CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
An analyst reviewing a company notes: the audit committee includes the former CFO, the firm's external auditor also supplies large consulting services, and the whistleblower channel reports to the CEO. Which conclusion about the risks from these weaknesses is most appropriate?
The weaknesses reduce the likelihood that misreporting is detected and reported independently. A former CFO on the audit committee, an auditor earning large consulting fees, and a whistleblower channel reporting to the CEO each compromise independence in oversight and escalation.
- AThey mainly increase the cost of equity through lower dividend payouts
- BThey reduce the likelihood of financial misreporting being detected and reported independentlyCorrect
- CThey strengthen oversight by concentrating information within management
Explanation
A former CFO on the audit committee, an auditor compromised by consulting fees, and a whistleblower line reporting to the CEO each impair independent detection and escalation of misreporting. They do not strengthen oversight.
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