Chapter 3 – Ethics and corporate governance
TRUE/FALSE
1. Deontologists judge the moral correctness of actions by only looking at the consequences of such
actions.
2. For accountants to use judgement in providing advice would be unethical.
3. It is ethical for an accountant to minimise the amount of tax his client is required to pay.
4. Effective corporate governance may reduce agency costs.
5. Corporate governance is a new phenomenon that has grown out of recent corporate collapses.
6. A company is classified as a separate legal entity, which often gives rise to a separation of powers,
which in turn is a primary reason for ensuring there are effective corporate governance systems in
place.
7. The appointment of an audit committee is an example of internal corporate governance, whereas
the ability of one company to take over another is an example of external corporate governance.
8. Good governance is only relevant to the for-profit sector, not the not-for-profit sector.
9. Corporate governance includes mechanisms, such as the board of directors, which exist to provide
some assurance to equity investors that the management of a company is being held accountable
for their actions, thus minimising agency costs.
10. The ASX principles and recommendations are mandatory on the top 200 listed companies.
11. The role of the board of directors is to represent shareholders and debtholders.
12. An audit committee is a sub-committee of the board of directors, and part of the corporate
governance structure of a company.
13. The major thrust for the creation of an audit committee is to add credibility to the financial
reporting process.
14. Australian regulation requires the automatic rotation of the lead audit partner every seven years.
MULTIPLE CHOICE
1. According to Josephson (1992), characteristics of an ethical person include:
A.
honesty, caring and listening to clients’ orders.
B.
promise-keeping, not listening to client’s orders and respectfulness.
C.
loyalty, fairness and caring.
D.
honesty, coolness and being smart.
2. According to Josephson (1992), people do not behave in an ethical manner because of:
A.
faulty reasoning and loyalty.
B.
self-righteousness and greed.
C.
self-deception and fidelity.
D.
self-protection and faulty reasoning.
3. In a utilitarian ethical framework, moral correctness is based on the premise that:
A.
the underlying nature of an action determines its correctness.
B.
the consequences of an action determine its correctness.
C.
the nature of an action and its consequences determines its correctness.
D.
all of the above are correct.
4. Ethical behaviour in business will be achieved if:
A.
the strict letter of the law is applied.
B.
a course in ethics is undertaken.
C.
judgement is used, based on rules and morals.
D.
None of the above is correct.
5. Which of the following factors could weaken corporate governance?
A.
The appointment of independent directors to the audit committee
B.
Stipulating the maximum number of directorships a director can commit to
C.
Ensuring continuity of all directors over a long period to enhance familiarity with the
company’s policies and procedures
D.
Ensuring the CEO is not the chairman of the board of directors
6. Which of the following is considered to be an example of good corporate governance according to
the ASX principles?
A.
The appointment of a board of directors consisting of the company CEO, three company
executives and one independent director.
B.
The appointment of an audit committee consisting of the audit partner and an independent
auditor, and the company CEO and one company director.
C.
A board of directors that has intimate knowledge of the company’s activities since their
appointment 10 years ago when the company was formed.
D.
Rotating the lead external audit partner every five years.
7. Which of the following statements is incorrect?
A.
Corporate governance can provide assurances that management is accountable for their
actions.
B.
The external auditor is responsible for the preparation of a company’s financial statements.
C.
Audit committees are now compulsory for the top 500 companies.
D.
An audit committee may be responsible for reviewing policies on internal control
procedures.
8. Which of the following would not be considered a function of an audit committee?
A.
The responsibility for appointing the members of the committee
B.
Overseeing the appointment of the internal auditor
C.
Overseeing the appointment of the external auditor
D.
Overseeing a company’s risk management practices
9. Which of the following statements regarding audit committees is incorrect?
A.
Audit committees review internal control procedures.
B.
Audit committees oversee the appointment and relationship of the external auditor.
C.
Audit committees oversee the appointment of the internal and external auditors.
D.
Audit committee members must be employees of the company.
10. Corporate governance:
A.
refers to the governance of not-for-profit entities.
B.
is concerned with promoting corporate fairness, transparency and accountability.
C.
is a recent phenomenon in the conduct of company affairs.
D.
will improve the company’s financial performance.
11. Which of the following recommendations are not associated with the principles of good corporate
governance issued by the ASX Corporate Governance Council?
A.
A board of directors should have a majority of independent directors.
B.
The CEO should not be the chairman.
C.
There should be a separate nominations and remuneration committee for directors.
D.
All audit committee members should be accountants.
12. The fundamental characteristic of the corporate form of business organisation that gives rise to the
need for governance mechanisms is:
A.
the separation of ownership and control.
B.
mutual agency.
C.
the lack of separation of ownership and control.
D.
the abuses by professional managers.
13. External corporate governance refers to:
A.
the board of directors.
B.
the audit committee.
C.
the discipline of the market place.
D.
triple bottom line reporting.
14. ASX Ltd needs to appoint a new director from 1 January 20X7. Which of the following persons
would meet the requirements for an independent director in accordance with the ASX principles?
A.
John who holds substantial shares in the company.
B.
Jill who is a major supplier of office supplies to the company.
C.
Jordan who was an employee of the company up until 31 December 20X5.
D.
Bill who was the auditor for the company from 1 January 19X7 until 31 December 20X3.
15. The majority of studies on board composition and firm performance and risk show that an increase
in the number of independent directors on a board will:
A.
reduce the financial performance of a form.
B.
increase the financial performance of a firm.
C.
have no impact on the financial performance of a firm.
D.
increase the risk of a firm.
SHORT ANSWER
1. Explain what is meant by the term ‘corporate governance’.
2. Describe the nature and general role of an audit committee.
CASE
1. In October 2002, Duke Power, the regulated electricity utility of the United States (US)
corporation Duke Energy, agreed to pay $25 million to its customers to settle allegations by
regulators in North and South Carolina that it had underreported net earnings by about $123
million between 1998 and 2002. The underreporting of net earnings by Duke Energy was allegedly
undertaken in order to avoid having to cut its electricity rates.
Required:
Evaluate the actions of Duke Energy’s management, which lead to the underreporting of net
earnings described in case study 1 above, from the perspective of ethical behaviour.
ESSAY
1. Discuss the role of the board of directors in Australia and the key issues discussed in the literature
about the board of directors impacting its effectiveness.