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Margot Co is a private company where a majority of shares are owned by the Margot family. This brings a risk of management bias, especially as one of the family members is the company’s chief executive officer, who is in a position to influence the financial statements.
I don’t quite understand how does owner managed business gives raise to a risk of management bias.
A definition: Management bias – A lack of neutrality by management in the preparation
of information.Start with the basics – directors are agents of the company/shareholders (the principals) and they may have conflicting interests.
Although conflicts of interest are more apparent in larger companies, management may be less biased because there are mechanisms in place to have them act more independently in the interests of the company (i.e. the shareholders as a class) – think NEDs and corporate governance.
But in owner-managed companies, although there may be no conflict of interests because directors and shareholders are one and the same – there isn’t the oversight on how they behave. The manager’s interests are the owner’s – e.g. with objectives to pay more dividends through overstating profits or to pay less tax by understating revenue or overstating expenses.
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