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Define agency relationship from the context of a public limited company and briefly explain how this arises.

Define agency relationship from the context of a public limited company and briefly
explain how this arises.

Answers

An agent is an individual or party acting on behalf. In the context of public limited agency
relationship may take two main forms.

(i) Agency relationship between Shareholders and Management.
The shareholders are the owners of the company through equity capital contribution.
However, they may not be involved in management. The shareholders may not have the
necessary skills or time required. As a result, they appoint other parties to run the
company on their behalf (managers). The shareholders are the principles and the
management constitute the agents.

(ii) Agency relationship between the shareholders and creditors.
The creditors are the contributors of debt capital They are not allowed to be involved in
management of the company directly. After provision of funds the shareholders are
expected to manage the funds along with the management on behalf of the creditors. The
creditors constitute the principles and the shareholders the agents.
The management may be involved in funds and irregularities. This will reduce the net
earnings accruing to the shareholders.

(iii) Other agency relationships is between shareholders and government auditors, employees and consumers.

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marto answered the question on February 8, 2019 at 08:20

Next: Discuss the reasons why IAS 12 (revised) requires enterprises to provide for deferred taxation on revaluations of assets and fair value adjustments on business combination.
Previous: Highlight the various measures that would minimize agency problems between the owners and the management.

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