ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches

Halden plc reported steadily rising profits for six years. A later investigation found that finance staff had been pressured by the board to recognise revenue early to meet analyst forecasts, and the external auditor also earned large consulting fees from Halden. Which pair of causes best explains how the misreporting went undetected?

Target-driven pressure from the board created the incentive to recognise revenue early, and the auditor's large consulting fees compromised independence, so the external check failed. Together these explain why the misstatement was neither prevented nor detected by the audit.

AA culture of target-driven pressure and an impaired auditor independence from non-audit feesCorrect
BWeak shareholder activism and an excessively long strategic planning horizon
COver-segregation of duties in finance and too many independent directors
DLack of a remuneration committee and a high dividend payout ratio

Explanation

Pressure to meet market expectations created the motive to manipulate revenue, while large consulting fees threatened the auditor's independence and so weakened the check on the financial statements. The other pairs do not link to the facts given. Excess independent directors and segregation of duties would normally strengthen control.

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