Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Why is the involvement of an independent board essential?

1. To ensure compliance with company regulations

2. To diversify the company's product line

3. To provide shareholders with annual reports

4. To conduct employee performance reviews

The correct answer is: To ensure compliance with company regulations

The involvement of an independent board is essential primarily to ensure compliance with company regulations. An independent board consists of members who are not part of the company's management team and do not have any material relationships with the company that could influence their judgment. This separation of powers is critical for effective governance as it helps in maintaining objectivity and impartiality in decision-making processes. By having an independent board, the company can better adhere to regulatory requirements and standards, thereby minimizing the risk of non-compliance that could lead to legal issues, financial penalties, or damage to the company’s reputation. This independence fosters transparency and can enhance the credibility of the company's operations, as stakeholders are more likely to trust that the board is overseeing the activities of the company without bias. The other options, while important aspects of overall business operations, do not directly relate to the primary role of an independent board in compliance. Diversifying the product line, providing annual reports to shareholders, and conducting employee performance reviews are typically management functions and do not inherently require the oversight or governance that an independent board offers.