ExpertEasy2 marksMultiple Choice
ACCA · Question 09 · Financial Management Function
Section A
In a Decentralized Autonomous Organization (DAO) transitioning to a traditional corporate structure, the founders are concerned about the 'agency problem' where new professional managers might not act in the best interests of the shareholders.
Which of the following is an example of an 'agency cost'?
Section A
In a Decentralized Autonomous Organization (DAO) transitioning to a traditional corporate structure, the founders are concerned about the 'agency problem' where new professional managers might not act in the best interests of the shareholders.
Which of the following is an example of an 'agency cost'?
Answer options:
A.
The cost of implementing a rigorous external audit to monitor management's financial reporting.
B.
The standard base salary paid to the Chief Executive Officer.
C.
The cost of raw materials increasing due to poor negotiation by the procurement team.
D.
The dividend payments made to the shareholders at year-end.
How to approach this question
Recall the definition of agency costs: costs incurred by shareholders to monitor management, bonding costs incurred by management, and residual loss.
Full Answer
A.The cost of implementing a rigorous external audit to monitor management's financial reporting.✓ Correct
Agency costs arise from the separation of ownership and control. They include monitoring costs (e.g., external audits, independent directors), bonding costs (e.g., managers providing guarantees), and residual loss (suboptimal decisions made by managers). The cost of an external audit is a direct monitoring cost.
Common mistakes
Classifying standard business expenses or operational losses as agency costs.
Practice the full ACCA FM — Financial Management Practice Exam 6
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