One of the characteristics of a principal-agent relationship is:
A)The owners of the company are involved in the daily management of the company.
B)The owners of the company hire an auditor to run the company for them and to make daily decisions for the company.
C)The owners have more knowledge than management about the daily operations of the company.
D)Outsiders benefit when an auditor is hired by owners to protect their interests in the company because the information available to outsiders is more likely to correspond to financial accounting standards.

Question

Quizplus · Accepted Answer

In a principal-agent relationship, the principal (owners) hires an agent (management) to perform tasks on their behalf. Choice D correctly reflects a characteristic of this relationship by indicating that when owners hire auditors to ensure their interests are protected, it benefits outsiders (such as investors or creditors) because the financial information becomes more reliable and in accordance with accounting standards. This improves transparency and trust in the financial statements.

One of the Characteristics of a Principal-Agent Relationship Is