REG Chapter 5 Part 1: Authority of Agents and Principals

Recall the types of agent authority

Welcome to section two of the most exciting CPA prep course of all time!!! Over the next several days we will discuss Business Law topics that will be covered on the CPA exam. Today’s lesson we will discuss authority of agents and principals. Here are today’s learning outcomes:

  1. Recall the types of agent authority.
  2. Identify whether an agency relationship exists given a specific scenario.

What is an Agent?

An agent is: a person authorized by the principal to act on the principal’s behalf and under the principal’s control.

principal-agent relationship exist when:

  1. Principal consents to an agent’s acting on the principal’s behalf, and
  2. the agent was subject to the principal’s control.

Some common types of agents are:

Specific (special) agent – a principal authorizes an agent to act on their behalf for a specific purpose. For example, a client gives an accountant authority to act on their behalf when handling an IRS audit.

General agent – a general agent acts on a principal’s behalf in all capacities. For example, an owner of a company hires a CEO to handle the day-to-day operations of the company.

Universal agent – a universal agent has ultimate power! Any actions they take will bind the principal. Universal agents are typically appointed by a power of attorney.

Agent Authority

There are 4 types of authority an agent might have:

  1. Actual express authority – client expressly states the authority of the agent in a written contract. For example, client makes the agent sign a contract specifying what the agent can and cannot do.
  2. Apparent authority – client gives agent authority verbally. For example, “Hey John, you can go ahead and make that purchase on my behalf.”
  3. Implied authority – agent authority that is implied in order to execute actual or apparent authority. For example, a car salesman has the express authority to sell cars but they also have the implied authority to call potential customers on the company’s behalf.
  4. Inherent authority – the agent exceeds the scope of their express or apparent authority but it can be implied by a third-party that the agent actually has that authority. For example, a car salesman is employed to sell new cars but they sell a client a used car at the dealership. There is no way a person buying a car would know a salesman at a dealership only had the express authority to sell new cars.

Does an Agency Relationship Exist?

So now that you can identify an agent and types of authority they have you’ll be tested on whether an agent relationship actually exist.

The easiest way to spot an agency/principal relationship is when there is express or apparent authority. If person “A” tells person “B” to act on their behalf, whether verbally or in writing, then an agency relationship exist.

An agency relationship can still exist even when it’s not obvious. For example, if a business owner gives an employee business cards and a title then they are inadvertently creating an agency relationship. If a reasonable third-party believes an agency relationship exist then an agency relationship may in fact exist.

Let’s look at two examples:

  1. Greg is the regional manger for a construction company. Greg has no express authority to make any purchases on behalf of the company. Greg executes a purchase agreement for $40,000 in equipment. A reasonable person would have no way of knowing Greg can’t  execute that purchase agreement. He is a regional manager acting on behalf of the company and a reasonable third-party would assume he had that authority.
  2. Susan is an Intern working at a large internet based company. She signs an agreement to sell half of the company for $10,000. A reasonable person would not assume Susan had such authority.

Key Takeaways

  • Know the difference between a specific, general, and universal agent.
  • Know the 4 types of agency authorities – actual, apparent, implied, and inherent
  • Know when an agency relationship exist. Remember, if a reasonable third-party believes a person is acting on a principal’s behalf then an agency relationship may exist. The easiest way to determine an agency relationship will always be actual or apparent authority.
Photo credit:Copyright: <a href=''>studiostoks / 123RF Stock Photo

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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