ACCA109 Chapter 2 and 3 - Corporate Governance, Business Ethics, Risk Management and Internal Control PDF

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CHAPTER 2: CORPORATE GOVERNANCE RESPONSIBILITIES ANDACCOUNTABILITIES Review Questions “Small business enterprises do not need good governance”. Do you agree? Explain.  I do not agree to the statement that small business enterprises do not need good governance because the characteristics of good go...

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CHAPTER 2: CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES  Review Questions 1. “Small business enterprises do not need good governance”. Do you agree? Explain.  I do not agree to the statement that small business enterprises do not need good governance because the characteristics of good governance can be found and used in both SME and large listed public companies. SME’s also need good governance to be participative, to follow the rule of law, transparent, responsive, consensus oriented, accountable, to have equity and inclusiveness, and effectiveness and efficiency to the business. 2. Does good governance require absolute rules that must be adopted by all organizations?  No, there is no absolute rule that must be adopted by all organizations. There is no simple universal formula for good governance. Organizations are encouraged to adopt approaches and principles which are appropriate to the organizations specific needs.  Multiple Choice Questions (Answer) 1. B 2. D 3. B 4. B 5. C Guide Questions 1. “Small business enterprises do not need good governance”. Do you agree? Explain  I do not agree to the statement that small business enterprises do not need good governance because the characteristics of good governance can be found and used in both SME and large listed public companies. SME’s also need good governance to be participative, to follow the rule of law, transparent, responsive, consensus oriented, accountable, to have equity and inclusiveness, and effectiveness and efficiency to the business. 2. Does good governance require absolute rules that must be adopted by all organizations?  No, there is no absolute rule that must be adopted by all organizations. There is no simple universal formula for good governance. Organizations are encouraged to adopt approaches and principles which are appropriate to the organizations specific needs. 3. What is the essence of any system of corporate governance?  Allow the board and management to freely exercise their freedom in order for the organization to move forward and to use the freedom within a framework of effective accountability. 4. What is management’s responsibility as far as financial reporting is concerned?  Choose which accounting principle best portray the economic substance of company transactions.  Implement a system of internal control that assures completeness and accuracy in financial reporting.  Ensure that the financial statements contain accurate and complete disclosure. 5. Describe the broad role of the Board of Directors.  The major representative of stockholders to ensure that the organization is run according to the organization’s charter and that there is proper accountability.

CHAPTER 3: SECURITIES AND EXCHANGE COMMISSION (SEC) CODE OF CORPORATE GOVERNANCE Exercise 1: Below is a summary of the SEC corporate governance requirements of companies publicly-listed in the stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in publicly traded organizations. a. Boards need to consist of at least 3 independent directors or 1/3 of the board which is higher.  The occupancy of independent directors to the board is to ensure that there is no conflict of interest between each member of the board and it leads to more objective decision making. b. Boards need to hold regular executive sessions of independent directors without management present.  It is because NEDs are bound to inspect and to look over to the organizations management performance in meeting the organizations goal and objectives. c. Boards must have a corporate governance committee composed at least 3 of independent directors.  Ensuring the compliance and proper observance to the corporate governance principles and policies. d. The corporate governance committee must have a written charter that addresses the committee’s purpose and responsibilities, and there must be annual performance evaluation of the committee.  Defines the roles and accountabilities of each committee to avoid any overlapping functions and can be used as a basis of assessing the committee’s performance. e. Boards must have an audit committee with a minimum of three independent members.  Responsible for establishing and maintaining adequate, effective and efficient internal control framework. Provide assurance in the areas of reporting, monitoring compliance with the laws, regulations, and internal policies, efficiency and effectiveness of operations, and safeguarding of assets. f. The audit committee must have a written charter that addresses the committee’s purpose and responsibilities, and the committee must produce an audit committee report; there must also be an annual performance evaluation of the committee.  Safeguard the company’s resources and ensure their effective utilization. Prevent occurrence of fraud and other irregularities. Protect the accuracy and reliability of the company’s financial data. Ensure compliance with applicable laws and regulations. Exercise 2: Below is a summary of the SEC listing requirements for audit committee responsibilities of companies listed on this stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in publicly traded organizations. a. Obtaining each year a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor.  Obtain better understanding of the entity’s nature of control as well its internal control to better identify and to look over the risks, fraud or error that might occur. b. Discussing the company’s financial statements with management and the external auditor.

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 For the integrity and objectivity of the financial statements. Managements and external auditors ensure that the responsibility is with compliance with the established financial standards and laws. Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts.  Support and discuss major financial reports and information to ensure timely and accurate dissemination of information. Discussing in its meetings policies with respect to risk assessment and risk management.  Functionality and effectiveness. Meeting separately with management, internal auditors, and the external auditor on a periodic basis.  To review the results of an audit of the committees if it is under generally accepted auditing standards. Reviewing with the external auditor any audit problems or difficulties that they had with management.  Review such changes in accounting and auditing policies and find any significant problems encountered in the course of their auditing. Setting clear hiring policies for employees or former employees of the external auditors.  Transparent and accountability. Reporting regularly to the board of directors.  To oversight responsibilities in areas such as an entity’s financial reporting, internal control systems, risk management systems and the internal and external audit functions....