CEA Corporate Governance & Compliance 3 — Questions and Answers
Question 1: What is the primary purpose of a whistleblower protection policy within a corporate compliance program?
- To reward employees who report competitors' misconduct
- To encourage reporting of internal wrongdoing without fear of retaliation (Correct answer)
- To ensure all employee complaints are reported to the SEC
- To protect the company from frivolous lawsuits
Correct answer: To encourage reporting of internal wrongdoing without fear of retaliation
Whistleblower protection policies create safe channels for employees to report misconduct, protecting them from retaliation and encouraging a culture of transparency.
Question 2: Under Sarbanes-Oxley (SOX) Section 404, what are management and external auditors required to assess?
- The accuracy of marketing claims and advertising materials
- The effectiveness of internal controls over financial reporting (Correct answer)
- The adequacy of the company's cybersecurity infrastructure
- The independence of board committee members
Correct answer: The effectiveness of internal controls over financial reporting
SOX Section 404 requires management to assess and external auditors to attest to the effectiveness of internal controls over financial reporting.
Question 3: A 'clawback' provision in executive compensation allows a company to:
- Automatically increase executive pay when profits rise
- Recover previously paid compensation if misconduct or restatements occur (Correct answer)
- Defer bonus payments to reduce short-term tax liability
- Grant executives additional equity during market downturns
Correct answer: Recover previously paid compensation if misconduct or restatements occur
Clawback provisions enable companies to recoup compensation paid to executives when it was based on inaccurate financial results or when misconduct is discovered.
Question 4: Which body primarily sets accounting standards used in financial reporting for U.S. public companies?
- Securities and Exchange Commission (SEC)
- Public Company Accounting Oversight Board (PCAOB)
- Financial Accounting Standards Board (FASB) (Correct answer)
- American Institute of CPAs (AICPA)
Correct answer: Financial Accounting Standards Board (FASB)
FASB sets Generally Accepted Accounting Principles (GAAP), which govern financial reporting for U.S. public and private companies.
Question 5: What does 'board independence' primarily mean in corporate governance?
- The board can overrule all government regulations affecting the company
- A majority of directors have no material relationship with the company (Correct answer)
- Directors independently set their own compensation packages
- The board operates without input from institutional shareholders
Correct answer: A majority of directors have no material relationship with the company
Board independence means that a majority of directors have no material financial, personal, or professional relationship with the company that could compromise their objective judgment.
Question 6: Which of the following best describes 'enterprise risk management' (ERM) in a corporate governance context?
- A process to eliminate all business risks before they materialize
- A framework to identify, assess, and manage risks across the entire organization (Correct answer)
- An insurance strategy for protecting physical corporate assets
- A regulatory requirement limited to financial institutions
Correct answer: A framework to identify, assess, and manage risks across the entire organization
ERM is a holistic framework that helps organizations identify, assess, prioritize, and respond to risks across all business functions to achieve strategic objectives.
Question 7: A company's compliance officer discovers a potential FCPA violation by a subsidiary. What is the MOST appropriate immediate action?
- Terminate the employees involved and close the matter internally
- Notify the CEO and begin a thorough internal investigation (Correct answer)
- Immediately self-report to the Department of Justice
- Freeze all international operations pending a board vote
Correct answer: Notify the CEO and begin a thorough internal investigation
The most appropriate first step is to notify senior leadership and conduct a thorough internal investigation to understand the scope before determining external reporting obligations.
CEA Corporate Governance & Compliance 3
What is the primary purpose of a whistleblower protection policy within a corporate compliance program?