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chapter 4 Flashcards

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1
Q

What is the corporate governance framework?

A

A: A set of rules and practices ensuring accountability, fairness, and transparency in a company’s relationship with stakeholders.

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2
Q

What are the key elements of the UK corporate governance framework?

A

A:

Legislation – Companies Act 2006.
Regulation – FCA’s Listing Rules for LSE-listed companies.
UK Corporate Governance Code – Issued by the Financial Reporting Council (FRC).
Best practices – Encouraged for non-listed companies.

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3
Q

who oversees corporate governance in the UK?

A

A: The Financial Reporting Council (FRC), soon to be replaced by the Audit, Reporting and Governance Authority (ARGA).

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4
Q

What key update was made in 2018?

A

A: The 2018 UK Corporate Governance Code focused on long-term sustainable success and stakeholder engagement.

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5
Q

Is compliance with the UK Corporate Governance Code mandatory?

A

A: No, but LSE-listed firms must “comply or explain” deviations in their annual report.

LSE=London Stock Exchange

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6
Q

What is the “Going Concern” principle?

A

A: Companies must assess and disclose risks that may impact their ability to continue operating.

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7
Q

What is the FRC’s Guidance on Risk Management?

A

A: It highlights best practices for managing principal risks, ensuring internal control, and embedding risk management in business processes.

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8
Q

How does corporate governance differ for mutual insurers?

A

A: The Association of Financial Mutuals (AFM) provides a governance code tailored to member-based insurers.

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9
Q

What is an example of adapted governance for mutual insurers?

A

A: The Metropolitan Police Friendly Society has non-executive directors with police backgrounds to represent members’ interests.

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10
Q

What is the FRC’s Minimum Standard for Audit Committees?

A

A: A “comply or explain” framework ensuring fair auditor selection, independence, and oversight.

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11
Q

What are key responsibilities of audit committees?

A

Ensuring a fair choice of external auditors.
Overseeing audit tenders and fees.
Engaging with shareholders.
Ensuring auditors have full access to records.
Monitoring audit independence and financial integrity.

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12
Q

What is the FRC’s Guidance on Board Effectiveness?

A

A: A 2018 framework helping boards assess leadership, composition, risk management, and remuneration.

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13
Q

What are examples of corporate governance codes outside the UK?

A

Germany – Deutscher Corporate Governance Kodex.
Australia – ASX Corporate Governance Principles.
OECD – Southeast Asia Corporate Governance Initiative.

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14
Q

What is the Sarbanes-Oxley Act (SOX) 2002?

A

A: A US law improving financial reporting accuracy following corporate scandals (e.g., Enron, WorldCom).

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15
Q

What are key SOX provisions?

A

Sarbanes-Oxley Act
Section 302 – Senior officers must certify the accuracy of financial disclosures.
Section 404 – Requires companies to assess and report on internal financial controls.

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16
Q

What are the UK Listing Rules?

A

The UK Listing Rules are additional regulations that publicly listed companies must follow. They cover matters such as IPO requirements, disclosure of price-sensitive information, financial reporting, and shareholder communications.

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17
Q

What is an IPO?

A

A: An IPO (Initial Public Offering) is when a company offers its shares to the public for the first time, and it must comply with the Listing Rules when seeking a listing.

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18
Q

What are the statutory obligations for quoted companies under the Listing Rules?

A

A: Quoted companies must produce half-yearly financial reports, annual reports, and comply with more stringent EU Transparency Directive requirements.

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19
Q

What must a company do to be legally recognized?

A

A: A company must be registered with Companies House to gain legal recognition and be able to enter into contracts and conduct business.

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20
Q

What is the second line of defence in risk management?

A

A: The risk management department is responsible for discussing and advising on the most appropriate risk controls. However, accountability for implementing risk control remains with operational management.

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21
Q

What is the third line of defence in risk management?

