Chapter 3

Question 1

Corporate governance

Answer 1

the framework of rules and practices by which a BOD ensures accountability, fairness, and transparency in a companys relationship with its stakeholders

Question 2

Listed companies must include a corporate governance report in their annual report. It should describe how the company applies the principles in the code and whether or not the company complies with the provisions of the code.

Answer 2

True

Question 3

Board leadership and company purpose Principles

Answer 3

A successful company is led by a board whose role is to promote the long term sustainable success of the company. It should establish company values and strategy and should ensure the company has the resources needed to meet its objectives. Q: Is the leadership structure clear ? Is power concentrated in one person?

Question 4

Division of responsibilities Principles

Answer 4

The chair leads the board. They facilitate constructive board relations and the contribution of all non exec directors and ensure that directors receive timely and clear information. There should be a clear distinction between who runs the board (chair) and who runs the business (CEO). Non execs should make time to meet their board responsibilities. They should provide strategic guidance and specialist advice and hold management to account.

Question 5

Composition, Succession and Evaluation

Answer 5

Appointments to the board should be subject to a formal and transparent procedure.
An effective succession plan should be maintained for board and senior management. Appointments and succession plans should be based on merit and objective criteria. The board must have the right balance of skills, expertise and independece. Q: Are directors capable and independent ? Is recruitment transparent and based on merit?

Question 6

Audit Risk and Internal Control Principles

Answer 6

The board is responsible for determining the company’s risk appetite and maintaining internal controls - Should present a fair, balanced and understandable assessment of the company’s position. Q: Are there strong internal controls? Is risk managed and reported properly? Companies must establish formal and transparent policies to maintain independence and integrity in financial reporting - A strong audit committee (made of independent non exec directors )should oversee the process Q: Is there a proper audit committee ? Are auditors independent and objective?

Question 7

Advantage of audit commitee

Answer 7

1. Increased confidence in the credibility and objectivity of financial reports
2. Provides an independent point of reference for external auditors
3. Provides an impartial body for internal auditors to report increasing their independence
4. Allows exec directors to devote their attention to management and committee can focus on the problems in financial reporting

Question 8

Remuneration

Answer 8

Executive pay should align with the company’s long term success. No director should be involved in deciding their own pay. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. Q: Are bonuses and salaries fair? Is excessive or unjustified pay controlled?

Question 9

Relations with shareholders

Answer 9

Ongoing dialogue with shareholders should be encouraged. The boars should understand the views of shareholders and respond appropriately Q: Is shareholder engagement active and transparent? Are concerns addressed?

Question 10

Audit commitee

Answer 10

a sub commitee of the BOD containing a number of independent non exec directors

Question 11

Role of audit committee

Answer 11

1. Review FS
2. Review internal control and risk management systems
3. Monitor and review effectiveness of internal audit dept
4. Recommend appointment, reappointment and removal of external auditor
5. Review and monitor independence and objectivity of external auditor
6. Implement policy on supply of non audit services by external auditor
7. Monitor arrangements safeguarding the privacy of whistle blowers
8. Where there is no internal audit function consider annually whether there is need for one

Question 12

Disadvantages of audit committee

Answer 12

Costs may be increased
Difficulty in selecting non exec directors with the necessary competence in audit so the committee can be effective
The establishment of such a formalised reporting procedure may dissuade auditors from raising matters of judgment and limit them to reporting matters of fact