MEMORANDUM

Academic Year 2023: July - December

Formative Assessment 1: Corporate Governance in

Accountancy (HCGA232-1)

NQF Level, Credits: 6, 12

Weighting: 15%

Assessment Type: Essay Questions

Examiner: M. Sass

Educator: T. Abrahams

Due Date: 08 September 2023

Total: 100 marks

Instructions:
• This paper consists of 2 questions.
• It is based upon units 1- 4 of your study guide (Chapter 4).
• All questions are compulsory.
• Copyleaks is not applicable to this assessment.
• The SAICA Competency Framework Reference at the end of a question is for
recordkeeping and will inform you which SAICA Competency is covered in the
question.
• Where applicable, always state the section/regulation in the Act, then
apply the specific section/regulation identified in the Act to the
question/information/scenario.
• If you choose to type your assessment use: Font: Arial; Font size: 12 and Line
spacing: 1.5.

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NOTE TO MARKER:
THROUGOUT THE PAPER, AWARD A MARK FOR ANY OTHER VALID AND RELEVENT
POINT BUT WITHIN THE MAXIMUM MARKS ALLOWED.

QUESTION 1 (50 MARKS)

Available marks Maximum 50 marks

Nomination of the board of directors

As per King Code IV recommended principle 7.14 ½ the nomination of candidates
for election as members of the governing body should be approved by the governing
body as a whole. ✓
• However, in Prime only the CEO along with the shareholders approved the
additional candidates for election. ✓

As per King Code IV, recommended principle 7.16-18 ½ before nominating a

candidate for election the governing body should consider the following: ✓
• The diversity of the governing body. ✓
• Whether the candidate meets the appropriate fit and proper criteria. ✓
• Background investigations and/or verification of the candidate’s qualifications
to determine whether they are competent and suitable or not. ✓
• Consideration of the collective skills, knowledge, and diversity of the board of
directors (principle 7.16 (a)½). ✓
• Consideration of the Board’s composition to determine whether the number and
balance of executive, non-executive, and independent non-executive directors
is adequate (principle 7.7 (b)½). ✓
• Consideration of whether candidates have other professional commitments and
whether they will have sufficient time available to fulfill their responsibilities as
board members (principle 7.18½). ✓
• At Prime none of the above was considered. ✓

Composition of the board of directors

As per King Code IV, recommended principle 7.8½, the board should comprise a
majority of non-executive directors, most of whom should be independent. ✓

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 • Including the new directors, the board consists of out 11 members. ✓ Out of
these 11, there are 5 non-executive directors, and thus the majority directors are
executive directors. ✓
• Of the 5 non-executive directors, only 3 are independent as Mr. A Reed, who is
was the Audit Partner at Firmly Accountants. ✓

Disclosure pertaining to the board of directors

The following disclosures of the composition of the governing body were not disclosed
based on King Code IV recommended principle (7.30½). ✓
• The target set for gender and race representation in the membership of the
governing body, and progress made against these targets. ✓
• The categorisation of each non-executive member as independent or not and,
when a non-executive member of the governing body has been serving for
longer than nine years, a summary of the views of the governing body on the
independence of the member. ✓
• Each member’s period of service on the governing body. ✓
• Other governing body and professional positions held by each member. ✓
• The reason why any members of the governing body have been removed,
resigned, or retired. ✓

Chairman of the board

In terms of principle 7, recommended practice 31 of part 5.3,½ the chairperson of
the board has to be a non-executive director who is independent. ✓
• The Chairman Mr. L Smith is the CEO and a shareholder of Prime. Therefore,
he is not an independent non-executive director ✓

As per King Code IV, recommended principle 34½, the CEO of the organisation
should not also chair the governing body. ✓
Mr. L Smith is both the Chairman of the board and the CEO of the organisation. ✓

