CHAPTER 4

“SEC CODE OF CORPORATE GOVERNANCE, CONTINUED”

QUESTIONS:
1. Assume that 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?
State the rationale for your response.
Audit committee is responsible in overseeing the financial reporting and disclosure
processes. They are in charge in monitoring the choice of accounting policies and
principles which are practiced in the business organization, as well as performance,
standards in hiring, and ensuring absolute independence of the external auditors. If the

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audit committee is ineffective in its line of work, this will affect the company’s

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performance in general, it will first affect the performance of the board of directors as it

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has a direct relationship with the board, and in turn will also affect the shareholders
caused by the ineffectiveness of the audit committee. Internal control and risk

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management will not be properly addressed which means a huge loss in the resources of
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the company. An ineffective audit committee will greatly affect the business
organization’s performance and financial condition as it will result to material weakness
or material misstatements in the company’s financial statements.
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2. Why is there a need for a corporation to maintain a comprehensive and cost-efficient

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communication channels to shareholders and other investors?

There is a need for a corporation to maintain a comprehensive and cost-efficient
communication channels to shareholders and other investors to keep them informed in
the decision-making processes and to maintain investor motivation and relationship
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which are held essential for the company. It is important that relevant information is
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disseminated to its intended users in a well-organized channel for reporting. The

medium must be well-organized so it can provide timely and up-to-date information to
the shareholders and other investors.
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3. What is the objective of the company in having a strong and effective internal control
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system?
A strong and effective internal control system ensures ethical and efficient functioning of
the company’s operations, financial reporting, and compliance. It aids business
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organizations in loss prevention and the practice of the right business procedures, it also
aids in the accurate reporting of financial information, identification of problems and its
solutions, as well as preventions acting as measures for the future, and it also aids in
ensuring that the company is complying with all the applicable internal and external
rules and regulations.

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 4. What is the purpose of having an independent internal audit function in a publicly-
listed corporation?
The purpose of having an independent internal audit function in a publicly-listed
corporation is to provide independent assurance in a business organization’s risk
management, corporate governance, and internal control processes. Internal auditors
operate independently rendering impartial and unbiased judgement, avoiding conflict of
interest situations to perform their duties in an unbiased attitude, all while maintaining
their neutrality.

5. Give at least four (4) responsibilities of the chief audit executive.

The CAE’s responsibilities include;
a. Periodically reviews the internal audit charter and presents it to senior management
and the board of audit committee for approval.
b. Establishes a risk-based internal audit plan, including policies and procedures, to
determine the priorities of the internal audit activity, consistent with the

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organization’s goals.
c. Communicates the internal audit activity’s plans, resource requirements and impact

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of resource limitations, as well as significant interim changes, to senior management
and the audit committee for review and approval.

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d. Spearheads the performance of the internal audit activity to ensure it adds value to
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the organization.

6. Enumerate the activities of the risk management department in publicly-listed

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corporation.
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The activities of the risk management department in publicly-listed corporation includes;

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a. Defining a risk management strategy.

b. Identifying and analyzing key risks exposure relating to economic, environmental,
social and governance (EESG) factors and the achievement of the organization’s
strategic objectives.
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c. Evaluating and categorizing each identified risk using the company’s predefined risk
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categories and parameters.

d. Establishing a risk register with clearly refines, prioritized and residual risk.
e. Developing a risk mitigation plan for the most important risks to the company, as
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defined by the risk management strategy.

f. Communicating and reporting significant risk exposures including business risks (i.e.,
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strategic, compliance, operational, financial and reputational risks), control issues

and risk mitigation plan to the board risk oversight committee.
g. Monitoring and evaluating the effectiveness of the organization’s risk management
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processes.

7. To what may the shareholders’ rights relate?

Shareholders’ rights relate to;
a. Pre-emptive rights.
b. Dividend policies.

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 c. Rights to propose the holding of meetings and to include agenda items ahead of the
scheduled annual and special shareholders’ meeting.
d. Right to nominate candidates to the board of directors.
e. Nomination process.
f. Voting procedures that would govern the annual and special shareholders’ meeting.

8. How may participation of employee in corporate governance be encouraged?

Employee participation in corporate governance is encouraged to create a symbiotic
environment, realizing the company’s goals and participate in its corporate governance
processes. Establishing policies and programs such as; health, safety and welfare,
training and development, reward/compensation for employees which could encourage
them to perform better and motivate them to take a more dynamic role in the
corporation.

9. TRUE or FALSE. Sustainability reporting includes voluntary corporate disclosure about

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sustainability initiatives, plans, and associated outcomes.
Answer: TRUE

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10. TRUE or FALSE. The terms nonfinancial reporting, corporate social responsibility
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reporting, and triple bottom-line reporting are each sustainability-related terms.
Answer: TRUE
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11. Define the terms nonfinancial reporting, corporate social responsibility reporting, and
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triple bottom-line reporting. How do these terms relate to sustainability reporting?

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Nonfinancial reporting:
is a form of transparency reporting where businesses formally disclose certain
information not related to their finances, including human rights information.
Corporate social responsibility reporting:
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is a periodical/annual report published by companies to report their corporate social

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responsibility actions and results.

Triple bottom-line reporting:
is a report on the financial, social, and environmental condition/performance of a
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company a given period of time.

These terms relate to sustainability reporting as it includes the disclosure and
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communication of sustainable, environmental, social and governance goals as well as

the company’s progress towards them. These reports emphasize the relationship
between financial and non-financial performance and influences long term management
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strategy, policies and business plans.

12. What factors have driven the demand for sustainability reporting?
Factors such as user’s interest on non-financial aspects of the company’s performance,
as well as the company’s roles in the government and civil society in contributing
solutions to complex global challenges like poverty, inequality, unemployment and

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 climate change. Sustainability reports help the company recognize its role and
importance in the interdependence of business and society, promoting mutually
beneficial relationship that allows the company to grow its business while contributing
to the advancement of the society it operates.

13. Why is there a demand for independent assurance on sustainability reporting?

There is a demand for independent assurance on sustainability reporting, in order for
business organizations to consider their impact on sustainability issues, enabling them to
be transparent about the risks and opportunities they face. Independent assurance gives
the business organization an overview of their sustainability conditions in an unbiased
way projecting their contributions to the government and the civil society.

14. Is it unethical for a company to provide a sustainability report, but provide no

assurance on the reliability of the information contain therein?
It is unethical for a company to provide a sustainability report but provide no assurance

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on the reliability of the information contained in such report, the basis of such report
must be disclosed which serves as a reliable assurance about the business organization’s

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sustainability condition. The information given in the sustainability report may be
inaccurate if there is no sufficient provision of assurance in terms of reliability of such

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information. Thus, it is important that sustainability reports must include assurance on
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the reliability of such information included, providing facts/evidences regarding the
contributions of the business organization in the government and civil society.
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-----END OF CHAPTER 4-----

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