ACFE Corporate Governance and Ethics 4 — Questions and Answers
Question 1: A compliance officer discovers that the CFO is circumventing internal controls. What is the MOST appropriate initial action?
- Report directly to the CFO to give them a chance to self-correct
- Immediately notify law enforcement without informing the board
- Escalate to the audit committee or board, bypassing the CFO (Correct answer)
- Document the concern but take no action until a pattern emerges
Correct answer: Escalate to the audit committee or board, bypassing the CFO
When suspected misconduct involves a senior executive, proper escalation goes around that executive to the board or audit committee, which has oversight authority.
Question 2: The duty of loyalty requires corporate directors to:
- Always vote with management recommendations
- Put personal interests ahead of shareholder interests when in conflict
- Act in the best interests of the corporation rather than personal interests (Correct answer)
- Maintain loyalty to the CEO who appointed them
Correct answer: Act in the best interests of the corporation rather than personal interests
The duty of loyalty requires directors to prioritize the corporation's best interests over their own personal financial interests or those of other parties.
Question 3: Which type of audit committee independence concern arises when a committee member receives consulting fees from the company?
- Structural independence failure
- Material relationship that compromises independence (Correct answer)
- Procedural bias
- Reputational conflict
Correct answer: Material relationship that compromises independence
Receiving consulting fees creates a material financial relationship between the director and the company, which compromises audit committee independence.
Question 4: Under the Business Judgment Rule, courts will generally NOT second-guess a board decision if directors:
- Achieved a profitable outcome for shareholders
- Made the decision in good faith, on an informed basis, and without conflicts of interest (Correct answer)
- Followed the recommendation of outside legal counsel
- Obtained a fairness opinion from an investment bank
Correct answer: Made the decision in good faith, on an informed basis, and without conflicts of interest
The Business Judgment Rule protects directors who acted in good faith, were adequately informed, and had no personal interest in the outcome.
Question 5: Which statement BEST describes the role of internal audit in corporate governance?
- Internal audit replaces the need for an external auditor
- Internal audit reports to the CFO to ensure financial accuracy
- Internal audit provides independent assurance on risk management and controls (Correct answer)
- Internal audit's primary duty is detecting employee theft
Correct answer: Internal audit provides independent assurance on risk management and controls
Internal audit provides independent, objective assurance to the board and management on the effectiveness of governance, risk management, and internal controls.
Question 6: An organization's anti-bribery policy should MOST importantly include which of the following?
- A list of approved gift recipients at partner companies
- Absolute prohibition on facilitation payments and clear due diligence requirements for third parties (Correct answer)
- A minimum dollar threshold below which gifts do not need to be reported
- Provisions allowing payments that are customary in local cultures
Correct answer: Absolute prohibition on facilitation payments and clear due diligence requirements for third parties
Effective anti-bribery policies require comprehensive third-party due diligence and clear prohibitions, as bribes are often paid through agents and intermediaries.
Question 7: Which of the following governance failures was MOST prominently associated with the Enron scandal?
- Failure to file required SEC disclosures on time
- Board waiving its own code of ethics to allow off-balance-sheet transactions (Correct answer)
- Excessive CEO compensation without shareholder approval
- Inadequate cybersecurity controls on financial systems
Correct answer: Board waiving its own code of ethics to allow off-balance-sheet transactions
Enron's board voted to waive its own code of ethics to allow CFO Andrew Fastow to manage the SPEs that concealed liabilities off the balance sheet.
ACFE Corporate Governance and Ethics 4
A compliance officer discovers that the CFO is circumventing internal controls.
What is the MOST appropriate initial action?