CPFM Ethics and Corporate Governance in Finance 2 — Questions and Answers
Question 1: Which of the following best describes insider trading?
- Trading company stock based on publicly available quarterly earnings reports
- Buying or selling securities based on material non-public information (Correct answer)
- Executing large block trades that move the market price significantly
- Trading between subsidiaries of the same parent company
Correct answer: Buying or selling securities based on material non-public information
Insider trading involves buying or selling a security using material information that is not yet available to the general public, which is illegal under securities law.
Question 2: A company's whistleblower policy is designed primarily to:
- Allow employees to report misconduct without fear of retaliation (Correct answer)
- Provide a channel for customers to file product complaints
- Limit the company's legal liability during audits
- Streamline internal communications between departments
Correct answer: Allow employees to report misconduct without fear of retaliation
A whistleblower policy creates a safe, confidential channel for employees to report suspected fraud or misconduct without risking job loss or retaliation.
Question 3: The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted primarily in response to:
- The Enron and WorldCom accounting scandals of 2001-2002
- The dot-com bubble burst of 2000-2001
- The 2008 global financial crisis and systemic risk failures (Correct answer)
- Foreign currency manipulation by international banks
Correct answer: The 2008 global financial crisis and systemic risk failures
Dodd-Frank was enacted in 2010 in response to the 2008 financial crisis to increase oversight of financial institutions and reduce systemic risk in the financial system.
Question 4: Under corporate governance best practices, a 'say-on-pay' vote gives shareholders the right to:
- Directly set the salaries of all employees
- Approve or reject the executive compensation packages through a non-binding vote (Correct answer)
- Sue executives for excessive pay on a class-action basis
- Require the board to disclose all personal financial information of executives
Correct answer: Approve or reject the executive compensation packages through a non-binding vote
Say-on-pay votes give shareholders an advisory (non-binding) vote on executive compensation, allowing them to express approval or disapproval of pay practices.
Question 5: Which of the following best describes the role of an external auditor in corporate governance?
- Preparing the company's financial statements on behalf of management
- Providing an independent opinion on whether financial statements are fairly presented (Correct answer)
- Managing the internal control systems of the organization
- Setting accounting policies and selecting disclosure methods
Correct answer: Providing an independent opinion on whether financial statements are fairly presented
External auditors independently examine a company's financial statements and internal controls to provide an objective opinion on whether they fairly represent the company's financial position.
Question 6: What is 'earnings management,' and why is it considered an ethical concern?
- Setting aggressive earnings targets to motivate employees, which is standard practice
- Manipulating accounting estimates or timing to achieve desired reported earnings, distorting true performance (Correct answer)
- Publishing forward-looking earnings guidance to investors and analysts
- Managing the timing of dividend payments to smooth cash flow
Correct answer: Manipulating accounting estimates or timing to achieve desired reported earnings, distorting true performance
Earnings management involves using accounting flexibility to manipulate reported results, which misleads investors and violates the principle of fair presentation of financial information.
Question 7: Which of the following governance structures is most effective at reducing the risk of financial fraud at a publicly traded company?
- A board where the CEO also serves as board chairperson
- A majority of independent directors with a separate audit committee (Correct answer)
- A board composed entirely of current company executives
- A governance structure with no formal charter or bylaws
Correct answer: A majority of independent directors with a separate audit committee
Having a majority of independent directors and a separate audit committee creates effective checks and balances that reduce the risk of financial fraud and misreporting.
CPFM Ethics and Corporate Governance in Finance 2
Which of the following best describes insider trading?