FNCE 220 BUSINESS FINANCE

LECTURE 2: NATURE OF BUSINESS FINANCE

( CONTD)

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KAIBOS MOSES
 Devotional Meditation

Proverbs 1:7
The fear of the LORD is the beginning of
knowledge, but fools despise wisdom and
instruction.
 3. SHAREHOLDERS AND THE GOVERNMENT

 The government in this agency relationship is the principal while the

company is the agent. It is an agent when it has to collect tax on behalf
of the government especially withholding tax and PAYE.

 Shareholders and by extension, the company they own operate within

the environment using the charter or licence granted by the
government.
 The government will expect the company and by extension its
shareholders to operate the business in a manner which is beneficial
to the entire economy and the society.
 Causes of conflicts:

Tax evasion:
- failure to give the accurate picture of the earnings or profits of the firm to minimize tax
liability.


Involvement in illegal business activities by the firm.


Lukewarm response to social responsibility calls by the government.

Lack of adequate interest in the safety of the employees and the products and services
of the company including lack of environmental awareness concerns by the firm.


Avoiding certain types and areas of investment coveted by the government.
 Solutions to this agency problem

The government can take the following actions to protect itself and its
interests.
Incur monitoring costs e.g. the government incurs costs associated
with: Statutory audit, Investigations of companies under Company Act

Lobbying for directorship (representation)

Offering investment incentives

- To encourage investment in given areas and locations, the
government offers investment incentives in form of capital allowances
Legislations e.g. regulation associated with disclosure of
information, minimum wages and salaries, environment protection

The government can inculcate the sense and spirit of social

responsibility
 4. SHAREHOLDERS AND AUDITORS

Shareholders appoint auditors to monitor the performance of

management and certify the financial statements issued by
management so as to establish if they give a true and fair view.

Auditors may prejudice the position of shareholders by:

 
Colluding with management in performance of their duties and
hence compromising their independence

Issuing misleading reports to shareholders and the general

public

Failure to exercise professional care and due diligence in the

performance of their duties and hence failing to detect errors
and frauds which they could have otherwise detected.
 Solutions to the agency problem

Legal action – shareholders can institute legal proceedings

against auditors who issue misleading reports in order to be
compensated for damages

Disciplinary action by professional bodies e.g. ICPAK. This can

lead to withdrawal of their practicing certificates

Shareholders can fire auditors during the AGM.

5. HEAD OFFICE AND BRANCHES

Branches are operated in order to protect the interests of the

head office.
 However, branches may pursue their goals at the expense of
the head office. This leads to conflict of interest between the
two parties.
 
Solutions to the agency problem.
Having an elaborate performance reporting system which
provides a two way feedback between the headquarters and
the branches
Frequent reshuffle of managers from one branch to another
Adopting a (global) strategic plan for all branches thus
promoting the communication of the vision and mission of the
whole group
Setting up performance standards and contracts for branch
managers and adequately compensating them
Threatening to fire those branch managers who are not
working towards the achievement of the common goals of the
entire group
TYPES OF BUSINESS ORGANIZATION

Sole Proprietorship
Partnerships
Co- operatives
Corporations / Parastatals
Limited Liability Company ( Private and Public)