Deck 9: Corporate Governance and Sustainability

Question 1

When shareholders appoint directors to run the company on their behalf, agency issues are the only problem that arises.

Answer 1

False

Question 2

Which of the following difficulties arise as a result of information asymmetry? Please select all that apply.

A) Shareholders are only as well informed as the directors allow.
B) Shareholders' interests are subordinated to those of the directors.
C) Shareholders cannot be certain that the annual financial statements present the full picture of the company's profits, cash flows and financial position.
D) Shareholders lack the necessary information to be able to be certain that the company is being run honestly, ethically and in accordance with the law.

Answer 2

A, C, D

Question 3

The agency problem arises from the fact that agents appoint principals to undertake tasks on their behalf.

Answer 3

False

Question 4

Agents will always work in their own best interests and not in the best interests of their principals.

Question 5

Information asymmetry and agency problems have a common source.

Question 6

Which one of the following statements does not describe the governance role of shareholders?

A) Satisfy themselves that the appropriate governance structure is in place.
B) Appoint the auditors.
C) Supervise the management of the organisation.
D) Appoint the directors.

Question 7

Executive directors are responsible for the governance of their companies.

Question 8

Corporate governance involves shareholders and the board of directors interacting and working together in the effective direction and control of their company.

Question 9

Which one of the following statements is not true?

A) The aim of Corporate Governance is to give investors' confidence in the honesty and accountability of listed companies.
B) Internal auditors report on the annual financial statements.
C) External auditors cannot be employees of the auditee company.
D) Internal control systems are set up to assist directors with their duty to safeguard the assets of the company and to ensure that operations are fully under control.

Question 10

Which one of the following statements does not describe the function of the Stock Exchange listing rules?

A) Guarantee the efficiency and regulation of the stock market.
B) Provide a high degree of confidence in the operations and integrity of the market.
C) Are applied by companies listing on the market on a comply or explain basis.
D) Aim to protect investors.

Question 11

Which one of the following statements does not describe non-executive directors?

A) Employed by the company.
B) Elected by shareholders.
C) Members of various board committees.
D) No executive management functions.

Question 12

External auditors: Please select all that apply.

A) Are qualified accountants.
B) Prepare the annual report and financial statements.
C) Report directly to the shareholders without involving the directors.
D) Report on the truth and fairness of the annual financial statements.

Question 13

Which one of the following statements does not describe executive directors?

A) Exercise executive management functions.
B) Implement company policies.
C) Involved with various board committees.
D) Deal with day-to-day operational issues.

Question 14

Which one of the following statements describes the role of internal auditors?

A) To set up the internal control system to prevent and detect fraud and error.
B) To assess the effectiveness of the risk management, control and governance procedures.
C) To focus on the truth and fairness of the annual report and financial statements and their compliance with the requirements of both the Companies Act 2006 and of IFRS.
D) To present a subjective view of all an organisation's activities and operations.

Question 15

Which one of the following statements is not an accurate description of the role of the external audit and the external auditors' report?

A) Enables users of financial statements to place a high degree of confidence in the audited financial information.
B) Assists shareholders in overcoming their information asymmetry problem.
C) Gives shareholders reasonable assurance that the annual report and financial statements present a true and fair view of the results for the year.
D) Bases the audit report on a 100% check of all the transactions undertaken during the year and a 100% check on the year end account balances.

Question 16

The Stock Exchange listing rules require: Please select all that apply.

A) Mandatory compliance with the Corporate Governance Code.
B) Companies to provide a statement in their annual reports and accounts stating how the principles of the Corporate Governance Code have been applied.
C) Confirmation of compliance with the provisions of the Corporate Governance Code.
D) Companies to abide by the Corporate Governance Code.

Question 17

External auditors: Please select all that apply.

A) Are appointed by the directors.
B) Use their expert knowledge to ensure all statutory disclosures have been made and that the annual financial statements comply with the requirements of IFRS.
C) Review the financial statements prepared by the directors.
D) Undertake testing of balances and transactions.

Question 18

Internal audit… Please select all that apply.

A) Is appointed by the board of directors.
B) Has a very wide ranging remit.
C) Is completely independent when its reports are made to the audit committee and not to the executive directors.
D) Focuses its audit work on the entire range of organisational operations.

Question 19

External audit is proactive and aims to add value to every part of an organisation's activities and operations.

