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ACCA Strategic Professional · Strategic Business Leader · Agency

Delmar plc incurs significant costs each year on external audit, board committees and an annual report to shareholders. In agency theory terms, these costs are best described as:

These are monitoring costs. Agency theory uses that term for expenses the principal incurs to oversee the agent, such as external audit, board committees and reporting. They differ from bonding costs borne by the agent and from residual loss, which remains after controls.

  1. AResidual loss
  2. BMonitoring costsCorrect
  3. CBonding costs
  4. DTransaction costs of share trading

Explanation

Monitoring costs are borne to observe and control the agent's behaviour, such as audits and oversight committees. Bonding costs are incurred by the agent to assure the principal, and residual loss is the remaining value lost despite these controls.

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