Question

Do some research and find some historical or current real life examples of agency problems. What measures will prevent problems like your example in the future. What other advise would you give this agency. You may provide examples of agency problems from your own experience. if you do, be careful to provide enough anonymity so that you won't get in trouble.

Answer 1

Agency problem occurs when agents who are entitled to look into the interests of principal but are using their authority for their own benefit. The agency problems can occur anywhere and in any organization such as in bussiness or in government organizations.

The real life example was fall of Enron, the energy giant. In year 2001, the agents of this company such as board of directors and company's top level employees including CEO and CFO were selling their shares at much higher rates as they showed their accounts false. After this scandal the shares of company dropped making the investors at heavy loss. Another example the case of Worldcom in 2001. the CEO of the company Bernard Ebbers took loan of above $400 million at 2.15% interest rate. The company didn't showed this loan in the book of accounts and so this scandal when was out in the news shattered the investors interests.

The measures to prevent these problems are

1) There should be strict rules and regulations in the company to look after the interest of every stakeholders in the firm.

2) Proper auditing is required so that scandals within firms can be prevented.

The advice to these agency is to keep proper accounts so that each and every transaction record is maintained. Proper regulations and auditing can prevent these agency problems.

An example from a personal experience, a person had bank account in a public sector bank which is said to be very reliable. A false transaction was made when he didn't withdraw the money from the automated transaction machine. He was trying to withdraw money but machine was running out of cash. The bank's record says he had already taken money but actually he didn't receive anything from the machine. Bank refused to credit this amount to him and so .He had to bear the loss.