Ethics and Corporate Governance

Question 1

Deficiency if it is proposed that the current marketing director be appointed as the Chair of the company when the current Chair retires.

Answer 1

A former executive director previously employed bu company won’t be independent on appointment

Question 2

Recommendation if it is proposed that the current marketing director be appointed as the Chair of the company when the current Chair retires.

Answer 2

Individual who is fully independent of company should be appointed to role of Chair when the current Chair retires

Question 3

Recommendation if only two directors are subject to annual re-election?

Answer 3

All directors should be subject to annual re-election by shareholders

Question 4

Deficeincy if NEDs have no financial experience

Answer 4

Unlikely they possess the required financial experience to be able to understand the financial statements

Question 5

Control recommendation if NEDs have no financial experience

Answer 5

The company should consider recruiting a new independent NED who has the required recent and relevant financial experience.

Question 6

Deficiency if NEDs’ renumeration is in the form of an annual bonus?

Answer 6

However, remuneration paid to NEDs should reflect the time and responsibilities attached to the role, as the inclusion of performance related elements

Question 7

Control recommendation if NEDs’ renumeration is in the form of an annual bonus?

Answer 7

The remuneration of the NEDs should be revised so they are paid an annual fee for their services, which is unrelated to how Petra Co performs and iinstead relates time committment and responsibilities attached to the role

Question 8

Deficiency for the finance director is keen to report Hurling Co’s financial results earlier than normal and has asked if the audit can be completed in a shorter time frame.

Answer 8

May create an intimidation threat on team members; they may feel under pressure to cut corners and not raise issues to satisfy the deadlines

Question 9

Control recommendation for the finance director is keen to report Hurling Co’s financial results earlier than normal and has asked if the audit can be completed in a shorter time frame.

Answer 9

The engagement partner should discuss the timing of the audit with the finance director to determine whether the audit can commence earlier and so ensure adequate time for the team to obtain evidence

Question 10

Deficiency for a non-executive director (NED) of Hurling Co has just resigned and the directors have asked whether the partners of Caving & Co can assist them in recruiting to fill this vacancy

Answer 10

Represents a self-interest threat as the audit firm cannot undertake the recruitment of members of the board of Hurling Co

Question 11

Control recommendation for a non-executive director (NED) of Hurling Co has just resigned and the directors have asked whether the partners of Caving & Co can assist them in recruiting to fill this vacancy

Answer 11

Caving & Co is able to assist Hurling Co in that they can undertake roles such as reviewing a shortlist of candidates and reviewing qualifications and suitability

Question 12

Deficiency if the EQ reviewer assigned to Hurling Co was until last year the audit engagement partner.

Answer 12

This represents a familiarity threat as the partner will have been associated with Hurling Co for a long period of time and so may not retain professional scepticism and objectivity

Question 13

COntrol recommendation if the EQ reviewer assigned to Hurling Co was until last year the audit engagement partner.

Answer 13

As Hurling Co is a listed company, the previous audit engagement partner should not be involved in the audit for at least a period of two years

Question 14

Deficiency if company provides taxation services, the audit engagement and possibly services related to the recruitment of the NED?

Answer 14

There is a potential self-interest or intimidation threat as the total fees could represent a significant proportion of Caving & Co’s income and the firm could become overly reliant on Hurling Co

Question 15

Control recommendation if company provides taxation services, the audit engagement and possibly services related to the recruitment of the NED?

Answer 15

Caving & Co should assess whether audit, recruitment and taxation fees would represent more than 15% of total fees for two consecutive years. If exeeds 15%, undertaking such services requires more consideration

Question 16

Deficiency if finance director has suggested that the audit fee is based on the profit before tax of Hurling Co which constitutes a contingent fee

Answer 16

A self-interest threat can arise if the fees remain outstanding, as Caving & Co may feel pressure to agree to certain accounting adjustments to ensure this year’s audit fee is paid

Question 17

Control recommendation if finance director has suggested that the audit fee is based on the profit before tax of Hurling Co which constitutes a contingent fee

Answer 17

A revised payment schedule must be agreed to settle the fees before much more work is performed for the current year audit.

Question 18

Control deficiency if chair resigned and Percy the CEO took over the role?

Answer 18

Percy has unfeltered power of decision making and will effectively be responsible for running the company and the board

Question 19

Control recommendation if chair resigned and Percy the CEO took over the role?

Answer 19

Percy should resign as the Chair and only carry out the role of chief executive. An independent non‐executive should be appointed to fill the Chair’s role

Question 20

Control deficieicny if The Chair recently wrote to all shareholders to inform them that any questions or comments they may have could only be raised at the company’s annual general mee ting (AGM)?

