ACCA Strategic Professional · Strategic Business Leader · Agency

Brandt Retail's finance director reports quarterly profit to shareholders. Shareholders cannot observe how the director achieved the profit, and the director knows much more about the underlying operations. Which agency cost is mainly demonstrated, and what is the most appropriate response?

The situation shows information asymmetry, which leads shareholders to incur monitoring costs. The appropriate response is independent external audit and an audit committee that scrutinises reported results, giving principals assurance about what the agent reports and how profit was achieved.

1. AResidual loss; the response is to abolish the monitoring function
2. BBonding cost; the response is for shareholders to manage operations directly
3. CMonitoring cost caused by information asymmetry; the response is independent audit and an audit committee reviewing reported resultsCorrect
4. DOpportunity cost; the response is to increase dividend payouts to nil