ACCA LW · Chapter 12
Corporate governance and fraudulent behaviour MCQs with Answers
11 multiple-choice questions on Corporate governance and fraudulent behaviour for ACCA LW Corporate and Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which approach to compliance does the UK Corporate Governance Code adopt for companies to which it applies?
- A) Strict legal compliance enforced by criminal penalties
- B) Voluntary adoption with no disclosure required
- C) Approval of each company's governance arrangements by the court
- D) Comply or explain
Show answer & explanation
Answer: D) Comply or explain
The UK Corporate Governance Code operates on a 'comply or explain' basis: a company within its scope must report how it has applied the Code's principles and either comply with its detailed provisions or explain why it has not. Departure from a provision is not a criminal offence and the court does not approve governance arrangements. Disclosure is mandatory so that shareholders can assess the explanations given and engage with the board.
Question 2
Which of the following is a recommendation of the UK Corporate Governance Code concerning board structure?
- A) The chief executive should also chair the audit committee
- B) The roles of chair and chief executive should not be exercised by the same individual
- C) All directors should be executive directors
- D) The board should not include any independent non-executive directors
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Answer: B) The roles of chair and chief executive should not be exercised by the same individual
The Code calls for a clear division of responsibilities between running the board (the chair) and running the business (the chief executive), so the two roles should not be exercised by the same individual. It also expects at least half the board, excluding the chair, to be independent non-executive directors, and the audit committee to consist of independent non-executive directors. Executive directors, including the chief executive, should not sit on, let alone chair, the audit committee.
Question 3
A company's director allowed the company to keep trading and taking customer deposits when she knew there was no prospect of supplying the goods, intending to keep the deposits. Which of the following best describes her potential liability?
- A) Wrongful trading only, which requires no dishonesty and carries no criminal liability, so fraudulent trading cannot apply
- B) Insider dealing under the Criminal Justice Act 1993
- C) No liability, because the company is a separate legal person
- D) Fraudulent trading, which is both a criminal offence under the Companies Act 2006 and a basis for civil liability under s213 Insolvency Act 1986 if the company is wound up
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Answer: D) Fraudulent trading, which is both a criminal offence under the Companies Act 2006 and a basis for civil liability under s213 Insolvency Act 1986 if the company is wound up
Fraudulent trading occurs where business is carried on with intent to defraud creditors or for any fraudulent purpose. Under s993 Companies Act 2006 it is a criminal offence whether or not the company is wound up, and under s213 Insolvency Act 1986 the court may, on a liquidator's application, order any person knowingly party to it to contribute to the company's assets. The dishonest intent here goes beyond wrongful trading.
Question 4
In proceedings for wrongful trading under s214 Insolvency Act 1986, which of the following is a defence available to a director?
- A) After the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, they took every step to minimise the potential loss to creditors that they ought to have taken
- B) The director did not intend to defraud creditors
- C) The director had no accounting qualification and did not understand the company's accounts
- D) The director had acted on the instructions of the majority shareholder
Show answer & explanation
Answer: A) After the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, they took every step to minimise the potential loss to creditors that they ought to have taken
Wrongful trading does not require dishonesty, so the absence of intent to defraud is no defence. The only statutory defence is that the director took every step to minimise potential loss to creditors once they knew or ought to have concluded that insolvent liquidation (or administration) could not be avoided. The director is judged against the objective standard of a reasonably diligent person in their position, so a lack of skill is not an excuse (Re Produce Marketing Consortium).
Question 5
Under Part V of the Criminal Justice Act 1993, which of the following best describes 'inside information'?
- A) Any information about a company, whether or not it has already been published
- B) General information about the economy that might affect all share prices
- C) Information that is only known to the company's auditors
- D) Information that relates to particular securities or issuers, is specific or precise, has not been made public, and would be likely to have a significant effect on price if it were made public
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Answer: D) Information that relates to particular securities or issuers, is specific or precise, has not been made public, and would be likely to have a significant effect on price if it were made public
Inside information must relate to particular securities or a particular issuer (not securities generally), be specific or precise, not have been made public, and be likely to have a significant effect on price if made public. Information that has already been published is not inside information. A person may be an insider through being a director, employee or shareholder of an issuer, through access by virtue of employment, office or profession, or by obtaining the information directly or indirectly from such a person.
Question 6
Which of the following is NOT one of the offences under the insider dealing provisions of the Criminal Justice Act 1993?
