CC 1 - Underpinning concepts of corporate governance

1. a
2. b
3. b
4. a
5. d
6. a
7. a
8. b
9. a
10. a
11. Transparency
Define transparency
Transparency is usually defined in terms of openness and adopting a default position of
information provision rather than concealment.
This means that unless there is an overwhelming reason not to disclose information of any kind
(perhaps for reasons of commercial sensitivity) then information should be disclosed or made
available upon request to any interested stakeholder.
The case for greater transparency at HHO
Transparency is an important principle in corporate governance, including at HHO, for a number
of reasons. In general, transparency has the effect of reassuring investors that their funds are
being responsibly stewarded and used for worthwhile investments.
In the case of a charity, such as HHO, without shareholders in the conventional sense, donors
give money to support the charitys stated aims and purposes. With the relief of suffering to
animals being a prominent reason any donors give to HHO, the amount of money diverted for
other purposes, such as salaries, would be information of considerable interest.
There are a number of potentially damaging allegations made against Mr Hoi including the
likelihood of large payments to himself and some profligacy in the purchase of the private jet.
These allegations could be rebutted if the organisation were to make the accounts public and
explain the case for the purchase of the jet. For a charity receiving money from well-meaning
individuals that care greatly about animal suffering, the allegations have the potential to do
much reputational damage to the charity.
The publication of the financial data is an inadequate expression of transparency and appears
to be a poor attempt to give the appearance of providing information whilst providing no useful

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detail at all. This would not meet any stakeholders information needs and fails to address any
of the concerns raised about HHO.
It does not give any absolute financial figures, for example, in terms of income and costs. Such
a truncated summary actually gives the impression, to any informed observer, of an attempt at
concealment and this provides a strong reason to provide a full financial statement.
12. True
13. B, C
14. A
15. A
16. A, B
17.

Patients quality of healthcare, price for healthcare;

Doctors (employees) job security, wages and remuneration

Government and local bodies healthcare is one of public interest, private actors are
under strong regulations and controls

Tax authority compliance with tax legislation, taxes paid in time

Shareholders/Owners profit, share price

18. A

This familiarity threat should be declared to the client at the outset and it may disqualify
the Audit partner from acting as audit partner on the Clients account.
19. C
20. B
Both Sarbanes-Oxley and the Smith Guidance (contained in the UK Combined Code), for
example, specify auditor rotation to avoid association threat.
One of the threats to independence identified between Arthur Andersen and Enron after the
Enron collapse was an over-dependence on Enron by Andersen arising from the provision
of several services to the same client.
21. B
Good practice is not to offer additional services to audit clients to avoid the appearance of
compromised independence. Some corporate governance codes formally prohibit this.
22. B

23. B
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24. A
25. D
26. A
If the director is elected for 1 year (instead of 3 years) and is under-performing, a board doesn't
need to pay for under-performing director to remain in post (for 3 years), with possible damage
to the company as a result, or by paying out severance costs, they can simply decide not to reelect them at the end of the one-year service contract.
27. A
28. A
29. B
30. A
31. B
32a. B
32b. B

33.
Integrity
The IFAC code of ethics explains integrity as follows:
The principle of integrity imposes an obligation on all professional accountants to be
straightforward and honest in professional and business relationships.
Integrity also implies fair dealing and truthfulness.
Integrity is an adherence to ethical standards despite any other pressures to act otherwise.
Integrity describes the personal ethical position of the highest standards of professionalism
and probity.

In terms of professional relationships, integrity is important for the following reasons:

It provides assurance to colleagues of good intentions and truthfulness.
For auditors such as Potto Sinter, integrity means not only observing the highest standards
of professional behaviour but also maintaining the appearance of integrity to his own staff
and also to the client.
It reduces time and energy spent in monitoring when integrity and openness can be
assumed. Costs will be incurred by Miller Dundas if colleagues feel that Potto Sinter is
untrustworthy.

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John Wangs professional relationship with Potto is very important to Miller Dundas. It is
important, therefore, that Potto has personal integrity.
34. D
35. A
36. B, C, D,F
37. A
38. B
39. B
40. A, B. C
41. A
42. B
43. A
The shortening of service contracts from three years to one year may result in greater
accountability for the following reasons:
It will enable shareholders to remove under-performing directors much more quickly and to
impose their will upon a board with less delay than previously.
Rather than paying for under-performing directors to remain in post, with possible damage to
the company as a result, or by paying out severance costs, they can simply decide not to reelect them at the end of theone-year service contract.
44. a) A; b) B
45.
Accountability and provisions resulting in greater accountability.
Accountability
Boards of directors are accountable to the shareholders of the company.
This means they are answerable to them in that they can be called to give an account for
their behaviour and actions as agents of the shareholders.
In the context of the code, it is recognised that boards do not always fully reflect the wishes
and needs of shareholders and this can represent a failure of accounting from the board to
the shareholders.
The measures proposed aim to close that gap and make it less likely that unqualified or illequipped people will be appointed to, or remain on, the board.

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Resulting in greater accountability

Corporate governance codes have had provisions for the retirement of directors by rotation
for some time.
This is when a fixed period of time is set for directorships, after which the default position is
that the director retires or leaves the service of the company unless actively re-elected by
the shareholders to serve another term in office.
Enhancing accountability to shareholders is a key objective of any corporate governance
code.
The shortening of service contracts from three years to one year may result in greater
accountability for the following reasons:
It will enable shareholders to remove under-performing directors much more quickly and to
impose their will upon a board with less delay than previously. Rather than paying for underperforming directors to remain in post, with possible damage to the company as a result, or
by paying out severance costs, they can simply decide not to re-elect them at the end of the
one-year service contract.
It will enable shareholders to rebalance or refresh a board in the light of environmental
changes or changes in strategy, rather than waiting for a period of time for the three-year
terms of previously re-elected directors to elapse.
This would make the company more responsive to the wishes of shareholders and reduce
the feeling that any director has a right to be on the board at any point.
However, a shorter period may leave the board under greater pressure to demonstrate short
term success and that could be at the expense of longer term prosperity.
The availability of biographical details will enable shareholders to clearly see the experience
of a candidate and decide for themselves whether they are likely to add value at a given
point.
The effect of this will be to act as a check and balance against vested interests that may
exist between and among directors.
It also places a responsibility upon candidates seeking election or re-election to a board to
actively demonstrate their suitability rather than just expecting it as an entitlement.
46. B
47. B
48. A, B, D
49. A
50. A
51. A

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52.
Transparency
Transparency is an important concept of corporate governance that promotes open and clear
disclosure, including voluntary disclosure of reliable information.
To be transparent, the company should:

should disclose all relevant information in the financial reports

shouldn't hide information which may materially affect others

If the company discloses material information, it underpins investors confidence.

Given the information provided in the case, Xaxa cannot be fairly criticised for a lack of
transparency. There was no attempt to hide the reasons why Xaxa had remained in the
baby food business, with the chief executive saying that it was a profitable business
opportunity and that he owed it to the shareholders to maximise their return.

Judgement
Judgement means making complex decisions that enhance the organisations prosperity.
A process used to reach a well-reasoned conclusion that is based on the relevant facts and
circumstances available at the time of the conclusion is called Professional judgement.
It is clear from the case that the Xaxa board strongly discounted any ethical consideration in
reaching its judgement in remaining in the baby food market in developing countries.
When the other two companies named in Killer Companies judged that it was safer to
withdraw from the market, Xaxa reached the opposite conclusion and this says something
significant about the boards judgement.
Some will conclude that the Xaxa board has demonstrated poor judgement on this issue.

53. A
54. B
55. B
56. F
57. A

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