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

Agency theory provides a critical framework for analysing the contractual relationship between principals, such as shareholders, and agents, including managers and executives. While agents are entrusted to act in the best interests of principals, conflicts frequently arise due to divergent objectives, information asymmetry, and differing risk appetites. These agency conflicts generate monitoring costs, reduce accountability, and threaten organisational performance. This paper adopts a conceptual research design, drawing on secondary sources including academic literature, regulatory frameworks, professional standards, and case studies from global and Nigerian contexts. Through a thematic analysis, it explores the evolution of agency theory, examines mechanisms traditionally used to mitigate principal–agent conflicts, and emphasises the unique role of internal audit as a governance safeguard. The findings highlight that internal audit reduces information asymmetry, lowers monitoring costs, and enhances transparency and accountability, thereby aligning managerial actions with shareholder interests. Case illustrations, such as Enron, WorldCom, and Cadbury Nigeria, demonstrate how weak internal audit functions exacerbate agency problems. The paper contributes by integrating internal audit directly into the agency theory framework and concludes with recommendations for strengthening audit independence, embedding risk management practices, and adapting audit functions to emerging governance challenges.