ACCA Strategic Professional · Strategic Business Leader · Agency
Taloma Ltd's finance director holds more information about the firm's true performance than the shareholders, who cannot easily verify her reports. Which term describes this feature of the agency relationship, and what is a typical governance response?
This is information asymmetry, where the agent knows more than the principal. Typical governance responses include independent external audit, mandatory disclosure and oversight by non-executive directors and audit committees, which help shareholders verify what managers report.
- AMoral hazard; replacing the audit with management certification
- BInformation asymmetry; independent external audit and disclosure requirementsCorrect
- CStewardship; removal of all non-executive directors
- DCorporate social responsibility; publication of a sustainability report only
Explanation
The agent knows more than the principal, which is information asymmetry. Independent audit, disclosure rules and non-executive oversight reduce it. Management certification alone would rely on the agent being self-reporting, so it would not solve the problem.
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