ACCA AK Business Ethics and Governance 2 — Questions and Answers
Question 1: Under the conceptual framework for financial reporting, what does 'faithful representation' require?
- Information must be presented in a way that maximises reported profit
- Information must be complete, neutral, and free from error (Correct answer)
- Information must only include figures that management approves
- Information must be presented in the most conservative way possible
Correct 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).
Question 2: Which of the following best describes the agency problem in corporate governance?
- The conflict between a company and its suppliers over payment terms
- The conflict arising when directors (agents) may pursue their own interests rather than those of shareholders (principals) (Correct answer)
- The difficulty of finding a suitable advertising agency
- The challenge of recruiting new board members
Correct 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.
Question 3: An accountant discovers that their employer is involved in money laundering. Under UK law, what should the accountant do?
- Ignore the matter as it is not their responsibility
- Report the matter to the appropriate authority, such as the National Crime Agency (NCA) (Correct answer)
- Resign immediately without telling anyone
- Confront the employer and demand they stop
Correct 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.
Question 4: What is the purpose of an internal audit function?
- To express an opinion on the truth and fairness of the financial statements
- To provide independent assurance on the effectiveness of governance, risk management, and internal controls (Correct answer)
- To prepare the company's tax returns
- To set the company's dividend policy
Correct 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.
Question 5: Sustainability reporting under frameworks such as GRI (Global Reporting Initiative) requires disclosure of:
- Only financial performance metrics
- Environmental, social, and governance (ESG) impacts alongside financial performance (Correct answer)
- Only the company's carbon emissions
- Trade secrets and proprietary information
Correct 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.
Question 6: The 'comply or explain' approach to corporate governance means that:
- Companies must comply with every provision of the governance code without exception
- Companies should comply with the code's provisions but may depart from them if they provide a clear explanation (Correct answer)
- Companies can ignore the code entirely without consequences
- Only financial institutions are required to follow the code
Correct 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.
ACCA AK Business Ethics and Governance 2
Under the conceptual framework for financial reporting, what does 'faithful representation' require?