Chapter 4 Flashcards
Definition of Corporate Governance
Corporate governance is the system by which companies are directed and controlled.
Key Elements of Good Corporate Governance
Transparency and accountability, including timely provision of high-quality information and clear decision-making processes.
Commonly Adopted Governance Principles
Shareholder rights, stakeholder obligations, board responsibilities, ethical decision-making, accountability, and financial verification.
UK Corporate Governance Code
Applies to companies listed on the London Stock Exchange and focuses on board leadership, accountability, and risk management.
The Companies Act 2006
Governs company formation, statutory reporting, and director responsibilities in the UK.
Three Lines of Defence Model
1st: Business managers controlling risks.
2nd: Risk management and compliance teams.
3rd: Internal audit for independent oversight.
Role of the Board of Directors
Establishes company objectives, monitors performance, and ensures compliance with governance standards.
Audit Committee Responsibilities
Oversees financial reporting, internal controls, and external audits to ensure accuracy and compliance.
Statutory Reporting Requirements
Includes confirmation statements, annual reports, directors’ reports, and financial accounts.
Risk Management in Corporate Governance
Essential for identifying, assessing, and mitigating risks to ensure business stability and regulatory compliance.
Record Keeping and Data Quality
Accurate record-keeping is crucial for business planning, risk management, and compliance with data protection laws.
Data Protection Legislation (UK GDPR)
Enforces principles like lawfulness, fairness, transparency, data minimisation, and security.
ICO (Information Commissioner’s Office) Role
Regulates data protection compliance and can impose fines of up to £17.5 million or 4% of annual turnover.
Breach Notification Requirements
Companies must report data breaches to the ICO, and if the risk is high, notify affected individuals.
International Data Transfers
Transfers of personal data outside the UK must comply with data protection laws to prevent misuse.
What is the primary purpose of corporate governance?
a) Maximising shareholder dividends
b) Ensuring companies are controlled and directed properly
c) Reducing the number of employees on a board
d) Avoiding regulatory compliance
b) Ensuring companies are controlled and directed properly
Which of the following is NOT a key principle of corporate governance?
a) Accountability
b) Transparency
c) Monopoly creation
d) Ethical decision-making
c) Monopoly creation
What is the UK Corporate Governance Code primarily designed for?
a) Companies that operate globally
b) Private companies with fewer than 50 employees
c) Companies listed on the London Stock Exchange
d) Sole traders and partnerships
c) Companies listed on the London Stock Exchange
What role does an audit committee play?
a) Setting corporate tax rates
b) Overseeing financial reporting and internal audits
c) Approving employee bonuses
d) Determining stock market investments
b) Overseeing financial reporting and internal audits
Under the three lines of defence model, who is responsible for identifying and controlling risks first?
a) Internal audit team
b) External auditors
c) Business managers
d) Shareholders
c) Business managers
Which legislation governs company formation and reporting requirements in the UK?
a) Financial Services Act 2012
b) UK GDPR
c) Companies Act 2006
d) Consumer Credit Act 1974
c) Companies Act 2006
Which of these is NOT a statutory reporting requirement?
a) Confirmation statement
b) Director’s report
c) Employee pension contribution report
d) Annual financial accounts
c) Employee pension contribution report
Why is risk management important in corporate governance?
a) To avoid paying employee salaries
b) To help identify and mitigate risks to business operations
c) To eliminate the need for financial audits
d) To reduce the number of employees
b) To help identify and mitigate risks to business operations
What does the Information Commissioner’s Office (ICO) do?
a) Regulates banking transactions
b) Enforces UK data protection laws
c) Sets corporate tax rates
d) Approves stock market trades
b) Enforces UK data protection laws
Which of the following is a key requirement under UK GDPR?
a) Unlimited data storage for future use
b) The right for individuals to request their data be erased
c) Selling customer data to third parties without consent
d) No need for businesses to inform individuals about data processing
b) The right for individuals to request their data be erased
What is one of the main penalties for breaching data protection laws?
