Week 3 Flashcards
1
Q
UK Corporate governance code?
A
- Board of leadership & company purpose
- division of responsibilities
- composition, succession & evaluation
- remuneration
- audit, risk & internal controls
2
Q
5 Principles of board leadership & company purpose?
A
- each company should have an effective board
- the board should ensure resources are in place to meet objectives
- board should establish effective controls to manage risks
- board should encourage shareholders’ input
- Workforce should be able to raise concerns
3
Q
Actions for board leadership & company purpose?
A
- Board should describe how opportunities have been considered & addressed
- board should assess & monitor culture
- board should understand shareholders’ views
- staff should be able to raise concerns anonymously
4
Q
Company structure?
A
Shareholders
Board of directors/chairman
CEO
COO & CFO
5
Q
What is the chair’s role?
A
Leads the board of directors and is responsible for overall effectiveness
Ensure effective contribution of all board members
6
Q
Should the board be balanced?
A
Yes
7
Q
NED?
A
Non-executive directors
8
Q
What must the board ensure?
A
Must ensure it has policies, processes, information, time and resources to function effectively
9
Q
Should the chair be independent?
A
Yes
10
Q
Are the chair & CEO the same people?
A
No
11
Q
Should the board include NED’s?
A
Yes, at least half the board should be NED’s
12
Q
Should one of the independent NED’s be appointed as a senior independent director?
A
Yes
13
Q
What do NED’s do?
A
NED’s should meet with the senior independent director to discuss performance of the chair
NED’s appoint, remove and scrutinise the performance of the executive directors
14
Q
Principels for composition, succession & evaluation?
A
- Appointments to the board should be formal, rigorous, transparent & based on merit
- should be an effective succession plan
- board should have skills, experience & knowledge
- should be an annual evaluation of the board
15
Q
Actions for composition, succession & evaluation?
A
- a nomination committee should be established to appoint board members
- the chair shouldn’t be a member of the committee when dealing with the appointment of their successor
- all directors should be subject to annual re-election
- chair should remain in post for more than 9 years
- open advertising for NED
- rigorous evaluation of the performance of the board annually
16
Q
What should an annual report describe?
A
- The work of the nomination committee in making appointments
- how the board evaluation has been conducted
- diversity & inclusion policy
- gender balance in senior management
17
Q
Principles for remuneration?
A
- Executive remuneration should be designed to promote long term success
- executive remuneration should be consistent with the company purpose and values
- no Director should be involved in determining their own pay
- remuneration policy should be formal and transparent
18
Q
Should NED remuneration include performance related pay?
A
No
19
Q
Should share awards be released on a phased basis?
A
Yes, and should be subject to a vesting & holding period of at least 5 years
20
Q
What type of salary is pensionable?
A
Only basic salary should be pensionable and be aligned with the workforce
21
Q
What is the notice period for remuneration?
A
No more than a year
22
Q
How must directors be paid?
A
Directors pay must be transparent, easy to understand, predictable and proportionate
23
Q
Audit, risk & internal control principles?
A
- board establishes policies & procedures to ensure internal & external audits are independent & effective
- board presents a fair, balanced & understandable assessment of the company’s financial position
- board established procedures to manage risk & oversee internal control framework
- board determines the nature & extent of the risks it’s willing to take to achieve long term objectives
24
Q
Audit, risk & internal control actions?
A
Board should state whether is considers it appropriate to adopt going concern basis of accounting in FSs
Must identify any material uncertainties regarding going concern
Board should explain annual report
Establish audit committee of independent NED’s
Chair shouldn’t be a member of audit committee
Directors must explain responsibility for preparing annual accounts
Board should carry out annual review to assess the effectiveness of internal controls system
25
Audit committee composition?
Minimum of 3 NED’s
1 with financial experiences independent of operational management
26
Audit committee objectives?
Increase public confidence
Provide financial awareness
Strengthen independence
27
Audit committee’s function?
Monitor financial statements
Review controls
Monitor & review internal audit
Monitor independence of external auditors
28
Code of ethics?
Conceptual framework
Fundamental principles
Threats & safeguards
Confidentiality
Conflicts of interest
29
Independence?
Freedom from situations & relationships where objectivity would be perceived to be impaired
30
2 main approaches for conceptual framework?
Rules based
Principle based
31
audit committee = ?
first line of audit
internal audit
32
corporate governance code = ?
good practice guidelines to ensure companies are run well
33
what does the UK corporate governance code consist of?