Mr. D Arendse

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In terms of principle 1, recommended practice 1 (a) (ii)½, members of the
governing body should avoid conflicts of interest, in cases where it cannot be avoided,
✓ it should be disclosed to the governing body in full at the earliest opportunity. ✓

Mr. D Arendse is a major shareholder at the company’s steel provider and therefore
has a conflict of interest. ✓
Mr. D Arendse however failed to disclose this to the governing body. ✓

In terms of principle 7, recommended practice 25½: each of the governing members

should submit a declaration of all financial, economic, and other interests at least
annually. ✓
Mr. D Arendse did not make any other disclosure of his interest which indicates that
he did not declare all his financial interests in the annual declaration. ✓

Responsibilities of the board

As per King Code IV recommended practice 12.13½ the board should exercise
oversight of technology ✓ and information management and not delegate it to the risk
committee. ✓
As per King Code IV, recommended practice 11.6½ the board should exercise
ongoing oversight of risk management ✓ and not the risk committee. ✓

As per King Code IV, recommended practice 10.98½ the performance and
independence of the company secretary should be evaluated at least annually by the
governing body. ✓
• At Prime this is done by the nomination committee ✓ and also not done annually
but every second year. ✓

As per King Code IV, recommended practice 15.59½ the governing body should
ensure that the internal audit provides an overall statement annually as to the
effectiveness of the organisations governance, risk management, and control
processes. ✓
• At Prime this is done by the audit committee and not the board of directors. ✓

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Audit Committee
As per King Code IV recommended principle 8.56½, all members of the Audit
Committee should be independent, non-executive members. ✓
• At the moment at Prime Mr. L Smith is the CEO and Mr. B Ruiters is the HR
Manager meaning they are both executive directors. ✓
• They are also both not independent. ✓

As per King Code IV, recommended principle 8.57½ the board should appoint an
independent non-executive member to chair the Audit Committee. ✓
• The chairman Mr.B Ruiter works for Prime as the HR Manager and is therefore
not an independent non-executive director. ✓
As per King Code IV, recommended principle 8.58 the Audit Committee should consist
of at least 3 members. ✓
• At Prime there are only 2 members on the Audit Committee. ✓

Internal Audit
As per King Code IV, recommended practice 5.9½ the board should be responsible
to the preparation of the annual financial statement. ✓
• At Prime it seems as if the internal audit department is responsible for the
preparation of the financial statements. ✓

As per King Code IV, recommended practice 11.3½ the board should be responsible
for the review of the company risk management plan ✓ and not the internal audit
department. ✓

As per King Code IV, recommended practice 11.1½ the board should be responsible
for the governance of risk, and decide on how these risks will be mitigated. ✓
• This responsibility rests with the internal audit department at the moment. ✓

Learning outcome:
• Identifying concerns/weaknesses of King IV principles.
Source(s):
• Chapter 4, pages 16 – 35.

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QUESTION 2 (50 marks)
Available 57 marks Maximum 50 marks

Composition of the risk committee

King Code IV recommended principle 8.64½ states that the risk committee should
be made up of executive and non-executive directors the majority of whom are non-
executive. ✓
• Unite risk committee consists of 3 executive directors and only 1 non-executive
director. ✓

Risk governance
Based on King IV, the oversight of risk management lacks a few results: ✓
• An assessment of risks and opportunities emanating from the triple context in
which the organisation operates and the capital that the organisation uses and
is affected . ✓
• The establishment and implementation of business continuity arrangements
that allow the organisation to operate under conditions of volatility, and to
withstand and recover from acute shocks. ✓
• The integration and embedding of risk management in the business activities
and culture of the organisation. ✓

Risk management
According to King Code IV recommended principle 11.3½, the risk policy should be
approved by the governing body. ✓
• Unites management approved the risk policy. ✓

King Code IV recommended principle 11.4½ states the risk appetite should be
approved by the board of directors. ✓
• Unite’s management approved the risk appetite. ✓

