ACCA Corporate Governance and Ethics 5 — Questions and Answers
Question 1: Under the ACCA Code of Ethics, the 'integrity' fundamental principle requires a professional accountant to be:
- Technically proficient and up to date with standards
- Straightforward and honest in all professional and business relationships (Correct answer)
- Free from conflicts of interest in all engagements
- Objective when preparing financial statements
Correct answer: Straightforward and honest in all professional and business relationships
Integrity requires accountants to be straightforward, honest, and not associate with misleading information or statements.
Question 2: The 'self-review threat' to auditor independence occurs when:
- An auditor is offered employment by an audit client
- An audit firm audits financial statements that include figures the firm itself prepared (Correct answer)
- An auditor becomes too familiar with client staff over many years
- An audit partner advocates for a client's position in a tax dispute
Correct answer: An audit firm audits financial statements that include figures the firm itself prepared
A self-review threat arises when an auditor is required to evaluate work that they or their firm previously performed, impairing objectivity.
Question 3: Which of the following is an example of an INTERNAL corporate governance mechanism?
- Stock market listing requirements
- Takeover regulations imposed by a financial regulator
- Executive remuneration linked to performance targets set by the remuneration committee (Correct answer)
- Mandatory auditor rotation rules imposed by law
Correct answer: Executive remuneration linked to performance targets set by the remuneration committee
Internal governance mechanisms are those controlled by the company itself, such as board structure, audit committees, and performance-linked pay policies.
Question 4: In the context of risk governance, the 'three lines of defence' model allocates which role to internal audit?
- First line: operational management and daily controls
- Second line: risk management and compliance functions
- Third line: independent assurance over the effectiveness of governance and risk management (Correct answer)
- External line: regulatory and statutory oversight
Correct answer: Third line: independent assurance over the effectiveness of governance and risk management
Internal audit serves as the third line of defence, providing independent assurance to the board that the first two lines are operating effectively.
Question 5: Which statement about executive remuneration best reflects good governance practice?
- Executive pay should be set solely by the CEO to attract top talent
- Remuneration packages should link a significant portion of pay to long-term performance metrics aligned with shareholder interests (Correct answer)
- Fixed salary should represent the entire remuneration package to avoid gaming of metrics
- The remuneration committee should include at least two executive directors to ensure business understanding
Correct answer: Remuneration packages should link a significant portion of pay to long-term performance metrics aligned with shareholder interests
Good governance requires that executive pay be structured to incentivize long-term value creation for shareholders, with variable elements tied to performance.
Question 6: A company's board of directors has decided to pursue a strategy that benefits a major shareholder but damages the interests of minority shareholders. This is an example of:
- Legitimate exercise of majority shareholder rights
- Tunneling or expropriation, a corporate governance failure (Correct answer)
- Effective agency cost management
- A standard related-party transaction properly disclosed
Correct answer: Tunneling or expropriation, a corporate governance failure
Tunneling refers to the extraction of value from a company by controlling shareholders at the expense of minority shareholders, representing a serious governance failure.
Question 7: Which body is responsible for developing and maintaining the International Ethics Standards Board for Accountants (IESBA) Code of Ethics?
- ACCA
- International Accounting Standards Board (IASB)
- International Federation of Accountants (IFAC) (Correct answer)
- Financial Reporting Council (FRC)
Correct answer: International Federation of Accountants (IFAC)
IESBA operates under the International Federation of Accountants (IFAC) and develops the global Code of Ethics for professional accountants.
ACCA Corporate Governance and Ethics 5
Under the ACCA Code of Ethics, the 'integrity' fundamental principle requires a professional accountant to be: