CCA CCA Ethics & Corporate Governance 2 — Questions and Answers
Question 1: Under IMA (Institute of Management Accountants) standards, which standard requires management accountants to disclose all relevant information that could influence users' understanding of reports?
- Integrity
- Objectivity
- Credibility (Correct answer)
- Confidentiality
Correct answer: Credibility
The IMA's credibility standard requires management accountants to communicate information fairly and objectively and disclose all relevant information users might need.
Question 2: What is 'whistleblowing,' and what protection does the Dodd-Frank Act provide for whistleblowers?
- Reporting securities violations internally; Dodd-Frank requires internal reporting before external
- Reporting suspected securities law violations to the SEC; Dodd-Frank provides anti-retaliation protections and financial awards for qualifying tips (Correct answer)
- Disclosing trade secrets to competitors; Dodd-Frank imposes penalties for this
- Reporting tax evasion to the IRS; Dodd-Frank mandates anonymous reporting
Correct answer: Reporting suspected securities law violations to the SEC; Dodd-Frank provides anti-retaliation protections and financial awards for qualifying tips
Dodd-Frank's whistleblower program protects individuals who report securities violations to the SEC from employer retaliation and provides financial awards (10–30% of sanctions over $1 million).
Question 3: What is the 'independence in appearance' requirement for external auditors?
- Auditors must physically locate their offices away from client premises
- Reasonable, informed observers must conclude that the auditor's objectivity is not impaired (Correct answer)
- Auditors must rotate every three years to maintain fresh perspectives
- Auditors must decline all non-audit services to any client
Correct answer: Reasonable, informed observers must conclude that the auditor's objectivity is not impaired
Independence in appearance means that from the perspective of a reasonable outside observer, the auditor's independence is not compromised — perception matters as much as actual independence.
Question 4: Under SOX Section 404, management of a public company must:
- Submit to annual SEC inspections of internal records
- Assess and report on the effectiveness of internal control over financial reporting (ICFR) (Correct answer)
- Certify that no material weaknesses existed in any prior period
- Provide quarterly updates on litigation risk to shareholders
Correct answer: Assess and report on the effectiveness of internal control over financial reporting (ICFR)
SOX Section 404(a) requires management to assess ICFR effectiveness using a recognized framework (such as COSO), and 404(b) requires the external auditor to attest to that assessment for large accelerated filers.
Question 5: Which corporate governance mechanism aligns the interests of executives with those of shareholders?
- Mandatory quarterly earnings guidance
- Performance-based equity compensation tied to long-term shareholder value metrics (Correct answer)
- Fixed annual salary increases based on tenure
- Debt covenants requiring minimum current ratios
Correct answer: Performance-based equity compensation tied to long-term shareholder value metrics
Performance-based equity compensation (stock options, RSUs tied to TSR or EPS) aligns executive incentives with long-term shareholder value creation.
Question 6: What is a 'related-party transaction,' and why does it require disclosure in financial statements?
- A transaction between a company and a competitor; disclosed to prevent antitrust violations
- A transaction between a company and an entity with which it has a special relationship (e.g., a subsidiary or executive's family member); disclosed because it may not be arm's length (Correct answer)
- A foreign currency transaction; disclosed due to exchange rate risk
- A transaction exceeding $1 million; disclosed for materiality purposes
Correct answer: A transaction between a company and an entity with which it has a special relationship (e.g., a subsidiary or executive's family member); disclosed because it may not be arm's length
Related-party transactions may not be conducted at market terms, so GAAP (ASC 850) requires disclosure to ensure users can evaluate whether transactions reflect fair value.
CCA CCA Ethics & Corporate Governance 2
Under IMA (Institute of Management Accountants) standards, which standard requires management accountants to disclose all relevant information that could influence users' understanding of reports?