According to King Code IV recommended principle 11.6½ the board of directors

should perform oversight of the risk management ✓

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 • Unite’s management performs oversight on the achievement of proper
integration between risk management and the business activities and culture of
the company. ✓

According to King Code IV, recommended principle 11.5½ states that the governing
body should delegate to management responsibility to implement and execution of risk
management.✓
• At Unite senior management delegates to the risk committee.✓

The directors must determine the risk tolerance levels, recommended principle
11.4(b½) ✓
• The risk committee determined the risk tolerance of Unite. ✓

Remuneration committee
The chairman of the board of directors cannot be the chairman of the remuneration
committee, principle (7.36½). ✓
• Mr. A Johannes is both the chairman of the board of directors and the chairman
of the remuneration committee. ✓

King Code IV ‘s principle 8.67½, states that the chairman of the remuneration
committee should be an independent non-executive director. ✓
• Mr. A Johannes is the chairman of the board of directors and therefore not
independent. ✓

King IV principle 8.66½ states that all members of the remuneration committee
should be non-executive directors. ✓
• The remuneration committee consists of 1 non-executive and 2 executive
directors. ✓

The majority of non-executive directors who serve on the remuneration committee

should be independent non-executive directors as required by King Code IV principle
(8.66½)✓
• None of the directors on the remuneration committee is independent. ✓

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The above results in the remuneration committee not consisting of at least three non-
executive directors as per King Code IV principle (8.46½). ✓

Remuneration governance
As per King Code IV recommended practice 14.26½, the governing body should
assume responsibility for the governance of remuneration by setting the direction for
how remuneration should be approached. ✓
• At Unite the remuneration committee takes this responsibility of governance of
remuneration. ✓

As per King Code IV, recommended practice 14.37½ the remuneration policy and
the implementation report should be tabled every year for separate non-binding
advisory votes by shareholders at the AGM. ✓
• At Unite this non-binding vote took place by the members of the remuneration
committee and not the shareholders. ✓

As per King Code IV, recommended practice 14.39½ in the event that either the
remuneration policy and implementation report, or both were voted against by 25% or
more of the voting rights exercised, the following should be disclosed in the
background statement of the remuneration report: ✓
• With whom the company engaged, and the manner and form of engagement to
ascertain the reasons for dissenting votes and ✓
• The nature of steps taken to address legitimate and reasonable objections and
concerns. ✓
• This was not done by Unite. ✓

Based on King Code IV, recommended practice 14.30½ all the elements of the
remuneration committee in the organisation and the mix of these should be set out in
the remuneration policy, should include: ✓
• Variable remuneration including short and long-term incentives and deferrals✓
• Sign-on, retention, and restraint payments ✓

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 • The provision, if any, for pre-vesting forfeiture and post-vesting forfeiture of
remuneration. ✓
• The fees of non-executive members of the governing body. ✓
• The above was not done by Unite and is in contradiction with King Code. ✓

Disclosure pertaining to the board of directors

King Code IV principle 7.30½ requires all the below should be disclosed relating to
the board of directors:
• whether the board is satisfied that the composition reflects the appropriate mix
of knowledge, skills, experience, diversity, and independence ✓
• the targets set for gender and race representation on the board and progress
made against these targets ✓
• categorisation of each director as executive or non-executive ✓
• categorisation of non-executive directors as independent or not ✓ – where an
independent non-executive director has been serving for longer than nine
years, details of the board’s assessment and findings regarding that director’s
independence ✓
• the qualifications and experience of the directors ✓
• the length of service✓
• and age of directors ✓
• reasons for removal, resignation or retirement of any director ✓
• other directorships and professional positions held by each director. ✓
The remuneration committee only wants them to disclose categorisation of each
director as executive or non-executive thus is not in line with King Requirements. ✓
Learning outcome:
• Identifying King IV principles regarding Board composition and committees
and applying them to a given scenario
Source(s):
• Chapter 4, page 42.
• Chapter 4 pages 44 – 48.

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