KATRINA GRACE C.

ANAPADA
Bachelor of Science in Accountancy
AE 18 – Governance, Business Ethics, Risk Management & Internal Control
BSA 2-1
Module 2: SEC Code of Corporate Governance
July 22, 2021

CHAPTER QUIZ
Assessment Exercises and Questions:
1. Below is a summary of the SEC corporate governance requirements of companies publiclylisted
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 order that no director or small group of directors can dominate the decision-making process the
SEC required corporation to have at least 3 independent directors or 1/3 of the board, to help corporation
minimized existence of fraudulent act inside the corporation. Independent Directors are persons who do
not have direct material relationship with the company, and are not part of their current operations or
business. They can most likely provide a more objective stance in every decision-making situation of the
Board.
b. Boards need to hold regular executive sessions of independent directors without management
present.
It will be easier for the independent directors to deal with more sensitive or confidential matters
without receiving possible deceiving opinions from the management. During executive sessions board
will review the organization’s financial audit. This allows the board to receive unfiltered feedback about
the organization’s financial health and practices, discuss chief executive’s performance review and
compensation, and alleged or actual improper behavior by the chief executive. In my opinion, this
requirement helps in ensuring that the independent directors can openly and freely communicate their
opinions and suggestions to each other. Through these sessions the corporation can identify and prevent
frauds inside the company.
c. Boards must have a corporate governance committee composed at least 3 of independent
directors.
The corporate governance committee exist to assist the board in the performance of its corporate
governance responsibilities. The composition of corporate governance committee will help the company
ensure compliance and proper observation of corporate principles and practices to prevent fraudulent
conducts.
d. The corporate governance committee must have a written charter that addresses the committee’s
purpose and responsibilities, and there must be annual performance evaluation of the committee.
The corporate governance committee must have a written charter that addresses the committee’s
purpose and responsibilities to avoid any overlapping functions with other existing committees in a very
business concern. The Board Charter guides the administrators on the way to discharge their functions. It
provides the standards for evaluating the performance of the Board. The Board Charter also contains the
roles and responsibilities of the Chairman. Disclosure of the standards, process and collective results of
the assessment ensures transparency and allows shareholders and stakeholders to see if the administrators
are performing their responsibilities to the corporate.
e. Boards must have an audit committee with a minimum of three independent members.
SEC required companies publicly listed in the stock exchange to have audit committee to enhance
the board’s oversight capability over the company’s financial reporting, control system, internal and
external audit processes, and compliance with applicable laws and regulations. To make sure that they're
formally and properly doing their duties and responsibilities without bias or conflict of, a minimum of
three independent members, including the chairman is required.
f. The audit committee must have a written charter that addresses the committee’s purpose ad
responsibilities, and the committee must produce an audit committee report; there must also be an
annual performance evaluation of the committee.
The audit committee must have a written charter that contains the description of role of internal
audit as well as the audit plan in order to oversees the implementation of the IA charter. Responsibility on
assessing the integrity and independence of external auditor and exercising oversight to review and
monitor the external auditor’s independence and objectivity and also the effectiveness of the audit process
must also be indicated there in.
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
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.
Obtaining a regular annual report by the external auditor helps in addressing or preventing the
danger of fraud in publicly traded organizations. The report by the external auditor addresses condition of
the company’s control procedures additionally as problems in regulations and internal control, this is
often done to cope with the potential conflict of interests. Doing an external audit will provides validity of
information and might discover errors and fraudulent acts inside the company.

b. Discussing the company’s financial statements with management and the external auditor.
It is important to discuss financial statement with the management and internal control to observe
and facilitate compliance with applicable laws, rules and regulations. The information the statements
provide offers benchmarks and feedback that help the company make minor adjustments and also
determine its overall direction. This helps address the possibility of fraud in publicly traded organizations
because it discusses if there are errors or misstatements within the company’s financial statements,
furthermore because the assurances if the financial information stated are correct and unbiased.
c. Discussing in its meetings the company’s earnings press releases, as well as financial information
and earnings guidance provided to analysts.
The earnings guidance is important information delivered to the company’s shareholders, market
analysts, and potential investors. The information is disclosed in the company’s quarterly and annual
reports. The information to be provided to the company’s shareholder point out the financial leads to a
given period, yet as insights about the financial performance of the corporate. This helps address the
chance of fraud in publicly traded organization because the financial analyst will be giving his
professional analysis in the given financial information regarding the company’s earnings.
d. Discussing in its meetings policies with respect to risk assessment and risk management.
Doing this will help address the chance of fraud in publicly traded organizations because it
ensures proper risk assessment and risk management. The purpose of the risk management policy is to
provide guidance regarding the management of risk to support the achievement of corporate objectives,
protect staff and business assets and ensure financial sustainability. Discussing these policies regarding
assessment and risk management which affects the profitability of the corporate can identifying possible
risks, problems, or disasters before they happen and enables the corporate to line up procedures to avoid
the chance or minimize its impact to the concern.
e. Meeting separately with management, internal auditors, and the external auditor on a periodic
basis.
This is to confirm that the management discloses within the financial reports the proper financial
information and also the significant findings that encompasses a significant impact to the corporate. This
helps address the danger of fraud in publicly traded organization because the management, internal and
external auditors are discussing the company’s financial statements and every one the financial
information it comprised. Also, to discuss any matters that the committee or internal audit believes should
be discussed privately.