a) Suspension of employee contracts
b) Fines of up to £17.5 million or 4% of annual global turnover
c) Public warnings with no financial consequences
d) Reduction in tax obligations
b) Fines of up to £17.5 million or 4% of annual global turnover
What is the purpose of internal audits in corporate governance?
a) To set employee performance targets
b) To monitor and improve internal control systems
c) To approve executive salaries
d) To replace external auditors
b) To monitor and improve internal control systems
Which governance principle ensures shareholders can hold boards accountable?
a) Transparency
b) Secrecy
c) Fraud protection
d) Outsourcing
a) Transparency
Why do companies need to maintain accurate records?
a) To comply with regulatory requirements
b) To avoid having to file tax returns
c) To make their operations less transparent
d) To reduce competition
a) To comply with regulatory requirements
What is the primary role of external auditors?
a) To advise on marketing strategies
b) To independently verify a company’s financial statements
c) To approve employee bonuses
d) To manage internal risk assessments
b) To independently verify a company’s financial statements
A publicly traded insurance company is facing declining profits. The shareholders demand better transparency in financial reporting. What action should the board take?
a) Ignore the concerns since profits fluctuate
b) Improve financial disclosures and increase communication with shareholders
c) Replace the CFO without explanation
d) Stop publishing financial reports
b) Improve financial disclosures and increase communication with shareholders
A director on the board of an insurance company also owns shares in a major supplier. What is the most appropriate action?
a) They should declare their interest and abstain from related decisions
b) They should secretly influence decisions to benefit their shares
c) They should sell all their shares to avoid suspicion
d) They should resign from the board immediately
a) They should declare their interest and abstain from related decisions
A company experiences a major cybersecurity breach due to weak security controls, exposing customer data. What should the board prioritise first?
a) Ignore the breach and hope it does not attract attention
b) Immediately inform regulators and affected customers while enhancing security measures
c) Blame the IT department and take no further action
d) Shut down all online services permanently
b) Immediately inform regulators and affected customers while enhancing security measures
An insurance firm fails to submit its annual financial report on time due to internal delays. What consequences might they face?
a) A fine and potential regulatory scrutiny
b) Increased company profits
c) A reduction in regulatory requirements
d) A reward for saving operational costs
a) A fine and potential regulatory scrutiny
An employee reports fraudulent financial activities within the company, but their manager threatens to fire them. What should the board do?
a) Investigate the claims and protect the whistleblower from retaliation
b) Fire the employee to prevent damage to the company’s reputation
c) Offer the employee a bonus to stay silent
d) Ignore the allegations unless the media finds out
a) Investigate the claims and protect the whistleblower from retaliation
A financial services company loses customer data due to improper handling by a third-party provider. What legal responsibility does the company have?
a) None, because the third party is at fault
b) Full responsibility under data protection regulations
c) Only a warning from the regulator
d) They can claim insurance and ignore the issue
b) Full responsibility under data protection regulations
A company director learns that the firm is about to merge with a competitor before it is publicly announced. They decide to buy shares in the company before the news goes public. What is the consequence?
a) A criminal offence, leading to fines and potential jail time
b) A smart financial decision with no legal impact
c) Encouraged as a benefit of being a director
d) No action unless the regulator finds out
a) A criminal offence, leading to fines and potential jail time
A company’s CEO also serves as the head of the audit committee. What governance issue does this raise?
a) Conflict of interest and lack of independent oversight
b) Improved efficiency and cost savings
c) No issue, as long as the CEO has experience in audits
d) Better decision-making due to one person controlling both roles
a) Conflict of interest and lack of independent oversight
A company discovers an accounting error that inflated profits in previous years. If they report it, they may face regulatory penalties. What is the correct action?
a) Report the error immediately and correct financial statements
b) Hide the error to avoid fines
c) Destroy the relevant financial records
d) Blame a former employee who has left the company
a) Report the error immediately and correct financial statements
An insurance company manipulates its financial statements to show higher profits and attract investors. What could happen if regulators find out?
a) Heavy fines, loss of investor trust, and possible criminal charges
b) Increased stock prices and company growth
c) A government bailout to avoid job losses
d) A minor warning with no real consequences
a) Heavy fines, loss of investor trust, and possible criminal charges
