Enron Company
Enron chief financial officer set up and managed several partnerships that did business with Enron. Enron board of directors waived the firm's conflict-of-interest rules to permit this. Bad accounting for the partnerships allowed Enron to keep billions of dollars of debt off its balance sheet and to hide hundreds of millions of losses. The partnerships paid Enron's CFO more than $30 million in addition to his regular compensation. Board members were shocked to discover this when they investigated the partnerships. And when the truth about Enron's true debt obligations was revealed, Enron went bankrupt. (Emery, D., Finnerty, J. and Stowe, J., 2007)

AGENCY COSTS
Monitoring, constraints, incentives, and punishments are designed to push agents to act in the principal’s best interests, but they are costly. The costs of doing these things are called agency costs. Agency costs are the extra costs of having an agent act for a principal, those in excess of what it would cost the principals to “do it themselves.” These costs are like friction in a machine – the more there is, the less efficient the machine, and the more energy that will be wasted.
Agency costs are defined in terms of the Principle of Incremental Benefits: The agency cost is the incremental cost of working through others, who serve as agents. In a perfect world, the agent would be paid exactly the fair amount without any waste. In our imperfect world, agency costs are a waste that is lost to the system.
Agency costs consist of three types:
1. Direct contracting costs, which include a. The transaction costs of setting up the contract, such as the costs and legal fees of issuing bonds. b. The opportunity costs imposed by constraints that preclude otherwise optimal decisions (for example, an inability to undertake a positive-NPV investment because of a restrictive bond covenant).