ACCA Advanced Audit and Assurance (AAA) Practice Exam

Which of the following compromises a non-executive director's independence?

1. Has served on the board for three years

2. Has previously worked for the company within the last five years

3. Has been involved in the industry for over ten years

4. Has a distant family relation in the company

The correct answer is: Has previously worked for the company within the last five years

A non-executive director’s independence can be significantly compromised if they have previously worked for the company within the last five years. This is because past employment creates an inherent conflict of interest and may influence the director's judgment. Their previous role within the organization can lead to biases or loyalties that are not aligned with the independent oversight required of a non-executive director. The familiarity with the company’s operations, employees, and culture can impair their ability to act independently and objectively when making decisions that affect the company and its stakeholders. The other scenarios do not carry the same direct implications for independence. For instance, serving on the board for three years does not automatically diminish a director's independence, as long as there are no other conflicting interests. Similarly, having industry experience, such as being involved in the industry for over ten years, can actually be beneficial, as it provides valuable insights, provided it does not lead to conflicts of interest. A distant family relation within the company is also less likely to compromise independence, depending on the nature of the relationship and the level of influence they exert.