Jensen (1983), in a detailed study, looked at executive compensation
methods used by publicly listed financial companies. The results revealed that such organizations
generally apply stock options and performance-based bonuses to ensure the interests of the
executives are in favor of those for the shareholders. The focus is to reduce agency problems by
linking executive compensation with financial performance of the firm.
Implication: The research highlights methods used by financial organizations in using incentive
structures to manage conflicts of interest between executives and shareholders. The Agency
Theory is practical in that its application increases the sense of synergy between various
stakeholders and promotes executives to take actions which increase shareholder value.
The provided instances serve to illustrate the applicability of Transaction Cost Theory and
Agency Theory in fostering practices that are observed at financial institutions. These theories
offer frameworks on which decision-making can be based and in the internalization of risk
management functions or the design of executive compensation packages, their use becomes
relevant either way. The absence of such framework puts a firm at risk especially since this is a
sector characterized by complex transactions and potential conflicts of interest.

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Two internal and two external factors that significantly impact the operations of
organizations within the accounting and financial sector
Internal Factors:
Technology Infrastructure:
Analysis:
Tahmidi et al (2011) said financial institutions rely on their internal technological capabilities
and infrastructures, which are important for the operations of these organizations. Well-working
internal systems, information security and cutting edge tools such as artificial intelligence affect
the efficiency and accuracy of financial transactions and data handling.
Impact:
The organizations that have strong and malleable technology infrastructure will be in a position
to automate operation, minimizing the amount of error associated with most financial
transactions. For example, integrating blockchain technology into its operations can radically
transform the internal operational nature of financial institutions since it relies on secure and safe
transactions (Gharpure et al., 2020).
Employee Skills and Training:
Analysis:
The human skills and knowledge possessed by the employees in an organization from the
accounting or financial institution are internal factors that affect the operations of an
organization. It enables the organization to effectively navigate complex financial landscapes by
ensuring that all staff members are updated and trained with latest accounting standards,
regulations of finance and emerging technologies (Steinman & Updegraff, 2015).
Impact:
Proper reporting, good compliance with regulations and effective decision making emanate from
well-trained employees. While ongoing training programs in changing industry practices, like
digital financial transformation, help employees embrace change and create a flexible culture
within organizations.
External Factors:
Global Economic Conditions:
Analysis:
The impact on financial institutions is shaped by a number of external socio-economic factors,
including currency rates variations, rates of interest changes and geopolitical conflicts.
Globalization of financial markets implies that transformations in economic performance of a
country influence the investment choices countries will make, capitals inflows and overall
market stability (Steinman & Updegraff, 2015).

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Impact:
The financial organizations need to be in touch with global economy by taking up new strategies
and adjusting old practices of investment and risk management. For instance, during periods of
economic uncertainties, organizations alter their collections to invest in risk resources in low risk
depression as show the changes made by external force due to global economic situation on
decision-making.
Regulatory Changes:
Analysis:
The external regulatory environment in terms of changing accounting and tax regulations and
reporting practices and compliance needs and government policies determine the business
models practiced in the accountancy and finance sector. However regulatory environment
transformations can lead to reporting practices, risk management frameworks and operational
procedures modifications (Krummaker, 2016).
Impact:
Financial institutions impoverish to be flexible in order to make quick responses in this
dynamically changing regulatory environment. For instance, the introduction of new accounting
standards is deemed incumbent on the careful preparation of such a change of standards which
could lead to the changes in the reporting frameworks for safeguarding the compliance abidance
and transparency (Krummaker, 2016).

