Business Ethics and Governance Flashcards

Under the conceptual framework for financial reporting, what does 'faithful representation' require?

Answer: Information must be complete, neutral, and free from error

Faithful representation, one of the two fundamental qualitative characteristics in the Conceptual Framework, requires that financial information is complete (includes all necessary information), neutral (free from bias), and free from error (no errors or omissions in description or process).

Which of the following best describes the agency problem in corporate governance?

Answer: The conflict arising when directors (agents) may pursue their own interests rather than those of shareholders (principals)

The agency problem arises because directors (agents) are entrusted to run the company on behalf of shareholders (principals), but may have different objectives — such as prioritising their own remuneration, job security, or empire-building over shareholder wealth maximisation.

An accountant discovers that their employer is involved in money laundering. Under UK law, what should the accountant do?

Answer: Report the matter to the appropriate authority, such as the National Crime Agency (NCA)

Under the Proceeds of Crime Act 2002 and the Money Laundering Regulations, there is a legal obligation to report knowledge or suspicion of money laundering to the appropriate authority (the NCA in the UK). Failure to report ('failure to disclose') is itself a criminal offence. Tipping off the employer could also be an offence.

What is the purpose of an internal audit function?

Answer: To provide independent assurance on the effectiveness of governance, risk management, and internal controls

Internal audit provides independent and objective assurance and consulting services to the organisation. It evaluates and improves the effectiveness of governance, risk management, and internal control processes. Unlike external audit, it does not opine on financial statements.

Sustainability reporting under frameworks such as GRI (Global Reporting Initiative) requires disclosure of:

Answer: Environmental, social, and governance (ESG) impacts alongside financial performance

Sustainability reporting frameworks like GRI require organisations to report on their environmental, social, and governance impacts — including carbon emissions, labour practices, human rights, anti-corruption, and community engagement — alongside traditional financial metrics.

The 'comply or explain' approach to corporate governance means that:

Answer: Companies should comply with the code's provisions but may depart from them if they provide a clear explanation

Under the UK's 'comply or explain' approach, listed companies are expected to comply with the provisions of the UK Corporate Governance Code. However, if they choose not to comply with a specific provision, they must explain to shareholders why they have departed and what alternative arrangements they have in place.