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ACCA Applied Knowledge · Financial Accounting · Duties and responsibilities of those charged with governance

Which of the following statements about the effect of the separation of ownership and control in large companies is correct?

Separation of ownership and control creates an agency problem, as managers may pursue their own interests instead of shareholders' interests. Corporate governance mechanisms such as independent directors, audit and disclosure aim to reduce this. Alignment is not automatic, and shareholders are not responsible for daily decisions.

  1. AIt creates an agency problem because managers may act in their own interests rather than those of shareholders, which governance rules aim to reduceCorrect
  2. BIt removes the need for financial statements because shareholders monitor operations directly
  3. CIt means that shareholders are legally responsible for the company's day-to-day decisions
  4. DIt ensures that directors' interests always align with those of the shareholders

Explanation

When owners appoint directors to run the business, the agent-principal relationship can lead to conflicts of interest, such as excessive pay or short-term decisions. Corporate governance, disclosure and audit mitigate this. Shareholders do not run the company, financial statements remain essential, and alignment is not automatic.

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