Corporate Governance, Business Ethics, Risk Management and Internal Control

CHAPTER 3
REVIEW QUESTIONS

Multiple Choice:
1. A.
2. B

Exercise 1
Below is a summary of the SEC corporate governance requirements of companies publicly-listed
in the stock exchange. For each requirement, state how it is intended to help to address the risk of
fraud in publicly traded organizations.
a. Boards need to consist of at least 3 independent directors or 1/3 of the board which is
higher.
In general context, having independent directors will severely affect the
company’s improvement and growth for success. Their characteristics of having fair
independent judgements and decision-making skills are needed. Furthermore, they could
formulate brilliant ideas for the company that can result in higher effectiveness and
overall efficiency.

b. Boards need to hold regular executive sessions of independent directors without

management present.
With the use of the session, those independent directors can freely communicate
and exchange information themselves. Moreover, with these meetings, directors
can assess the company’s current state while addressing issues and planning for
future ends or goals.

c. Boards must have a / corporate governance committee composed at least 3 of

independent directors.
 Having three independent director will regulate and ensure that the board
members are working effectively and efficiently. This was another way of
avoiding unfairness and biases in their work.

d. The corporate governance committee must have a written charter that addresses the
committee’s purpose and responsibilities, there must be annual performance evaluation of
the committee.
With the use of this corporate policies, this will safeguard the organization’s
goodwill and reputation. It will serve as the foundation that a company can adhere
to and to help them attain their missions and visions. By having written charters
and annual performance evaluations, a company will be guided by the company
course and what actions it will take in the future.

e. Boards must have an audit committee with a minimum of three independent members.
Possessing at least three audit committee will help achieve a fair and less omitted
errors on the audits of the company. It will also help in providing an unbiased
internal and external audits of the company.

f. The audit committee must have a written charter that addresses the committee’s purpose
and responsibilities, and the committee must produce an audit committee report; there
must also be an annual performance evaluation of the committee.
This will make certain that the auditing committee will comply to rules and
regulations as well as properly statement of the audit reports. Annual performance
evaluation will determine on how the company should improve and manage its
audit committee to perform better.

Exercise 2
Below is a summary of the SEC listing requirements for audit committee responsibilities of
companies listed on this stock exchange. For each requirement, state how it is intended to help to
address the risk of fraud in publicly traded organizations.
a. Obtaining each year a report by the external auditor that addresses the company’s internal
control procedures, any quality control or regulatory problems, and any relationships that
might threaten the independence of the external auditor.
This requirement is to make sure that company is abiding or following to the
regulatory standards and to avoid arising of conflicts. The external auditor will be
able to detect if the company made such violations.

b. Discussing the company’s financial statements with management and the external auditor.
This is to ensure that the company’s financial statements are not fabricated. That
it doesn’t make a mistake or have deliberately made an error. It also helps ensure
the integrity of each members of the company.

c. Discussing in its meetings the company’s earnings press releases, as well as financial
information and earnings guidance provided to analysts.
This is done for the sake of clean and transparent operations as well as, to be able
to handle the earning and financial information of the company.

d. Discussing in its meetings policies with respect to risk assessment and risk management.
Precautionary measures are set to avoid large scale loss and must be followed
when problem occurs. As we all know, unforeseen events may cause great deal of
loss and very much risky to the company and to its people working for it.
Therefore, it is necessary to discuss risk assessment and how to manage risk.

e. Meeting separately with management, internal auditors, and the external auditor on a
period basis.
This requirement is necessary for the company to avoid deliberation of fraud
amongst the members above. This is also for them to be able to do their
profession more efficient and effective with integrity.

f. Reviewing with the external auditor any audit problems or difficulties that they had with
management.
 This is to make sure that if the audit reports have already issued, possible
complications will immediately be eliminated and avoided. This also make sure
that arising problems that has much complications will be avoided.

g. Setting clear hiring policies for employees or former employees of the external auditors.
This requirement enables those potential employees to be guided according to
what the company established. For quality performance and highest efficiency
possible, hiring select qualified employees will provide their best in an honest and
dignified manner.

h. Reporting regularly to the board of directors.

Generally, the board of directors have the executive power to run the company
into its proper course. By doing that, they will be needing information from the
lower departments to analyse and to make sound decisions for the internal and
external controls of the company. This will also help to improve their qualities as
a company as well as managing risks and running the corporate entity.