ACCA Strategic Professional · Strategic Business Leader · Agency
Pelmar Group's shareholders want to reduce agency costs. They are considering a package: monitoring through an independent audit committee, bonding through a requirement that executives hold company shares, and incentives through share options. Which element is correctly classified as a monitoring cost?
The cost of running the audit committee and external audit is a monitoring cost, because it is spent by principals to observe and control agent behaviour. Share holding rules are bonding, option dilution is an incentive cost, and value lost from avoided projects is residual loss.
- AThe cost of operating the independent audit committee and external auditCorrect
- BThe cost to executives of holding shares they cannot sell
- CThe dilution of existing shareholders from share options
- DThe value lost when managers reject risky but profitable projects
Explanation
Monitoring costs are incurred by principals to observe and control agent behaviour, such as audits and committees. Share holding requirements are bonding mechanisms, and the option dilution is an incentive cost. Lost value from managers avoiding risky projects is residual loss, which remains after monitoring and bonding.
Did you get it right without looking?
One question tells you little. A timed set on Agency shows your real accuracy, how long you take and where you lose marks.
More Agency questions
- Zorvan Plc's board holds a large share option scheme, and the CEO has recently cut research spending to lift this year's profit. A non-execu…
- Taloma Ltd's finance director holds more information about the firm's true performance than the shareholders, who cannot easily verify her r…
- Marlow Water is a state-owned utility whose board is accountable to a government ministry, regulators, customers and the public. An analyst …
- The board of Delmar Industries is considering a remuneration scheme for its chief executive. Shareholders want to reduce the information asy…
- Halden Retail's board has been criticised by customers, employees and a local community group after a store closure. A director argues that …
- Karvel Foods is a listed company whose managers act diligently for shareholders. Critics say that this strictly shareholder-focused agency r…