CFE Corporate Governance 5

Question 1

Which of the following BEST describes 'clawback' provisions in executive compensation plans?

Accepted Answer

Requirements that executives return previously paid compensation if fraud is discovered

Answer

Clawback provisions allow a company to recover incentive compensation paid to executives when it is later determined to have been based on fraudulent or restated financial results.

Question 2

A related-party transaction must typically be disclosed and approved because it creates a risk of:

Accepted Answer

Conflict of interest that could harm the company for a director or officer's personal benefit

Answer

Related-party transactions involve parties with pre-existing relationships with the company and carry inherent conflict-of-interest risk that could result in unfavorable deal terms.

Question 3

The Caremark standard holds that a board can be liable for fraud losses if it:

Accepted Answer

Failed to establish any system to monitor legal compliance

Answer

Under the Caremark doctrine, directors face liability if they utterly failed to implement information and reporting systems to detect illegal conduct.

Question 4

Which practice BEST demonstrates that a board is exercising effective oversight of management-prepared financial information?

Accepted Answer

Meeting privately with the external auditor without management present

Answer

Private (executive) sessions between the audit committee and external auditors without management present allow candid communication about management's integrity and reporting quality.

Question 5

Which of the following represents an example of 'tunneling' in a corporate governance context?

Accepted Answer

A controlling shareholder transferring corporate assets to entities they privately own

Answer

Tunneling refers to controlling shareholders extracting company value for personal benefit, often to the detriment of minority shareholders.

Certified Fraud Examiner Exam Practice Test

Certified Fraud Examiner Exam Practice Test

CFE Corporate Governance 5