A

A: The internal audit team reviews the overall risk management operation, ensuring the agreed strategy is being actively followed. External parties, such as regulatory bodies, can also assess the effectiveness of risk management.

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22
Q

How does the claims department in an insurance company apply the three lines of defence?

A

First line: Supervisors/managers ensure fraudulent claims aren’t paid using peer review control processes.
Second line: Risk management reviews the effectiveness of these controls.
Third line: Internal audit checks that the processes are being followed

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23
Q

What does the scope of strategic risks cover?

A

A: Risks related to expansion decisions like new lines of business, opening branches, or adopting new distribution methods (e.g., brokers, websites).

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24
Q

What do operational risks cover?

A

A: Risks not covered under other categories, such as property damage, fraud, regulatory breaches, employee injury, or IT failures.

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25
What is a risk appetite statement?
A: A statement that outlines the types and levels of risk a company is willing to accept, such as tolerance levels for claims, investments, or operational risks.
26
What is the role of the audit committee?
A: The audit committee scrutinizes the control framework and assesses its application. It consists of at least three directors, including independent ones, with the chairperson available at the AGM to answer questions.
27
What is the statutory external audit requirement for UK companies?
A: Companies meeting certain size thresholds (turnover, net assets, employees) must have an external audit. The auditor reports whether the financial statements give a true and fair view.
28
What is the purpose of the Audit, Reporting and Governance Authority (ARGA)?
A: ARGA was introduced to ensure rigorous audit practices, especially for large firms, and to improve corporate transparency, replacing the FRC.
29
What is the role of the Chief Internal Auditor (CIA)?
The CIA proposes an annual audit plan, reports to the audit committee, and evaluates risks to ensure effective internal controls.
30
How does internal audit contribute to corporate governance?
It helps ensure effective internal controls, reviews board reports, ensures directors are updated on accounting issues, and communicates with external auditors.
31
What is mandatory for large UK companies regarding climate change?
They must disclose climate risks and opportunities as part of the UK Government’s efforts to reach net-zero by 2050.
32
What was the purpose of the Cadbury Report (1992)?
A: It was the first corporate governance code, created after corporate failures. It aimed to improve transparency and accountability in company boards.
33
What does the Financial Reporting Council (FRC) do?
A: Sets UK corporate governance standards, accounting standards, monitors corporate reporting, and enforces audit quality.
34
What is required for Board composition?
A: A mix of skills, experience, diversity, and independence. Appointments should be merit-based with formal evaluations.
35
What was the Turnbull Report and when was it published?
A: It was a 1999 report setting out best practice for internal controls in UK listed companies.
36
What guidance replaced the Turnbull Report in 2014?
A: The FRC’s "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting".
37
Do UK companies have to legally follow the Corporate Governance Code?
A: No, but listed companies must comply or explain their non-compliance under the Listing Rules.
38
What is the Sarbanes-Oxley Act (SOX)?
A: A US law introduced in 2002 to improve financial reporting and protect investors.
39
Why was SOX introduced?
A: To prevent fraud and corporate scandals like Enron and WorldCom by improving governance.
40
Who must comply with SOX?
A: All companies listed on US stock exchanges (including some UK companies).
41
What are Listing Rules?
All companies must follow company law, but publicly listed companies also need to follow special rules called the Listing Rules. These rules are enforced by the Financial Conduct Authority (FCA) and have legal power.
42
Who enforces the UK Listing Rules?
A: The Financial Conduct Authority (FCA).
43
What is an IPO?
A: An Initial Public Offering – when a company offers shares to the public for the first time.
44
What must be included in an IPO under the Listing Rules?
A: A detailed prospectus with key information for investors.
45
What is the role of Companies House?
A: It registers and dissolves companies, stores company information, and makes it available to the public.
46
Who is responsible for making sure company information is filed?
A: The company directors.