f. Reviewing with the external auditor any audit problems or difficulties that they had with
management.
Reviewing the audit problems, they had with management can make sure the integrity of the
external auditor in his line of labor within the company. This address concerns of audit problems or
difficulties wherein the management may have a problem regarding cooperation or compliance with the
applicable laws, rules and regulations.
g. Setting clear hiring policies for employees or former employees of the external auditors.
This is required by all applicable laws to formally set hiring policies regarding employees of the
external auditor. Employees must have a major background during this line of labor and must meet the
necessities of applicable law and listing standards, to confirm that they're the proper employees of the
external auditor which will participate within the capacity of auditing work. If clear hiring policies for
employees is followed accordingly, organizations can guarantee reliability from its employee, the risk of
fraud can be address beforehand.
h. Reporting regularly to the board of directors.
Making a regular report to the board of directors is necessary because audit committee has direct
relationship with the board, they need to discuss audit plans, audit findings and other items of audit which
are held significant that contains a direct impact within the business. The audit committee is responsible
in overseeing financial reporting and related matters which will be reported to the board of directors to
make sure the effectiveness of the entity’s control and risk management systems.
3. Assume that the management had determined that its organization’s audit committee is not
effective. How do the weaknesses in audit committee affect management’s evaluation of internal
control over financial reporting? Would an ineffective audit committee constitute a material
weakness in internal control over financial reporting? Stat the rationale for your response.
 Yes. If the audit committee is ineffective, this can affect the company’s performance. Audit
committee has direct relationship with the board so they will be the first to be affected, and later on it will
affect the shareholders due to the ineffectiveness of the audit committee. Audit committee is the one in
charge of monitoring the discretion of accounting policies and principles which are practiced within the
enterprise, likewise as performance, standards in hiring, and ensuring absolute independence of the
external auditors. They are accountable in overseeing the financial reporting and disclosure processes of
the company’s financial information. The control and risk management won't be properly addressed
which result in a major loss within the resources of the corporation. An ineffective audit committee will
greatly affect the business organization’s performance and status because it will result to material
weakness or material misstatements within the company’s financial statements.
4. Why is there a need for a corporation to maintain a comprehensive and cost-efficient
communication channels to shareholders and other investors?
Maintaining a comprehensive and cost-efficient communication channels to shareholders and
other investors is important to keep them informed in the decision-making processes and to maintain
investor motivation and relationship which are held essential for the company. Relevant information must
be disseminated in a well-organized channel to its intended users for reporting.
The information must also be timely and up to date. The objectives of communicating with shareholders
are to increase awareness of the company within the investment community, ensure that key messages are
delivered consistently, and ultimately, facilitate the availability of capital at a lower cost. Effective
stockholder communication plans allow companies to exercise greater control over the capital formation
process.

5. What is the objective of the company in having a, strong and effective internal control system?
Having strong and effective internal control system will keep the company healthy to achieve
their company’s objectives. Right internal control system will protect the business physical and financial
assets from fraud. It will also maintain the validity credibility of financial information. A strong internal
control environment can foster efficiency through automation of manual control and removing
unnecessary processes.
6. What is the purpose of having an independent internal audit function in a publicly-listed
corporation?
Independent auditors can provide assurance in a business organization risk management,
corporate governance, and control processes. Independent auditors have a mandate to guard shareholders
and potential investors form a public company’s possible fraud and accounting improprieties. The
company’s managers can use the results of an independent audit to boost company’s processes.
7. To what may the shareholders right relate?
Shareholder’s right relates to contractual relations and through voluntary commitments respected
by the corporation in accordance by the law. Shareholders exercise their power at meetings, typically
through voting for directors. The company’s shareholders play a role in its growth and long-term
viability. Shareholders may view corporate documents with proper demand and a proper purpose. A
shareholder may also file suit on behalf of the corporation—a legal proceeding called a derivative action.
8. What factors have driven the demand for sustainability reporting?
Sustainability reporting is driven by sustainable issues surrounding the company. These issues
including resource scarcity, globalization, and access to information continue to increase and impacts the
company’s long-term viability and competitiveness. Organization need to provide tangible, credible
demonstrations of their level of sustainability, by having sustainability reporting and disclosures of non-
financial information.
9. Why is there a demand for independent assurance on sustainability reporting?
Sustainability reporting can help organizations measure, understand and communicate their
economic, environmental, social and governance performance, and then set goals, and manage change
more effectively. With independent assurance on sustainability reporting organizations build trust among
customers and all the stakeholders, which in turn directly impacts the bottom lines. Transparency is a
currency which builds trust and trust is what build businesses that is why there should always assurance in
every sustainable reporting.
10. Is it unethical for a company to provide sustainability report, but provide no assurance on the
reliability of the information contained therein?
Providing sustainability report without assurance of reliability of the information is not unethical.
Rather, it is a matter of corporate reporting decision. There are companies who want to provide assurance
on their sustainability report for greater credibility, and some decide to provide limited assurance or no
assurance at all. However, if the organization is aware of that they are providing false information at the
first place that would be unethical.
References:

https://saylordotorg.github.io/text_foundations-of-business-law-and-the-legal-environment/s26-02-
rights-of-shareholders.html

https://info.knowledgeleader.com/communicating-with-shareholders-what-you-need-to-know
https://corporatefinanceinstitute.com/resources/knowledge/finance/earnings-guidance/
https://yourbusiness.azcentral.com/importance-companys-financial-statements-11007.html
https://www.coursehero.com/file/80963217/QUIZdocx/
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https://www.studocu.com/ph/document/notre-dame-university/basic-accounting/chapter-3-review-
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https://info.knowledgeleader.com/communicating-with-shareholders-what-you-need-to-know
https://saylordotorg.github.io/text_foundations-of-business-law-and-the-legal-environment/s26-02-rights-
of-shareholders.html