- board leadership & company purpose
- division of responsibilities
- composition, succession and evaluation
- remuneration
- audit, risk & internal controls
34
what are the principles of board leadership & company purpose?
a company should have an effective board
the board ensures that resources are in place to meet objectives
the board establishes effective controls to manage risks
encourage input from shareholders
workforce can raise concerns
35
what actions represent board leadership & company purpose?
board shoulddescribe in annual report how opportunities & risks have been addressed
board should assess & monitor culture
staff can raise concerns anonymously
board should understand shareholders' views
36
what are the principles of division of responsibilities?
the chair leads the board and is responsible for overall effectiveness
the chair should ensure effective contribution of all board members
the board should be balanced
NED should have enough time to meet their board responsibilities
37
NED's purpose/role?
advisor role to the company
usually very experienced
independent to make uninfluenced decisions on shareholders
38
what actions represent division of responsibilities?
chair should be independent
chair & CEO aren't the same
NED's appoint, remove and scrutinise the performance of the executive directors
one of the independent NED's should be appointed as a senior independent director
NED's and senior independent director meet annually
39
what are the principles of composition, succession & evaluation?
appointments to the board should be formal, rigorous, transparent and based on merit
there should be an effective succession plan
appointments to the board should promote diversity
board should have skills, experience & knowledge
annual evaluation of the board
40
what actions represent composition, succession & evaluation?
a nomination committee established to appoint board members
the chair shouldn't be a member of the committee when dealing with the appointment of their successor
directors should be subject to annual re-election
chair shouldn't remain in post for more than 9 years
open advertising for NED (can't be someone you know)
41
what are the principles of remuneration?
executive remuneration should be designed to promote long term success
executive remuneration should be consistent with the company purpose & values
no director should be involved in determining their own pay
the remuneration policy should be formal and transparent
42
what actions represent remuneration element of corporate governance?
NED remuneration shouldn't include performance related pay (bonuses/shares)
share awards should be released on a phased basis and be subject to a vesting and holding period of at least 5 years
only basic salary should be pensionable and be aligned with the workforce
notice period should be no more than a year
ensure directors pay is transparent, easy to understand, predictable & proportionate
43
what are the principles of the audit, risk & internal control element of corporate governance?
the board should establish policies and procedures to ensure audits are independent & effective
board should present a fair, balanced & understandable assessment of the companies financial position
board should establish procedures to manage risk & oversee the internal control framework
board should determine the nature/extent of risks they're willing to take to achieve long term objectives
44
what actions represent audit, risk and internal control for corporate governance?
board should state whether it considers it appropriate to adopt going concern based on its FS's
must identify any material uncertainties to the company's ability to continue for at least 12 months after the approval of the FS's
board should explain in annual report how it assessed the prospects of the company
board should establish an audit committee of independent NED's with at least 3 members for large companies
chair shouldn't be a member of the audit committee
committee must have sector competence
directors should explain responsibility for preparing annual accounts
annual review should be carried out
45
what are the key elements of the code of ethics?
conceptual framework
fundamental principles
threats & safeguards
confidentiality
conflicts of interest
46
independence?
freedom from situations and relationships where objectivity may be brought into question
for an auditor to be trusted, independence must be ensured
47
what are the two main approaches form conceptual framework?
rules based
principles based
48
rules based conceptual framework?
good - easier to follow
bad - rules need frequent updating and encourages narrow interpretation
49
principles based conceptual framework?
good -
- flexible, can be used in rapidly changing circumstances,
- can be used across boarders,
- accountant uses professional judgement
- requires compliance
conceptual framework uses a principle based approach
50
which approach does conceptual framework use?
principle based
51
fundamental ethical principles?
integrity
objectivity
professional competence & due care
confidentiality
professional behaviour
52
threats to independence & objectivity?
self-interest (financial interest that may influence judgement/behaviour)
self interest can include
- owning shares in a client
- fee dependence
- gifts/hospitality
- employment w/ client
- overdue fees
53
fee dependency's safeguard?
listed clients fees shouldn't exceed 15% for 2 consecutive years
engagement quality control review
54
gifts/hospitality safeguard?
don't accept gifts/hospitality unless minor
55
owning shares' safeguard?
to audit, one mustn't have shares in the relevant party
56
overdue fees' safeguard?
don't perform work until payment has been made
57
business relationships safeguard?
no safeguard can reduce the threat
58
potential employment with audit client safeguard?
firm must be notified, and individual will be removed from the audit
59
contingent fees safeguard?
fees based on level of profits of the company aren't allowed
(performance based fees aren't allowed)
60
compensation/evaluation safeguard?
audit partner can't be evaluated/compensated based on success in selling audit services
61
litigation safeguard?
discuss w/ audit committee
obtain external review
withdraw from assignment
62
familiarity?
the auditor becomes sympathetic to or trusting of a client, and no longer applies professional scepticism
can be caused by long association and personal relationship
63
long association safeguard?
independent review
if not a PLC, rotate audit partner to prevent a relationship being built over time
64
family relationships safeguard?
remove individual from audit team
