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    People act in their Own Financial Self Interest In financia

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    People act in their Own Financial Self Interest

    In financial theory, an agency relationship is one where management manages a business for the owners with the primary goal of maximizing owner wealth. Agency issues then stem from the conflicting interests and behaviours that managers, or advisors/agents have in acting in their own self interests vs. those of the business owners. For example, for a firm, distorting sales/ profits to realize bonuses, or taking on too risky of projects for the probability of a high profit, or passing up risky but viable projects to protect oneâ??s reputation are examples of agency issues. Others are spending excessively on benefits/ perks such as offices, travel, events, cars that erode profits.

    Provide an example of this principle as applied to your company or a company in the news. Describe how the business code of conduct and/or the Board of Directors mitigate these risks.

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    Solution Preview

    This can be applied to my company, which is a public accounting firm, or to one of many companies in the news in the past few years. In my own company, we have policies in-place to prevent bonuses and perks that exceed a certain dollar amount. This is written in the code of ethics, the code of conduct, and is a written directive held by our board of directors. This prevents owners from being tempted in any form to misstate financial data, which would produce inaccurate financial statements, as well as allow ...

    Solution Summary

    People act in their Own Financial Self Interest

    In financial theory, an agency relationship is one where management manages a business for the owners with the primary goal of maximizing owner wealth. Agency issues then stem from the conflicting interests and behaviours that managers, or advisors/agents have in acting in their own self interests vs. those of the business owners. For example, for a firm, distorting sales/ profits to realize bonuses, or taking on too risky of projects for the probability of a high profit, or passing up risky but viable projects to protect oneâ??s reputation are examples of agency issues. Others are spending excessively on benefits/ perks such as offices, travel, events, cars that erode profits.

    Provide an example of this principle as applied to your company or a company in the news. Describe how the business code of conduct and/or the Board of Directors mitigate these risks.

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