- A) Dealing in price-affected securities on the basis of inside information
- B) Encouraging another person to deal in price-affected securities
- C) Disclosing inside information otherwise than in the proper performance of employment, office or profession
- D) Failing to report a suspicion of insider dealing to the authorities
Show answer & explanation
Answer: D) Failing to report a suspicion of insider dealing to the authorities
The three insider dealing offences are dealing, encouraging another to deal, and improperly disclosing inside information. There is no offence under the 1993 Act of failing to report a suspicion of insider dealing; failure-to-disclose offences arise under money laundering legislation for the regulated sector. Defences include showing that the individual did not expect the dealing to result in a profit attributable to the information.
Question 7
Money laundering is commonly described as involving three stages. Which stage involves passing criminal proceeds through a series of transactions to disguise their source?
- A) Placement
- B) Integration
- C) Layering
- D) Tipping off
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Answer: C) Layering
Placement is the initial introduction of criminal proceeds into the financial system, layering involves complex transactions to obscure the audit trail, and integration is the return of the funds to the legitimate economy so that they appear clean. Tipping off is a separate offence of disclosing information likely to prejudice an investigation, not a stage of laundering.
Question 8
An accountant working in the regulated sector tells a client that she has made a report to the authorities about the client's suspicious transactions, knowing this is likely to prejudice an investigation. Which offence under the Proceeds of Crime Act 2002 has she most likely committed?
- A) Failure to disclose
- B) Tipping off
- C) Insider dealing
- D) Fraudulent trading
Show answer & explanation
Answer: B) Tipping off
Tipping off (s333A Proceeds of Crime Act 2002) occurs where a person in the regulated sector discloses that a suspicious activity report has been made, or that an investigation is contemplated or being carried out, and the disclosure is likely to prejudice an investigation. Failure to disclose is the opposite situation, where a person fails to report knowledge or suspicion of money laundering. The other offences relate to securities dealing and insolvency.
Question 9
Under s7 Bribery Act 2010, a commercial organisation commits an offence if a person associated with it bribes another person intending to obtain or retain business for the organisation. What defence is available to the organisation?
- A) That the directors did not personally know about the bribe
- B) That the bribe was paid outside the United Kingdom
- C) That it had adequate procedures in place designed to prevent persons associated with it from undertaking such conduct
- D) That the bribe was a small facilitation payment
Show answer & explanation
Answer: C) That it had adequate procedures in place designed to prevent persons associated with it from undertaking such conduct
Section 7 creates a strict liability corporate offence of failing to prevent bribery, with a single defence of having adequate procedures in place. Lack of knowledge by senior management is not a defence, and the Act has extensive extra-territorial reach. Unlike some other jurisdictions, the Bribery Act 2010 contains no exemption for facilitation payments.
Question 10
Which of the following correctly describes the offences under ss1 and 2 Bribery Act 2010?
- A) Section 1 covers bribery of foreign public officials only, and s2 covers bribery in the private sector only
- B) Section 1 covers offering, promising or giving a bribe, and s2 covers requesting, agreeing to receive or accepting a bribe
- C) Section 1 covers corporate failure to prevent bribery, and s2 covers individuals who give bribes
- D) Both sections apply only to public officials and not to private sector transactions
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Answer: B) Section 1 covers offering, promising or giving a bribe, and s2 covers requesting, agreeing to receive or accepting a bribe
Section 1 is the general offence of bribing another person and s2 is the offence of being bribed; both apply to the public and private sectors, and both turn on improper performance of a relevant function or activity. Bribery of a foreign public official is a separate offence under s6, and the failure of a commercial organisation to prevent bribery is under s7.
Question 11
Which of the following is an offence under the principal money laundering provisions of the Proceeds of Crime Act 2002?
- A) Holding shares in a company that later becomes insolvent
- B) Dealing in shares on the basis of published information
- C) Paying a dividend out of distributable profits
- D) Acquiring, using or having possession of criminal property
Show answer & explanation
Answer: D) Acquiring, using or having possession of criminal property
The principal money laundering offences are concealing, disguising, converting, transferring or removing criminal property (s327), entering into or becoming concerned in an arrangement facilitating its acquisition, retention, use or control (s328), and acquiring, using or having possession of criminal property (s329). Criminal property is a benefit from criminal conduct that the person knows or suspects represents such a benefit. The other options describe lawful activities.