Question ID: CIA1 M2 Q065 (Topic: A-D. Governance and Corporate Social Responsib

  • This topic has 3 replies, 3 voices, and was last updated 2 weeks ago by Brian Hock.
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  • #231945

    This forum is restricted to members of the associated course(s).

    This forum is restricted to members of the associated course(s).

    Omar Saeed
    Participant

    Audit committee members should be independent non-executive directors. In which of the following situations would an audit committee member not be considered independent?

    1.  The member is the former CFO. The member left the company eight months ago.
      II.  The member’s brother-in-law is CEO of the company.
      III.  The member has significant stock options in the company that have not vested.
      IV.  The member is also CEO of the company’s main raw material supplier.
    • I, II, III, and IV. correct
    • II and IV. wrong
    • I and III.

    Why is it considered a lack of independence if the audit committee owns stock options in the company?

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  • #231956

    This forum is restricted to members of the associated course(s).

    Brian Hock
    HOCK international

    Hello, Omar Saeed,

    The unvested stock options would present an issue with independence because the value of hose options will depend on the share price of the stock. And the share price of the stock can be impacted by the audit report and the type of audit report. So, the audit committee member may be motivated to overlook something that should be disclosed because they do not want the value of the shares to be negatively impacted by that information. This is why those unvested stock options (or any stock options) will impair independence for the audit committee member.

    Does this help?

    Brian

    #244130

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    Cesar Pedro Noya
    Participant

    Just piggybacking on a great question & answer. If instead it was a Mutual Fund which happens to have the CEO’s company’s shares, the CEO would still be considered independent because the CEO would not have control over the performance of the other shares that are part of the Mutual Fund (e.g. Walmart, Walgreens, 3M, GE…).

    Cesar P. Noya

    #244145

    This forum is restricted to members of the associated course(s).

    Brian Hock
    HOCK international

    Cesar P. Noya,

    Yes, if the Director owned a mutual fund that owned shares of the company, they would most likely still be independent. I say most likely because there could be a situation in which the Director knows the makeup of the mutual fund and a significant portion of the mutual fund is the shares of the company and the mutual fund makes up a large % of the director’s wealth. In this case, they may not be independent even though the shares are in a mutual fund. But, generally they would still be independent if the share ownership was through a mutual fund.

    Brian

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