ACCA Strategic Professional · Strategic Business Leader · Management and internal control systems
Karima Industries has just listed. Its new audit committee comprises two non-executives and the chief executive, who proposes also to chair it. Under typical corporate governance code principles, what is the main weakness in this proposal?
The main weakness is lack of independence. An audit committee should consist of independent non-executive directors, because it oversees reporting and controls produced by executives. The chief executive sitting on and chairing it would mean reviewing their own performance, undermining objectivity.
- AThe committee lacks independence because an executive sits on and chairs itCorrect
- BThe committee has too few members to be valid under any code
- CNon-executives should not review financial statements
- DThe chief executive lacks the authority to attend board meetings
Explanation
Governance codes require audit committees to consist of independent non-executives, since they oversee executive-prepared reporting and controls. The CEO would be reviewing their own work. Two members is a minimum in many codes, and non-executives are expected to review the statements.
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