Identify and briefly explain the three main forms of agency relationship in a firm.

CPA-Financial-Management-Section-3 Revision kit

Agency relationships
Shareholders and management

In this case the shareholders act as the principal while the management acts as their agents. The shareholders provide equity capital while the managers provide managerial skill.

Shareholders and creditors
In this case the shareholders act as the agent and the creditors act as the principal.
The relationship arises from the fact that though the creditors provide debt capital to the various operations of the firm, they do not make decisions.

Shareholders and the government
Any shareholder will rely on the establishment existing in a specific country in undertaking any form of business and reliance will be made on the government services. In this case the government expects the owners to reciprocate by avoiding engagement in activities which would be in conflict with societal expectations. The government will act as the principal and the shareholders will act as the agent who is expected to consider the government interests.

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