Solutions Manual – Corporate Governance, Business Ethics, Risk Management and Internal Control

CHAPTER 4

SEC CODE OF CORPORATE GOVERNANCE, CONTINUED

Answer to Questions

1. If an audit committee has weak directors with little financial knowledge

and inadequate independence, management would have to consider that
to be a control deficiency. Professional guidance indicates that
ineffective oversight by the audit committee would likely indicate the
presence of a material weakness in internal control over financial
reporting, as it indicates that an essential part of internal control may be
lacking. Enron, WorldCom, and Tyco all had ineffective boards of
directors, and it would be difficult to argue that those boards did not
constitute material weakness in internal control.

2. To ensure that timely and accurate dissemination of public, material and

relevant information to its shareholders and other investors to enable
them to make informed decision-making.

3. To ensure the integrity, transparency and proper governance in the

conduct of its affairs. Refer to the explanation of recommendation 12.1.

4. Refer to the explanation of Recommendation 12.2.

5. Refer to the explanation of Recommendation 12.3.

6. Refer to the explanation of Recommendation 12.4.

7. Refer to the explanation of Recommendation 13.1.

8. Refer to the explanation of Recommendation 15.1 and 15.2.

9. True

10. True
11. Non-financial reporting is the “practice of measuring, disclosing and
being accountable to internal and external stakeholders for organizational
performance towards the goal of sustainable development.” Corporate
social responsibility reporting is the “continuing commitment by
business to behave ethically and contribute to economic development
while improving the quality of life of the workforce, their families, the
local community and society at large.” Triple bottom-line reporting is the
“reporting on financial, environmental and social performance.” These
three terms are commonly used to describe what we define as
sustainability reporting, i.e., the voluntary corporate disclosures about
sustainability initiatives, plans and associated outcomes.

12. Factors that have driven the demand for sustainability reporting include
investor interest, socially responsible investment funds, and the Dow
Jones Sustainability Index.

13. There is a demand for independent assurance on sustainability reporting

because such assurance enhances the credibility of the reported
information. Ad this might be information that management would have
incentive for misstating.

The Global Reporting Initiative (GRI) Reporting Framework states that

external assurance over sustainability reports should:

 Be conducted by those with competence in the subject matter and

assurance practices
 Be performed in a systematic manner that is evidence-based and
includes adequate documentation
 Assess whether the sustainability report is reasonable, balanced, and
appropriately inclusive
 Be issued by individuals or organizations that are independent of the
company issuing the sustainability report
 Assess the extent to which the report preparer has applied the
GRIReporting Framework in reaching its conclusions
 Report result in a report that is publicly available, written in form,
and that states the relationship between the preparer of the report and
the issuer of the report

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14. It is not unethical for a company to provide a sustainability report, but to
provide no assurance on the reliability of the information contained
therein. Rather, this is simply a corporate reporting decision. Some
companies want to provide reasonable (high) assurance on their
sustainability reports to lend them greater credibility. In contrast, some
companies choose to make only limited assurance, or to provide no
assurance at all. The only thing that would be unethical would be for a
company to knowingly provide false information in its sustainability
reports, but this is a separate issue from that of assurance provision.