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CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management

Shareholders of Bharat Textiles Ltd. appoint an external firm to audit the managers' accounts every year and pay it a fee. In agency theory, this fee is best classified as:

The audit fee paid by shareholders is a monitoring cost, because it is spent by the principal to observe and verify what the managers are doing. Bonding costs are incurred by the agent, and residual loss is the remaining welfare loss after controls.

  1. ABonding cost borne by the agent
  2. BResidual loss
  3. CMonitoring cost incurred by the principalCorrect
  4. DStewardship reward

Explanation

Expenses incurred by the principal to observe and check the agent's behaviour, such as audit fees, are monitoring costs. Bonding costs are incurred by the agent to assure the principal. Residual loss is the value lost even after such measures.

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