47
What is the minimum share capital for a public company?
A: £50,000.
48
Confirmation Statement
What is it? A yearly summary of a company’s key details. What does it include? -Registered office address -Business activities -Directors & company secretary -Shareholders -Share capital How often? Once every 12 months. Must be filed within 28 days of the ‘made up date’.
49
time periods for submitting Annual Accounts
Private companies – within 9 months of year end Public companies – within 6 months Quoted companies must also publish online Late submissions = penalties
50
What is the purpose of the directors’ remuneration report?
A: To disclose directors' pay and link it to performance.
51
Is a company secretary required for all companies?
A: Only public companies (PLCs) are required to have one. Private companies can choose.
52
What is the Three Lines of Defence model used for?
A: It's a risk management model where everyone in an organisation plays a role in identifying and controlling risk.
53
Who is responsible in the first, second and third line of defence?
1st- Operational managers (e.g. heads of claims, IT, finance) who control risks in their area. 2nd- Risk management team that advises, monitors, and supports front-line managers. 3rd- Internal audit – they review the effectiveness of the whole risk management process.
54
What are the 3 financial criteria that require a company to have a statutory audit?
A: Turnover over £10.2m, net assets over £5.1m, or more than 50 employees.
55
Which companies are always required to have an external audit?
A: Banks, insurance companies, investment firms, and public companies.
56
What is ARGA and why was it introduced?
A: ARGA (Audit, Reporting and Governance Authority) is the new regulator replacing the FRC to improve audit quality and protect jobs/investors.
57
What is the aim of mandatory climate risk reporting?
A: To help the UK meet its net-zero commitments by 2050.
58
Which companies must follow mandatory climate reporting from April 2022?
A: Companies with more than 500 employees and over £500m annual turnover.
59
What are SDRs?
A: Sustainability Disclosure Requirements – a framework for ESG risk and impact reporting.
60
What areas must companies report on under ESG?
A: Environment, employees, social matters, human rights, anti-corruption/bribery.
61
What is insider dealing?
A: Making investment decisions using confidential information. It is a criminal offence.
62
What legislation covers insider dealing in the UK?
A: The Financial Services and Markets Act 2000 and UK Market Abuse Regulation (UK MAR).
63
What is the penalty for insider dealing in the UK?
A: Up to 10 years in prison and unlimited fines.
64
What is corporate governance?
A: It’s the system for directing and controlling a company.
65
What are the key features of the UK Corporate Governance Code?
Board effectiveness: A balanced and skilled board should promote long-term success. Division of responsibilities: Clear separation between the roles of Chair and CEO. Audit, risk, and control: Transparent internal and external audit systems. Board composition: Inclusion of both executive and independent non-executive directors. Remuneration: Executive pay should be linked to long-term performance. Stakeholder engagement: Boards should engage with shareholders and other stakeholders.
66
If a UK stock market listed business is NOT fully compliant with the UK Corporate Governance Code, it must: Question 2Select one: a. advise the London Stock Exchange. b. advise the FCA. c. state in its annual report where it is not compliant and provide reasons. d. ask its auditors to make recommendations to address the failings.
c. state in its annual report where it is not compliant and provide reasons.
67
A public limited company that has a year end of 31 December must file its accounts by the following: Question 3Select one: a. 30 June. b. 30 September. c. 31 December. d. 31 March.
a. 30 June.
68
The UK Risk Management Standard sets out the key elements of risk analysis. These include the following, EXCEPT: a. risk mitigation. b. risk estimation. c. risk identification. d. risk description.
a. risk mitigation.
69
Who is ultimately responsible within a limited company for ensuring that the required company documents are filed with Companies House? Question 8Select one: a. All of the directors. b. The managing director. c. The finance director. d. The finance director and the company secretary.
a. All of the directors.
70
An individual's role is to set policy, monitor controls and check adherence to it. Where is this role most likely to fall within the 'three lines of defence' model of risk management? a. The first line of defence. b. The second line of defence. c. The risk committee. d. The third line of defence.
b. The second line of defence.

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