Answer 20

Restricting shareholders to only raising concerns at the AGM will not ensure regular effective engagement with the owners of the company. This could result in the board making decisions which are not in line with the wishes of major shareholders

Question 21

Control recommendation if The Chair recently wrote to all shareholders to inform them that any questions or comments they may have could only be raised at the company’s annual general mee ting (AGM)?

Answer 21

The Chair of Daley Co should take steps to encourage regular effective engagement with major shareholders in addition to the AGM (e.g. form of regular meetings)

Question 22

Deficiency if non‐executive directors’ remuneration is based on pre‐tax profit targets agreed by the board at the start of the year?

Answer 22

Non‐executive directors’ remuneration should not be based on pre‐determined profit targets as their pay should not be based on how the company performs as this would reduce their independence

Question 23

Control recommendation if non‐executive directors’ remuneration is based on pre‐tax profit targets agreed by the board at the start of the year?

Answer 23

Daley Co should pay the non‐executive directors an annual fee for their services to the company and this fee should be unrelated to the company’s financial performance, but rather based on time committed and responsibilities of the role

Question 24

Deficiency if the company currently does not have an audit committee as the board views the internal control environment as very effective?

Answer 24

The lack of an audit committee means there is no oversight in the company to enable the directors to discharge their responsibilities for accountability appropriately

Question 25

Control recommendation if the company currently does not have an audit committee as the board views the internal control environment as very effective?

Answer 25

The audit committee should be comprised of at least three non‐executive directors and one of these non‐executive directors should have recent and relevant financial expertise

Question 26

Deficiency if the finance director is a member of the audit committee?

Answer 26

The role of the committee is to maintain objectivity with regards to financial reporting; this is difficult if the finance director is a member of the committee as the finance director will be responsible for the preparation of the financial statements

Question 27

Control recommendation if the finance director is a member of the audit committee?

Answer 27

The audit committee must com prise independent NEDs only, therefore the finance director should resign from the committee

Question 28

Deficiency if the renumeration is set by the finance director

Answer 28

No director should be involved in setting their own remuneration as this may result in excessive levels of pay being set

Question 29

Control recommendation if the renumeration is set by the finance director

Answer 29

The NEDs should form a remuneration committee to decide on the remuneration of the executives

Question 30

Deficiency if executive renumeration includes a significant annual profit related bonus?

Answer 30

Annual targets can encourage short‐term strategies rather than maximising shareholder wealth

Question 31

Control recommendation if executive renumeration includes a significant annual profit related bonus?

Answer 31

The remuneration of executives should be restructured to include a s ignificant proportion based on long‐term company performance

Question 32

Deficiency if the chair ahs sole responsibility for liaising over shareholders?

Answer 32

This is a role which the board should undertake

Question 33

Control recommendation if the chair has sole responsibility for liaising over shareholders?

Answer 33

All members of the board should be involved in ensuring that satisfactory dialogue takes place with shareholders, for example, all should attend meetings with shareholders such as the annual general meeting

Question 34

Deficiency if the board is comprised of five executives and only three non-executive directors?

Answer 34

No individual or group of individuals dominates the board’s decision-making.

Question 35

Control recommendation if the board is comprised of five executives and only three non-executive directors?

Answer 35

At least half of the board should be comprised of non-executive directors

Question 36

Deficiency if Percy is considering appointing his close friend as a non-executive director; the friend has experience of running a manufacturing company

Answer 36

If this director is a close friend of percy, it is possible that he will not be independen

Question 37

Control recommendation if Percy is considering appointing his close friend as a non-executive director; the friend has experience of running a manufacturing company

Answer 37

Only independent non-executives with relevant experience and skills should be appointed to the board of Saxophone

Question 38

Deficiency if Saxophone does not currently have an audit committee?

Answer 38

Audit committees undertake an important role in that they help the directors to satisfy their responsibility of accountability with regards to maintaining an appropriate relationship with the company’s auditor

Question 39

Control recommendation if Saxophone does not currently have an audit committee?

Answer 39

Saxophone should appoint an audit committee as soon as possible. The committee should be comprised of at least three independent non-executives, one of whom should have relevant financial experience

Question 40

Deficiency if Saxophone is not planning to hold an annual general meeting (AGM) as the number of shareholders are such that it would be too costly and impractical?

Answer 40

AGM is an important meeting in that it gives the shareholders an opportunity to raise any concerns, receive an answer and vote on important resolutions

Question 41

Control recommendation if Saxophone is not planning to hold an annual general meeting (AGM) as the number of shareholders are such that it would be too costly and impractical?

Answer 41

The company should continue to hold the AGM