ACCA - Association of Chartered Certified Accountants Corporate Governance and Ethics Questions and Answers — Questions and Answers
Question 1: A company's management team is awarded significant bonuses based on achieving high short-term revenue growth. To meet their targets, they approve several high-risk projects that boost immediate sales but have uncertain long-term profitability and could damage the company's reputation. This situation is a classic example of which concept in corporate governance?
- Stakeholder conflict
- The agency problem (Correct answer)
- Poor risk appetite formulation
- A failure of internal reporting
Correct answer: The agency problem
The agency problem arises from the conflict of interest between a company's principals (shareholders, who desire long-term value) and their agents (management). In this scenario, the bonus structure incentivises management to act in their own short-term interest, potentially at the expense of the shareholders' long-term interests.
Question 2: According to the principles of good corporate governance, what is the primary responsibility of the nominations committee?
- Setting the remuneration packages for executive directors and senior management.
- Reviewing the integrity of the company's financial statements and internal controls.
- Leading the process for board appointments and ensuring a balanced and effective board. (Correct answer)
- Developing and implementing the company's overall risk management strategy.
Correct answer: Leading the process for board appointments and ensuring a balanced and effective board.
The primary role of the nominations committee is to lead the process for board appointments, undertake succession planning, and regularly review the structure, size, and composition (including skills, knowledge, and diversity) of the board to ensure it remains effective.
Question 3: An accountant discovers a new product has a minor defect that is not dangerous but will be very costly to recall. The accountant's manager argues against the recall, stating, 'The cost of the recall will harm our profits, potentially leading to job losses and a drop in shareholder value. The negative impact on these large groups far outweighs the minor inconvenience to a few customers.' The manager's argument is most closely aligned with which ethical perspective?
- Deontology
- Utilitarianism (Correct answer)
- Virtue ethics
- Egoism
Correct answer: Utilitarianism
Utilitarianism is a consequentialist theory that judges an action's morality based on its ability to produce the greatest good for the greatest number of people. The manager is weighing the consequences for different groups (employees, shareholders vs. customers) and concluding that the action causing the least overall harm is the most ethical choice.
Question 4: Many corporate governance codes, including the UK Corporate Governance Code, operate on a 'comply or explain' basis. What is the fundamental principle behind this approach?
- To legally mandate specific governance structures, making any deviation a criminal offence.
- To provide a rigid set of rules that all listed companies must follow without exception.
- To allow companies flexibility to depart from the code's provisions if they provide a transparent and robust justification to their shareholders. (Correct answer)
- To offer a set of voluntary recommendations that companies can choose to ignore without any requirement to disclose their non-compliance.
Correct answer: To allow companies flexibility to depart from the code's provisions if they provide a transparent and robust justification to their shareholders.
The 'comply or explain' approach acknowledges that a 'one-size-fits-all' model is not always appropriate. It allows a company to not comply with a specific provision, provided it explains its reasoning to shareholders, who can then assess if the justification is acceptable. This promotes transparency and tailored governance rather than rigid, mandatory rules.
Question 5: Which of the following statements best describes the primary difference between the shareholder view and the stakeholder view of corporate purpose?
- The shareholder view is legally mandated for all public companies, while the stakeholder view is a voluntary framework for private companies.
- The shareholder view is focused on long-term sustainability, whereas the stakeholder view prioritises short-term profits.
- The shareholder view focuses on profit maximisation above all else, while the stakeholder view completely ignores financial performance.
- The shareholder view prioritises the interests of the company's owners, while the stakeholder view considers the interests of a wider group including employees, customers, and society. (Correct answer)
Correct answer: The shareholder view prioritises the interests of the company's owners, while the stakeholder view considers the interests of a wider group including employees, customers, and society.
The core distinction is the group whose interests the company is run to serve. The shareholder theory posits that a company's main duty is to maximize wealth for its owners (shareholders). In contrast, the stakeholder theory argues that a company should balance the interests of all groups affected by its actions, such as employees, customers, suppliers, and the community.
Question 6: An audit firm has provided audit services to a listed company for 12 years. The lead audit partner has been in place for the last eight years and has developed a close friendship with the client's Finance Director. According to the ACCA's Code of Ethics and Conduct, which fundamental threat to objectivity is most prominent in this situation?
- Self-review threat
- Advocacy threat
- Familiarity threat (Correct answer)
- Intimidation threat
Correct answer: Familiarity threat
A familiarity threat arises from a long or close relationship with a client or employer, where a professional accountant becomes too sympathetic to their interests or too accepting of their work. The long association with both the client and the Finance Director creates a significant risk that the auditor's professional scepticism and objectivity may be compromised.
ACCA - Association of Chartered Certified Accountants Corporate Governance and Ethics Questions and Answers
A company's management team is awarded significant bonuses based on achieving high short-term revenue growth.
To meet their targets, they approve several high-risk projects that boost immediate sales but have uncertain long-term profitability and could damage the company's reputation.
This situation is a classic example of which concept in corporate governance?