Question 20

Non-executive directors' dominance of the board ensures the effective enforcement of the Corporate Governance Code in each and every company.

Question 21

Directors are less likely to make risky decisions when their company complies with the requirements of the Corporate Governance Code.

Question 22

Which one of the following would not promote board effectiveness?

A) Timely information.
B) Continuity of leadership.
C) Diversity.
D) Training.

Question 23

Division of responsibilities is a means of exercising control.

Question 24

Effective leadership of the board is exercised by chief executives acting on their own initiative.

Question 25

Board effectiveness is achieved by: Please select all that apply.

A) Avoiding complacency.
B) Giving directors sufficient time in which to undertake and fulfil their duties.
C) Evaluation of directors' performance.
D) Likeminded directors.

Question 26

Executive directors can ignore the views and opinions of the non-executive directors.

Question 27

Which one of the following will not assist the audit committee in assessing whether the annual report and financial statements present a fair, balanced and understandable assessment of a company's position and prospects?

A) Requiring audit committee members to have competence relevant to the sector in which the company operates.
B) Requiring at least one audit committee member to have recent, relevant financial experience.
C) Requiring the audit committee to be composed of at least three non-executive directors.
D) Requiring the audit committee to meet with the external auditor on a regular basis to discuss the financial statements and any issues arising.

Question 28

Which one of the following is not a role of the audit committee set out in the Corporate Governance Code?

A) Monitoring the integrity of the financial statements of the company and any formal announcements relating to the company's financial performance, reviewing significant financial reporting judgements contained in them.
B) Reviewing the company's internal financial controls and internal control and risk management systems.
C) Monitoring and reviewing the effectiveness of the company's internal audit function and assessing the effectiveness and independence of the external auditors.
D) Determining the executive directors' remuneration.

Question 29

The audit committee's remuneration is determined by the financial results for the year.

Question 30

The executive directors of a company have a duty to prepare and present annual financial statements which show a true and fair view of a company's profit or loss and cash flows for the year and of its financial position at the year-end date.

Question 31

Ensuring that the annual report and financial statements present a fair, balanced, and understandable assessment of the company's position and prospects is a collaborative effort.

Question 32

Which one of the following statements does not accurately represent Milton Friedman's view of the social responsibility of business?

A) Companies only exist to make a profit for their shareholders.
B) Directors' sole responsibility is to the shareholders.
C) As long as a profit is being made in any way whatsoever, nothing else is seen to matter.
D) Directors should ignore all other performance measures and indicators and report only financial data.

Question 33

The Companies Act 2006, Section 172(1) requires directors to act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, directors should have regard to various considerations. Which one of the following is not one of the matters that Section 172(1) requires directors to have regard to?

A) The need to act fairly as between stakeholders of the company.
B) The impact of the company's operations on the community and the environment.
C) The need to foster the company's business relationships with suppliers, customers and others.
D) The interests of the company's employees.

Question 34

While recognising that other parties are interested in a business, its activities and its performance, stakeholder theory prioritises shareholders' interests above those of other stakeholders.

Question 35

Milton Friedman's view of the social responsibility of business ignores the effect that businesses and the products they produce have on the natural environment, on consumers, on communities and on other interested parties.

Question 36

The Companies Act 2006 Section 172(1) requires directors to promote the success of the company solely for the benefit of its members as a whole.

Question 37

For businesses, sustainability can be defined as leaving the planet no worse off at the end of the accounting period than it was at the beginning.

Question 38

A sustainability strategy is perfectly compatible with Milton Friedman's insistence that profit generation is the only social responsibility of business.

Question 39

Which one of the following statements is not true?

A) Corporate social responsibility reporting presents information on a business' profits, employees and its impact on both society and the environment.
B) A sustainability strategy generates only long-term benefits for stakeholders.
C) The Companies Act 2006 states that companies listed on the stock exchange should present information on environmental matters, the company's employees and social, community and human rights issues.
D) Disclosing information about a company's social responsibility and sustainability activities is part of good corporate governance.

Question 40

Which of the following statements are true? Please select all that apply.

A) Businesses have a wider duty of accountability than just to shareholders.
B) The board of directors as a whole has a responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
C) Compliance with the listing rules ensures that boards of directors study the Corporate Governance Code to make sure that their companies comply with the Code.
D) The annual report and accounts is the sole channel through which the board of directors communicates with the shareholders.