Question Four Corporate Governance Code A major corporate governance code contains the following entry on audit committees: The board should establish formal and transparent arrangements for considering how they should apply the corporate reporting and risk management and internal control principles and for maintaining an appropriate relationship with the company$$s external auditors. The board should establish an audit committee of at least three, or in the case of smaller companies, two, independent non$-$executive directors. In smaller companies the company chairman may be a member of$,$ but not chair, the committee in addition to the independent non$-$executive directors, provided he or she was considered independent on appointment as chairman. All audit committee members should be considered independent upon appointment to the committee. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience. When Hafnium Company floated on the stock exchange, it attempted to establish the audit committee required by the listing rules. It was unable to recruit a non$-$executive director with the requisite financial experience so it appointed experienced non$-$executive director, Sophie Xu$,$ as the committee chairman. Sophie Xu was a technical engineer. She was appointed to the board of Hafnium because of her expertise in the technology used by Hafnium and she understood the company$$s business model and its systems. But she did not understand financial matters. Sophie Xu told colleagues that she did not understand much about the concept of independence. She said that in her own field of engineering, colleagues inside and outside a certain company often supported each other and that this was often encouraged. As a community of specialists, they often found that helping each other was an important part of professional life over the years. Accordingly, she said she did not really understand why independence was important for audit committee members. She also said that she did not understand much about the company$$s relationship with the external auditors. YOU ARE REQUIRED TO: $4\mathrm{.}1$ Define $$independence$$ in the context of audit committees and explain why audit committee members should be $$considered independent$$ at the time of their appointment. $(10$ marks$)4\mathrm{.}2$ Discuss how the inability of Hafnium Company to recruit a person with $$recent and relevant financial experience$$ might threaten the effectiveness of the audit committee$$s contribution to shareholder value. $(10$ marks$)4\mathrm{.}3$ Explain the nature of an $$appropriate relationship with the company$$s external auditors$$ and discuss how Hafnium Company$$s audit committee should respond if it believes the relationship to be too close. $(10$ marks$)$ SUBTOTAL