ACCA Applied Knowledge · Business and Technology · Governance in business organisations
Which of the following is an agency cost borne by shareholders in trying to control the behaviour of directors?
External audit fees are an agency cost because they are incurred to monitor directors and give shareholders assurance about the reported results. Dividends, raw materials and depreciation are ordinary business items, not costs of controlling agents.
- AFees paid for an external audit of the financial statementsCorrect
- BDividends paid to shareholders
- CCost of raw materials used in production
- DDepreciation of the company's factory
Explanation
Agency costs include monitoring costs such as external audit fees, which help shareholders check that directors are reporting honestly. Dividends, materials and depreciation are normal business items and are not costs of controlling agent behaviour.
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