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Internal Factors:
Technology Infrastructure:
Example: Based on the above situations, JP Morgan Chase can be ideal for demonstrating how
the technology infrastructure has modernized this company. The block chain platform by the
bank, Quorum had heavy investments to become profitable and enable easy and secure
transactions. This led to them have a seamless process and reduced the durations of transactions
and the costs of operation. Quorum’s success also proves the adaptability of successful
technology infrastructures as models for setting up optimized workflows of operations of
financial institutions (FitzGerald et al., 2020).
Employee Skills and Training:
Example: As an example, Ernst & Young (EY), one of the Big Four accounting firms, puts
stress on continuous employee trainings because things are different all the time. EY spends on
programs that equip its personnel with up – to- date knowledge in fields ranging from digital
transformation, cyber security and data analytics. This dedication to lifelong employee learning
means that EY’s teams stay current enough on the latest trends and developments in complex
financial settings. It also allows them to implement innovations, ensure high quality service for
their clients, and increase productivity. In the above example, it is observed that employee skills
and training play an indirect role on operational strength of financial organizations as well as
their adaptability (FitzGerald et al., 2020).
External Factors:
Global Economic Conditions:
Example: In 2008, when the world economy collapsed under pressure of many factors the
Lehman Brothers case has shown how much global economic situations influenced financial
institutions. With financial markets being all inter-linked, it meant that the collapse of Lehman
Brothers would lead to a domino effect as this was bound to impact global stability. Financial
institutions around the globe needed changes in their methods of operations as part of efforts to
curb risks, changing portfolio investments and investment strategies used. This is an instance of
how external economic situation may have severe implications and need policymakers to adapt
quickly in terms of their operational approach within the banking sector (Steinman & Updegraff,
2015).
Regulatory Changes:
Example: The implementation of the General Data Protection Regulation (GDPR) in the
European Union can be perceived as a particularly illustrative case regarding how changes of
regulators affect financial organizations. From May 19, 2016 the banks and financial
organizations that were conducting their business in the EU had to realize much stricter data
protection procedures and reorganize their customer’s data handling processes according to
GDPR demands. Changes in the regulatory framework applied to regular procedures which
required hefty changes in data management approaches that are aimed at penalizing non-

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compliance. This example shows that external regulatory change can, like mentioned above,
directly contribute to shaping and reshaping the operational field of financial institutions.
Conclusion
Overall, the organizational dynamics are interconnected to a mix of internal and external factors
that affect the accounting and financial sector. Operation efficiencies and adaptability are highly
determined by internal variables such as technology infrastructure development and employee
skills. The signposts Industry exemplars such as JP Morgan Chase and Ernst & Young stress
how the investment in technology, and making employee training a priority are critical to
remaining competitive with an ever-changing financial atmosphere. In external sphere alongside
global economic conditions and regulatory changes, an enormous pressure is imposed on
financial institutions. Real-life cases that capture the 2008 financial crisis collapse of Lehman
Brothers’ underline the ripple effect of global economies on operational strategies. At the same
time, regulatory changes such as GDPR demonstrate how internal or external disruptions require
organizational changes to become compliant and build trust with stakeholders. And so
recognizing the symbiotic relationship of these other factors, namely internal and external has to
be a vital process for organizations that want not only to cope with risks but also preempt it in an
industry where adaptability and compliance are key. The ability to balance internal strengths
with external awareness makes financial organizations ‘resilient’ and ensures their continued
success as an industry constantly changing, among others by continuously tightening regulations.

References
Krummaker, S., 2016. Corporate Demand for Insurance: Empirical Evidence from Germany.

Steinman, C.T. and Updegraff, J.A., 2015. Delay and death-thought accessibility: A meta-
analysis. Personality and Social Psychology Bulletin, 41(12), pp.1682-1696.

Romano, A., 2020. Study: Nearly a third of Americans believe a conspiracy theory about the origins of the
coronavirus. Vox.

Burke, B.L., Kosloff, S. and Landau, M.J., 2013. Death goes to the polls: A meta‐analysis of mortality
salience effects on political attitudes. Political Psychology, 34(2), pp.183-200.

Gharpure, R., Hunter, C.M., Schnall, A.H., Barrett, C.E., Kirby, A.E., Kunz, J., Berling, K., Mercante, J.W.,
Murphy, J.L. and Garcia‐Williams, A.G., 2020. Knowledge and practices regarding safe household
cleaning and disinfection for COVID‐19 prevention—United States, May 2020. American Journal of
Transplantation, 20(10), pp.2946-2950.

Jensen, M. C., & Meckling, W. H. (1976). "Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure." Journal of Financial Economics, 3(4), 305-360.

Fama, E. F., & Jensen, M. C. (1983). "Separation of Ownership and Control." Journal of Law and
Economics, 26(2), 301-325.

Tahmidi, A., Sheludchenko, D. and Allahyari Westlund, S., 2011. The Effect of Macroeconomic Variables
on Market Risk Premium: Study of Sweden, Germany and Canada.

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FitzGerald, A., Kwiatkowski, K., Singer, V. and Smit, S., 2020. An instant economic crisis: How deep and
how long. McKinsey Company, 6.

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