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Appendix 2

12 XXP is a listed company which supplies water to 40% of the households in
Country R. In line with best practice, XXP has an audit committee made up of
three non-executive directors. Two of these are recently retired members of the
XXP executive board and so have a thorough understanding of the regulations
surrounding water supply. All three are qualified water engineers.

The CEO believes that in a highly regulated industry, the audit committee plays
a vital role. For example, it oversees the work of internal audit and provides
assurance that internal controls are effective. In turn this gives assurance that
the company is in full compliance with laws and regulations.

Some of the CEO’s other views are presented below. Which would appear
to be in line with best practice? Select all that apply.

A It is important that all members of the audit committee are retired water
engineers.

B In a highly regulated industry like water supply, the audit committee must
operate independently of the board.

C Technical knowledge of the industry is more important than recent relevant
financial experience in order to understand the compliance issues in XXP.

D The audit committee should oversee the work of internal audit and in doing
so provide the necessary authority for the internal audit function to operate
efficiently.

E The audit committee has an important role in preserving the independence
of the internal audit function from pressure or interference.

13 Four years ago Mr Chat was appointed CEO of Q, a large global bank. In order
to secure Mr Chat’s services, the remuneration committee, made up of NED’s
agreed to his demands for a generous, non-performance related pension to be
written into his contract so it would be payable whenever he decided to leave
the company, subject to a 2 year minimum term.

The finance director was an old friend of Mr Chat and reassured the
remuneration committee that Mr Chat would be worth the expense of his
remuneration package. Two of the NED’s on the committee were former
colleagues of Mr Chat and they told the finance director they would ensure Mr
Chat received what he wanted in terms of remuneration.

Once in post, Mr Chat led an aggressive strategy which ultimately failed and led
to job losses as well as a complete collapse of Q’s shares.

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