chapter 4 Flashcards
What is the corporate governance framework?
A: A set of rules and practices ensuring accountability, fairness, and transparency in a company’s relationship with stakeholders.
What are the key elements of the UK corporate governance framework?
A:
Legislation – Companies Act 2006.
Regulation – FCA’s Listing Rules for LSE-listed companies.
UK Corporate Governance Code – Issued by the Financial Reporting Council (FRC).
Best practices – Encouraged for non-listed companies.
who oversees corporate governance in the UK?
A: The Financial Reporting Council (FRC), soon to be replaced by the Audit, Reporting and Governance Authority (ARGA).
What key update was made in 2018?
A: The 2018 UK Corporate Governance Code focused on long-term sustainable success and stakeholder engagement.
Is compliance with the UK Corporate Governance Code mandatory?
A: No, but LSE-listed firms must “comply or explain” deviations in their annual report.
What is the “Going Concern” principle?
A: Companies must assess and disclose risks that may impact their ability to continue operating.
What is the FRC’s Guidance on Risk Management?
A: It highlights best practices for managing principal risks, ensuring internal control, and embedding risk management in business processes.
How does corporate governance differ for mutual insurers?
A: The Association of Financial Mutuals (AFM) provides a governance code tailored to member-based insurers.
What is an example of adapted governance for mutual insurers?
A: The Metropolitan Police Friendly Society has non-executive directors with police backgrounds to represent members’ interests.
What is the FRC’s Minimum Standard for Audit Committees?
A: A “comply or explain” framework ensuring fair auditor selection, independence, and oversight.
What are key responsibilities of audit committees?
Ensuring a fair choice of external auditors.
Overseeing audit tenders and fees.
Engaging with shareholders.
Ensuring auditors have full access to records.
Monitoring audit independence and financial integrity.
What is the FRC’s Guidance on Board Effectiveness?
A: A 2018 framework helping boards assess leadership, composition, risk management, and remuneration.
What are examples of corporate governance codes outside the UK?
Germany – Deutscher Corporate Governance Kodex.
Australia – ASX Corporate Governance Principles.
OECD – Southeast Asia Corporate Governance Initiative.
What is the Sarbanes-Oxley Act (SOX) 2002?
A: A US law improving financial reporting accuracy following corporate scandals (e.g., Enron, WorldCom).
What are key SOX provisions?
Section 302 – Senior officers must certify the accuracy of financial disclosures.
Section 404 – Requires companies to assess and report on internal financial controls.
What are the UK Listing Rules?
The UK Listing Rules are additional regulations that publicly listed companies must follow. They cover matters such as IPO requirements, disclosure of price-sensitive information, financial reporting, and shareholder communications.
What is an IPO?
A: An IPO (Initial Public Offering) is when a company offers its shares to the public for the first time, and it must comply with the Listing Rules when seeking a listing.
What are the statutory obligations for quoted companies under the Listing Rules?
A: Quoted companies must produce half-yearly financial reports, annual reports, and comply with more stringent EU Transparency Directive requirements.
What must a company do to be legally recognized?
A: A company must be registered with Companies House to gain legal recognition and be able to enter into contracts and conduct business.
What is the second line of defence in risk management?
A: The risk management department is responsible for discussing and advising on the most appropriate risk controls. However, accountability for implementing risk control remains with operational management.
What is the third line of defence in risk management?
A: The internal audit team reviews the overall risk management operation, ensuring the agreed strategy is being actively followed. External parties, such as regulatory bodies, can also assess the effectiveness of risk management.
How does the claims department in an insurance company apply the three lines of defence?
First line: Supervisors/managers ensure fraudulent claims aren’t paid using peer review control processes.
Second line: Risk management reviews the effectiveness of these controls.
Third line: Internal audit checks that the processes are being followed
What does the scope of strategic risks cover?
A: Risks related to expansion decisions like new lines of business, opening branches, or adopting new distribution methods (e.g., brokers, websites).
What do operational risks cover?
A: Risks not covered under other categories, such as property damage, fraud, regulatory breaches, employee injury, or IT failures.
What is a risk appetite statement?
A: A statement that outlines the types and levels of risk a company is willing to accept, such as tolerance levels for claims, investments, or operational risks.
What is the role of the audit committee?
A: The audit committee scrutinizes the control framework and assesses its application. It consists of at least three directors, including independent ones, with the chairperson available at the AGM to answer questions.
What is the statutory external audit requirement for UK companies?
A: Companies meeting certain size thresholds (turnover, net assets, employees) must have an external audit. The auditor reports whether the financial statements give a true and fair view.
What is the purpose of the Audit, Reporting and Governance Authority (ARGA)?
A: ARGA was introduced to ensure rigorous audit practices, especially for large firms, and to improve corporate transparency, replacing the FRC.
What is the role of the Chief Internal Auditor (CIA)?
The CIA proposes an annual audit plan, reports to the audit committee, and evaluates risks to ensure effective internal controls.
How does internal audit contribute to corporate governance?
It helps ensure effective internal controls, reviews board reports, ensures directors are updated on accounting issues, and communicates with external auditors.
What is mandatory for large UK companies regarding climate change?
They must disclose climate risks and opportunities as part of the UK Government’s efforts to reach net-zero by 2050.
