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ACCA P1 Professional Accountant

1 Concepts underpinning corporate governance
1) 2) Fairness: means taking into account all stakeholders who have legitimate interests in the company Openness / Transparency: means clarity, lack of withholding of relevant information unless necessary and a default position of information provision rather than concealment. This is particularly important in financial reporting, as this is the primary source of information that investors have for making effective investment decisions. Independence: need for independent non-executive directors who can monitor the company without conflicts of interests Probity / Honesty: means telling the truth, not misleading shareholders and other stakeholders by presenting information in a slant way. Responsibility: means being able to correct and hold managers to account for poor management. Accountability: refers to whether an organisation (and its directors) are answerable for the consequences of their actions. The UK Cadbury report emphasis that boards of directors are accountable to shareholders. Reputation: the purely commercial reason for promoting the organisations reputation is that the price of publicly traded shares is often depended on reputation and hence reputation is often a very valuable asset of the organisation. Judgement: means the board making decision that enhance the prosperity of the organisation. Board members must acquire a broad enough knowledge of the business and its environment to be able to provide meaningful direction to it. Integrity: means straightforward dealing and completeness. Integrity can be taken as someone of high moral character, who sticks to principles no matter the pressure to do otherwise.

3) 4) 5) 6)




TB 49-51 / PK P70-28-C-P159 Definition of corporate governance Corporate governance is the system by which organisations are directed and controlled. It is a set of relationships between directors, shareholders and other stakeholders. Passcard P3 The major issues in corporate governance - Duty of directors (Separate of Chairman and CEO) Corporate governance regulation normally requires that the roles of the chairman and the CEO are split. The reason for this is to ensure that no one person has too much influence over the running of the company. The only exception to this rule is that the roles can be combined for a short period of time where the company faces significant difficulties and giving more power to one person will assist in overcoming those difficulties. Composition and balance of the board (NED) The board will normally be made up of executive directors who work full time for the company and have specific roles. The board should also consist of some NEDs who will be part-time and have no


specific operational role in the company. The combined Code states that at least half the board should be independent non-executive directors. This is to ensure that their views carry sufficient weight and that power and information is not concentrated in the hands of one or two individuals. Board committees (4 committees): The Higgs report recommends that no one individual should serve on all committees; most reports recommend that the committees should be staffed by preferably independent non-executive directors. Reliability of financial reporting and external auditors Greater transparency, sufficient disclosure and reduction in risks faced by investors Directors remuneration and rewards Remuneration: levels should be enough to attract directors of sufficient calibre, but companies should not pay more than is necessary. Directors should not be involved in setting their own remuneration packages. A remuneration committee, staffed by independent NEDs, should determine specific remuneration packages. Service contract: need to be limited to 3 years, with re-appointment for a third term being classed as unusual. NEDs who have been on the board for a few years may become too familiar with the operations of the company and therefore not provide the necessary external independent check that they are supposed to do. Responsibilities of the board for risk management and internal control systems Rights and responsibilities of shareholders (Communication with shareholders) Under corporate governance codes, the annual general meeting should be the principal forum for communication between the board and shareholders.

- Corporate social responsibilities and business ethics - Compliance with laws and regulations TB P67-69 / PK P49-3-a-P79 / PK P50-5-b-P85 / PK P67-27-b-P152 / PK P68-28-b-P157 / PK P225-1-a-P234

2 Different categories of stakeholders

1) Definition of stakeholder Stakeholders are any entity (person, group or possibly non-human entity) that can affect or be affected by the actions or policies of an organisation. It is a bi-directional relationship. Each stakeholder group has different expectation about what it wants and different claims upon the organisation.

TB P56 2) Definition of stakeholder theory - Instrumental view of stakeholders: this reflects the view that organisations have mainly economic responsibilities (plus the legal responsibilities that they have to fulfill in order to keep trading) to maximise the companys profit. - Normative view of stakeholders: this suggests the existence of ethical and philanthropic responsibilities as well as economic and legal responsibilities and organisation focusing on being altruistic. TB P57 / PK 65-26-a-P147 3) Classification of stakeholders The level of involvement with the business - Internal: employees, management


- Connected: shareholders, customers, suppliers, lenders, trade union, competitions - External: The government, local government, the public, pressure groups, opinion leaders How much the businesss activities affect them - Narrow: those most affected by the organisations strategy shareholders, managers, employees, suppliers, dependent customers Wide: those less affected by the organisations strategy government, less dependent customers, the wider community

How much power and influence they have - Primary: those without whose participation the organisation will have difficulty continuing as a going concern, such as customers, suppliers and government (tax and legislation) Secondary: those whose loss of participation won't affect the companys continued existence such as broad communities (and perhaps management)

How much they participate in the businesss activities - Active: those who seek to participate in the organisations activities. Obviously includes managers and shareholders, but may also include other groups not part of the organisations structure such as regulators or pressure groups. Passive: those who do not seek to participate in policy-making such as most shareholders, local communities and government


