Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In the context of corporate governance, what does independence refer to?

1. A necessity for independent oversight within the organization

2. A measure of financial liquidity

3. The ability to operate without external pressures

4. The practice of outsourcing management functions

The correct answer is: A necessity for independent oversight within the organization

In the context of corporate governance, independence primarily refers to the necessity for independent oversight within the organization. This oversight is crucial in ensuring that the decision-making processes are free from undue influence and that the interests of all stakeholders, including shareholders, employees, and the general public, are protected. Independent oversight typically involves individuals or committees that do not have any ties to the company, allowing them to make objective judgments and recommendations. This independence is essential for effective corporate governance as it helps to prevent conflicts of interest and promotes transparency, accountability, and ethical behavior within the organization. It ensures that the governing bodies, such as the board of directors, can fulfill their roles without being compromised by internal pressures or affiliations. The other options do not directly relate to the concept of independence in corporate governance. Financial liquidity pertains to a company's ability to meet short-term financial obligations, while operating without external pressures could imply a broader sense of autonomy but does not specifically address the need for oversight. Outsourcing management functions relates to delegating responsibilities outside the organization, which does not encompass the concept of independence in governance itself.