Advance Financial Accounting: Agency Cost and Corporate Governance Mechanism

This article discusses the level of agency cost associated with different scenarios in advance financial accounting and the corporate governance mechanism required under the circumstances. It includes three scenarios and their respective agency costs and corporate governance mechanisms. The subject is Advance Financial Accounting, and the course code and college/university are not mentioned.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Scenario 1:..................................................................................................................................2
Indicating the level of agency cost associated with the scenarios:............................................2
Depicting the agency cost associated with the scenarios:..........................................................2
Stating the corporate governance mechanism required under the circumstances:.....................2
Scenario 2:..................................................................................................................................3
Indicating the level of agency cost associated with the scenarios:............................................3
Depicting the agency cost associated with the scenarios:..........................................................3
Stating the corporate governance mechanism required under the circumstances:.....................3
Scenario 3:..................................................................................................................................3
Indicating the level of agency cost associated with the scenarios:............................................3
Depicting the agency cost associated with the scenarios:..........................................................4
Stating the corporate governance mechanism required under the circumstances:.....................4
References:.................................................................................................................................5

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Scenario 1:
Indicating the level of agency cost associated with the scenarios:
The agency cost level of relevantly high, when Birim equity is not allowed into the
management despite holding the highest investment in the company. In the other scenario, the
agency cost is low, as the overall situation has changed, where Birim equity is allowed within
the management.
Depicting the agency cost associated with the scenarios:
The situation indicates the presence of costs of opportunistic behaviour, where the
management is not allowing Birim equity to make managerial decisions. However, the
agency cost relevantly changes with the alteration in the current situation, where Birim equity
is allowed within the organisation then to costs to the principal of monitoring the agent is
initiated (Chang, Kang and Li 2016).
Stating the corporate governance mechanism required under the circumstances:
The corporate governance mechanism such as external audit needs to be initiated by
the investors for reducing the implication of the agency cost and monitoring the current
financial progress of the company. Nevertheless, the internal audit corporate governance
mechanism can be initiated with the Birim equity present within the management, where the
ethical operations of the company need to be analysed.

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Scenario 2:
Indicating the level of agency cost associated with the scenarios:
The scenario mentions about the investment, which needs to be conducted in a listed
company, where the agency cost presence is low. The company needs to provide detailed
financial progress in their annual report, as per the requirements set by the stock market,
which will directly reduce the occurrence of agency cost (Jensen and Meckling 1976).
Depicting the agency cost associated with the scenarios:
The situation relevantly indicates the presence of costs to the principal of monitoring
the agent, where adequate monitoring needs to be conducting for securing the investment
within the company.
Stating the corporate governance mechanism required under the circumstances:
The use of independent audit corporate governance mechanism might help in
reducing the implications of the identified agency cost for the situation. The independent
audit report might allow the investor to gauge into the current financial progress, which has
been made during the fiscal year (Kim and Sorensen 1986).
Scenario 3:
Indicating the level of agency cost associated with the scenarios:
The situation is considered to have high level of agency costs, as the investment is
conducted on a company with high debt. The presence of high debt has altered the situation
and raised concern for the investors, as high debt can lead to insolvency.

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Depicting the agency cost associated with the scenarios:
The presence of bonding cost is relevantly identified in the scenario, where adequate
investment has been made by the investor within a high debt accumulated company (Coffee,
et al. 2018).
Stating the corporate governance mechanism required under the circumstances:
The initiation of the independent audit report might help the investor to understand
the current position of the company and reduce the implication of the agency cost. The report
will not only analyse the current financial potion of the company, while it will also anticipate
the future earnings, which can be obtained by the organisation.

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References:
Chang, K., Kang, E. and Li, Y., 2016. Effect of institutional ownership on dividends: An
agency-theory-based analysis. Journal of business research, 69(7), pp.2551-2559.
Coffee, J. C., Jackson, R. J., Mitts, J., and Bishop, R. 2018. Activist Directors and Agency
Costs: What Happens When an Activist Director Goes on the Board?
Jensen, M. C., and Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency
costs and ownership structure. Journal of financial economics, 3(4), 305-360.
Kim, W. S., and Sorensen, E. H. 1986. Evidence on the impact of the agency costs of debt on
corporate debt policy. Journal of Financial and quantitative analysis, 21(2), 131-144.