MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
29) Which of the following was not a finding of the Cadbury Commission?
A) Audit and compensation committees should be made up entirely of independent directors or, at least,
have a majority of them.
B) Auditors should be rotated, and there should be fuller disclosure of non–audit work.
C) The CEO should not be chairman of the board, and at the very least there should be a lead independent
director with similar agenda–setting powers.
D) The CEO and the CFO should personally attest to the accuracy of the financial statements presented to
shareholders.
30) The Sarbanes–Oxley Act requires all of the following except?
A) That audit partners rotate every five years to limit the likelihood that auditing relationships become too
cozy over long periods of time.
B) Strict limits on the amount of non–audit fees (consulting or otherwise) that an accounting firm can earn
from the same firm that it audits.
C) That senior management and the boards of public companies to be comfortable enough with the
process through which funds are allocated and controlled, and outcomes monitored throughout the
firm, to be willing to attest to their effectiveness and validity.
D) The Auditor must personally attest to the accuracy of the financial statements presented to
shareholders and to sign a statement to that effect.
31) While the Sarbanes–Oxley Act (SOX) contains many provisions, the overall intent of the legislation was to
improve the accuracy of information given to both boards and to shareholders. SOX attempted to achieve
this goal in all of the following ways except?
A) Overhauling incentives and independence in the auditing process
B) Mandating the separation of the positions of CEO and Chairman of the Board
C) Stiffening penalties for providing false information
D) Forcing companies to validate their internal financial control processes
32) Which of the following statements is false?
A) The Cadbury Commission stiffened the criminal penalties for providing false information to
shareholders.
B) The Exchange Acts of 1933 and 1934, among other things, established the Securities and Exchange
Commission (SEC) and prohibited trading on private information gained as an insider of a firm.
C) Many of the problems at Enron, WorldCom, and elsewhere were kept hidden from boards and
shareholders until it was too late. In the wake of these scandals, many people felt that the accounting
statements of these companies, while often remaining true to the letter of GAAP, did not present an
accurate picture of the financial health of a company.
D) While one study found that those firms that separated the position of CEO and chairman performed
better, another found no relation between the independence of key board committees and firm
performance in the post–Cadbury era.
33) Which of the following statements regarding auditors is false?
A) Most auditors have a longstanding relationship with their audit clients; this extended relationship and
the auditors’ desire to keep the lucrative auditing fees makes auditors less willing to challenge
management.
B) Most accounting firms have developed large and extremely profitable consulting divisions. Obviously,
if an audit team refuses to accommodate a request by a client’s management, that client will be less
likely to choose the accounting firm’s consulting division for its next consulting contract.
C) Auditing firms are supposed to ensure that a company’s financial statements accurately reflect the
financial state of the firm.
D) In the post Sarbanes–Oxley world, accounting firms are no longer allowed to offer both audit and non
audit services to the same firm.
34) Which of the following statements regarding auditors is false?
A) The Sarbanes–Oxley Act called on the SEC to force companies to have audit committees that are
dominated by outside directors and required that at least one outside director have a financial
background.
B) Whether information is material has been defined in the courts as referring to whether the information
would have been a significant factor in an investor’s decision about the value of the security.
C) CEOs and CFOs must return bonuses or profits from the sale of stock or the exercise of options during
any period covered by statements that are later restated.
D) The law is especially strict with regard to takeover announcements, prohibiting any insider with
nonpublic information about a pending or ongoing tender offer from trading on that information or
revealing it to someone who is likely to trade on it.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
35) Describe the main requirements of the Sarbanes–Oxley Act of 2002.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
36) Which of the following statements is false?
A) In many other countries, the central conflict is between what are called “controlling shareholders” and
“minority shareholders.”
B) Controlling shareholders can make decisions that benefit them disproportionately relative to the
minority shareholders, such as employing family members rather than the most talented managers or
establishing contracts favorable to other family controlled firms.
C) As recent events and corporate scandals have shown, investor protection in the United States is
generally seen as substandard when compared to the developed economies in the world.
D) Much of the focus in the United States is on the agency conflict between shareholders, who own the
majority of a firm but are a dispersed group, and managers, who own little of the firm and must be
monitored.
37) Which of the following statements is false?
A) The United States is somewhat of an exception, in that it focuses solely on maximizing shareholder
welfare.
B) A controlling family has many opportunities to expropriate minority shareholders in a pyramid
structure.
C) One way for families to gain control over firms even when they do not own more than half the shares is
to issue dual class shares—a scenario in which companies have more than one class of shares and one
class has superior voting rights over the other class.
D) Researchers have claimed that the degree of investor protection was largely determined by the legal
origin of the country—specifically, whether its legal system was based on British common law (less
protection) or French, German, and Scandinavian civil law (more protection).
38) Which of the following statements is false?
A) Controlling shareholders pay for their control rights because the firm effectively faces a higher cost of
equity for outside capital.
B) Most countries follow what is called the stakeholder model, giving explicit consideration to other
stakeholders—in particular, rank–and–file employees.
C) In a pyramid structure, a family first creates a company in which it owns more than 50% of the shares
and therefore has a controlling interest.
D) A conflict of interest arises because the family has an incentive to try to move profits (and hence
dividends) down the pyramid—that is, toward companies in which it has few cash flow rights and
away firms in which it has more cash flow rights.
39) Examples of cross–holdings include:
I. Japanese keiretsu
II. German Gruppe
III. Australian foundations
IV. Korean chaebol
A) I, II, and IV
B) I, II, and III
C) I and IV
D) All of the above are examples of cross–holdings.
40) Which of the following countries has employees appoint some board members?
A) Canada
B) the United States
C) Turkey
D) Germany
41) Which of the following are NOT ways in which individuals or families can gain control over firms, even
when they don’t own more than half the shares?
A) Dual class shares
B) Pyramid structures
C) The stakeholder model
D) All of the above are ways in which individuals or families can gain control over firms, even when they
don’t own more than half the shares.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
42) How does a pyramid structure work?
43) Describe the “stakeholder” model of corporate governance.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
44) Which of the following statements is false?
A) It is important to keep in mind that good governance is value enhancing and so, in principle, is
something investors in the firm should strive for.
B) Corporate governance is a system of checks and balances that trades off costs and benefits.
C) Because good governance is based upon a basic set of principles, like those detailed in the Cadbury
Commission’s findings, one should expect all firms to display similar governance structures.
D) The costs and benefits of a corporate governance system also depend on cultural norms.
45) The costs and benefits of a corporate governance structure
A) are the same in all countries.
B) are the same for all companies within a country.
C) depend on cultural norms.
D) are not important in maximizing shareholder wealth.
46) Having a founder and top executive also be a major shareholder
A) always results in agency conflicts that are bad for minority shareholders.
B) can sometimes, as in the case of Google, have benefits that outweigh the costs.
C) is illegal in the U.S. and most other industrialized countries.
D) is never beneficial to employees.
