ACCA Strategic Professional · Strategic Business Leader · Agency
Kestrel Foods plc has dispersed shareholders who cannot observe the daily decisions of the chief executive. The board is concerned that the CEO may favour a large acquisition that increases her own prestige rather than shareholder wealth. Which of the following is an example of a monitoring cost in this agency relationship?
Paying an external auditor to examine the CEO's expenses and the accounts is a monitoring cost. It is expenditure by principals to check what the agent does. Share options are incentives, and the fall in value caused by a poor decision is a residual loss.
- APaying an external auditor to examine the CEO's expense claims and the financial statementsCorrect
- BGranting the CEO share options that vest after three years
- CThe fall in share value caused by the CEO's poor acquisition decision
- DAwarding the CEO a fixed salary with no performance element
Explanation
Monitoring costs are incurred by principals to observe and check agent behaviour, such as audit, reporting and oversight. Share options are an incentive (bonding) mechanism, not a monitoring cost. The fall in value is a residual loss, and a fixed salary is neither monitoring nor an incentive.
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