Required:
(a) Explain ‘risk appetite’ and demonstrate how different risk appetites might affect the selection of investments
between Jayland and Pealand. (6 marks)
(b) Use the AAA (American Accounting Association) seven-step model to examine the ethical decision whether
to select the Jayland option or the Pealand option. (14 marks)
(c) Describe the general purposes of an internal control system and, based on Emily Baa’s views, assess the
main internal control challenges that Hayho might encounter if it chose the Jayland option. (12 marks)
(d) Prepare briefing notes from Emily Baa to prepare chief executive of Hayho, Helen Duomo, for the board
meeting as requested in the case. The notes should cover the following:
(i) A discussion of the meaning of accountability at Hayho and of how the Mendelow framework can be
used to predict the influence of the Watching Business pressure group; (7 marks)
(ii) A brief explanation of the agency relationship between the board of Hayho and Quark Investments, and
advice on why the demands from Watching Business should be carefully considered. (7 marks)
Professional marks will be awarded in part (d) for the clarity, flow, persuasiveness and structure of the briefing
notes. (4 marks)
(50 marks)
3 [P.T.O.Section B – TWO questions ONLY to be attempted
2 John Louse, the recently retired chief executive of Zogs Company, a major listed company, was giving a speech
reflecting on his career and some of the aspects of governance he supported and others of which he was critical. In
particular, he believed that board committees were mainly ineffective. A lot of the ineffectiveness, he said, was due
to the lack of independence of many non-executive directors (NEDs). He believed that it was not enough just to have
the required number of non-executive directors; they must also be ‘truly independent’ of the executive board. It was
his opinion that it was not enough to have no material financial connection with a company for independence: he
believed that in order to be truly independent, NEDs should come from outside the industry and have no previous
contact with any of the current executive directors.
In relation to risk committees, he said that in his experience, the company’s risk committee had never stopped any
risk affecting the company and because of this, he questioned its value. He said that the risk committee was ‘always
asking for more information, which was inconvenient’ and had such a ‘gloomy and pessimistic’ approach to its task.
He asked, ‘why can’t risk committees just get on with stopping risk, and also stop making inconvenient demands on
company management? Do they think middle managers have nothing else to do?’ He viewed all material risks as
external risks and so the risk committee should be looking outwards and not inwards.
Since retiring from Zogs, Mr Louse had taken up a non-executive directorship of SmallCo, a smaller private company
in his town. In a meeting with Alan Ng, the new chief executive of Zogs, Mr Ng said that whilst risk management
systems were vital in large companies like Zogs, fewer risk controls were needed in smaller companies like SmallCo.
Required:
(a) Define ‘independence’ in the context of corporate governance and critically evaluate Mr Louse’s comment
that greater independence of non-executive directors is important in increasing the effectiveness of board
committees. (8 marks)
(b) Describe the roles of a risk committee and criticise Mr Louse’s understanding of the risk committee in Zogs
Company. (9 marks)
(c) Assess whether risk committees and risk mitigation systems are more important in larger companies, like
Zogs, than in smaller companies like SmallCo. (8 marks)
(25 marks)
