ACCA Applied Knowledge · Financial Accounting
Duties and Responsibilities of Those Charged with Governance
Governance is the system by which a company is directed and controlled. Those charged with governance, mainly the directors, must act in shareholders' interests, manage risk, keep proper records and report fairly. To solve questions, identify who is acting, name their duty, then match it to a principle such as accountability, transparency or fairness.
What this chapter covers
This chapter covers how companies are directed and controlled, and who is answerable for what. You study the meaning and principles of corporate governance, the duties of directors, the roles of shareholders, auditors and other stakeholders, the use of non-executive directors and board committees, and the agency problem that governance tries to reduce.
In the ACCA Applied Knowledge exams, governance content is mainly assessed in Business and Technology (BT). Check the current syllabus for your paper. For Financial Accounting (FA), the chapter is useful background. It explains why directors are responsible for preparing financial statements, why auditors report independently, and why users can rely on published accounts.
The questions are objective test questions. Expect short scenarios where you pick the right duty, the right person or the right committee. The ideas are simple, but the wording of options is close, so you need precise definitions.
Governance questions are usually quick to answer once you know the definitions, so they are some of the easiest marks in an objective test. They also reward clear thinking over calculation. If you learn who is responsible for what, and which principle each action supports, you can answer fast and save time for harder questions. The same ideas link to ethics, internal control and audit, so the effort pays off across several exams.
Duties and responsibilities of those charged with governance: topics in the order to study them
- 1Corporate Governance: Meaning and PrinciplesStart here because every later topic uses these definitions and principles.
- 2Agency Problem and Governance CodesNext, learn why governance is needed: owners and managers can have different interests, and codes are the response.
- 3Role and Duties of DirectorsWith the purpose clear, study the main people charged with governance and what they must do.
- 4Role of Shareholders, Auditors and Other StakeholdersThen see who holds directors to account and who else is affected by their decisions.
- 5Governance Structures: Non-Executive Directors and CommitteesFinish with the practical structures that put the principles into action, which are easy to confuse without the earlier topics.
How to prepare Duties and responsibilities of those charged with governance
Aim to learn definitions precisely, then practise matching them to short scenarios. Phone-friendly study works well here because the content is mostly recall.
- Write the meaning of corporate governance in one sentence of your own, then list the main principles: transparency, accountability, fairness and responsibility. Note that different codes use slightly different lists.
- Explain the agency problem aloud: shareholders (principals) appoint directors (agents), and the two may want different things. Name two ways governance reduces the gap.
- Make a one-page table in your notes of each party (directors, shareholders, auditors, other stakeholders) with its main role. Keep each role to one line.
- Learn what each board committee does: audit, remuneration and nomination. Link each to the role of non-executive directors and to independence.
- Learn the difference between a rules-based and a principles-based approach, and what comply or explain means.
- Practise objective questions in the three formats: multiple choice, multiple response (select the stated number) and number entry. For multiple response, tick exactly the number asked.
- Review wrong answers by asking which key word in the option you missed, such as prepare, audit, approve or appoint.
Common mistakes in Duties and responsibilities of those charged with governance
Saying auditors are responsible for preparing the financial statements.
Fix: Remember: directors prepare, auditors give an independent opinion. Look for the verb in the option.
Treating shareholders and directors as the same group.
Fix: Think of ownership and management as separate roles, even if one person does both.
Mixing up the audit, remuneration and nomination committees.
Fix: Link each to one word: audit to reporting and control, remuneration to pay, nomination to appointments.
Assuming governance codes are always laws.
Fix: Check the wording. Some countries use law, others use codes with comply or explain. Do not state one approach as universal.
Ticking too many or too few options in multiple response questions.
Fix: Read the number first, pick the strongest options, then count your ticks before moving on.
Memorising a single list of principles and rejecting options that use different wording.
Fix: Learn what each principle means, not only its label, so you can recognise it in a scenario.
Last-day revision: Duties and responsibilities of those charged with governance
- Corporate governance is the system by which companies are directed and controlled.
- Common principles: transparency, accountability, fairness and responsibility. Exact lists vary by code.
- Directors manage the company and are accountable to the shareholders.
- Directors are responsible for preparing the financial statements and keeping adequate accounting records.
- Auditors are independent of management and give an opinion on whether the financial statements are presented fairly.
- Auditors do not prepare the financial statements and do not run the company.
- Shareholders own the company and usually appoint directors and auditors.
- Agency problem: agents (directors) may act in their own interest rather than the principals' (shareholders').
- Non-executive directors are not employees and bring independent judgement to the board.
- Audit committee: reviews financial reporting, internal control and the external auditor relationship.
- Remuneration committee sets pay for directors; nomination committee proposes board appointments.
- Comply or explain: follow the code, or state clearly why you did not.
Duties and responsibilities of those charged with governance practice questions
- When preparing financial statements, the directors assess whether the company can continue operating for the foreseeable future. Which accou…
- Which of the following features of a board is MOST consistent with the recommendations of typical corporate governance codes on board compos…
- A listed company's board wants to make sure shareholders can see how directors have used the resources entrusted to them. Which governance p…
- Which of the following is a core principle of good corporate governance?
- Which of the following best describes corporate governance in the context of FA?
- Which one of the following is a duty of the directors of a company in relation to financial reporting?
- Which one of the following is a statutory-style duty of a director that is most clearly breached in the situation described? Mr Lee, a direc…
- Which committee of the board is normally responsible for determining the remuneration policy and packages of executive directors, and should…
Duties and responsibilities of those charged with governance in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Duties and responsibilities of those charged with governance: frequently asked questions
Who are those charged with governance?
They are the people with responsibility for overseeing the direction of a company and its financial reporting. In most companies this means the board of directors, including non-executive directors and any audit committee.
Is this chapter in the Financial Accounting exam?
Governance is mainly examined in Business and Technology. In Financial Accounting it is background, for example in understanding who prepares and who audits financial statements. Check the current syllabus for your exam before you decide how much time to spend.
What is the agency problem in simple terms?
Shareholders own the company but directors run it day to day. Directors may act in their own interest, for example by taking high pay or avoiding risk. Governance rules, independent directors and audit reduce this problem.
How should I answer governance questions in a computer-based test?
Read the scenario, identify who is acting, and decide which duty or principle applies. Eliminate options that give an auditor a management role, or the reverse. For multiple response, select exactly the number the question states.