TB P57-58 / PK P49-4-a-P81 Mendelows matrix Mendelow classifies stakeholders on a matrix. The matrix is used to identify the type of relationship the organisation should seek with its stakeholders, and how it should view their concerns. The two axis show: - The level of interest the stakeholder has in the company - The amount of power that stakeholder has to influence the decision of the company Using these two axes, stakeholders can be divided into four groups as follows: Level of interest Low Low A P o w e r High Section A: Stakeholders in this section have a low level of interest in the company and have minimal power to influence the decision of the company. Minimal effort is expended on section A. (Government) Section B: Stakeholders in this section have a high level of interest in the company, but have minimal power to actually influence its activities. This group will normally attempt to influence the company by lobbying groups that have high levels of power and they should therefore be kept informed. (The local community, suppliers, employees) Section C: Stakeholders in this section have a low level of interest in the company, although they

High B


have the ability to exercise power over the company if they choose to do so. The group will have to be kept satisfied to ensure that their power is not used. (Shareholders, institutional shareholders) Section D: Stakeholders in this section have a high level of interest of the company and also a high level of power. These stakeholders are therefore able to influence the company. The organisations strategy must be acceptable to them, at least. (key players) (Customers, directors) 5) TB P59 / PK 171-1-a-P180 Institutional investors Definition: Institutional investors manage funds invested by individuals. They can influence prices, avoid speculative shares, want short-term profits, can influence companies through meeting and voting, able to take direct action dissatisfied. The major institutional investors in the UK are: - Pension funds - Insurance companies - Investment and unit trusts - Venture capital organisations The condition for institution investors to intervene the company - Threats to value of shareholding: Institutional shareholders may intervene if they perceive that managements policies could lead to a fall in the value of the company and hence the value of their shares. Lack of confidence in management integrity: Institutional investors may intervene because they feel management cannot be trusted. At worst they may fear management fraud. Failure to control management: Institutional investors may take steps if they feel that there is insufficient influence being exercised by non-executive directors over executive management. Lack of control systems: Intervention would be justified if there were serious concerns about control systems. Failure to address shareholder concerns Failure to comply with stock market requirements Pressure from their own investors: Institutional investors own investors may expert pressure on them not to invest in high-risk companies, or companies with a poor ethical reputation.

PK P51-6-b-P87

3 The agency problem

Agency cost Agency costs arise from the need of principles (owner/shareholder) to monitor the activities of agents (the board). This means that principles need to find out what the agent is doing, which may be difficult because they may not have as much information about what is going on as the agent does. Principles also need to introduce mechanism to control the activities of the agent. Both finding out and introducing mechanism will incur costs that can be viewed in terms of money spent, resources consumed or time taken. Define / Explain PK P51-6-a-P87 2) The agency problem The agency problem in joint stock companies derives from the principles (owners) not being able 1)


to run the business themselves and therefore having to rely on agents (directors) to do so for them. This separation of ownership from management can cause issues if there is a breach of trust by directors by intentional action, omission, neglect or incompetence. This breach may arise because the directors are pursuing their own interests rather than the shareholders or because they have different attitudes to risk-taking to the shareholders. Explain / Analyse TB P54 3) Fiduciary duty Fiduciary duty is a duty imposed upon certain persons because of the position of trust and confidence in which they stand in relation to another. The duty is more onerous than generally arises under a contractual or tort relationship. It requires full disclosure of information held by the fiduciary, a strict duty to account for any profits received as a result of the relationship, and a duty to avoid conflicts of interest. Define / Explain TB P52 4) Agency relationship Agency relationship is a contract under which one or more persons (the principles) engage another person (the agent) to perform some service on their behalf that involves delegating some decision-making authority to the agent. Explain / Explore TB P52

4 Principles vs. Rules based approach

1) Basic concept of principles-based approach In a principles-based jurisdiction, corporate governance is underpinned by certain basic ethical concepts such as integrity and accountability. These should be applied willingly and clearly are not designed as an excuse for non-compliance. Principles and requirements: In most principles-based jurisdictions, the general guidance is often combined with specific stock market requirements. Companies have to comply with requirements to continue to enjoy a stock market listing. Comply or explain: Other, less specific, requirements are based on what would normally be regarded as best practice and thus investors would expect companies to comply with them. If companies don't, they should supply good and clear reasons for non-compliance. 2) PK P50-6-d-P89 Advantage of principles-based approach a) It avoids the need for inflexible legislation that companies have to comply with even though the legislation is not appropriate. b) It is less burdensome in terms of time and expenditure. c) It allows companies to develop their own approach to corporate governance that is appropriate for their circumstances within the limits laid down by stock exchanges. d) Enforcement on a comply or explain basis means that businesses can explain why they have depart from the specific provisions if they feel it is appropriate. e) A principles-based approach accompanied by disclosure requirements puts the emphasis on investors making up their own minds about what businesses are doing.


TB P77 / PK P199-1-b-P209

5 Sarbanes-Oxley
1) Provision of Sarbanes-Oxley - Auditing standards: audit firms should retain working papers for at least seven years and ensure that the financial statements are prepared in accordance with GAAP. Non-audit services: auditors are not allowed to provide other services to an audit client to avoid conflicts of interest. Quality control procedures: rotation of lead or reviewing audit partners every five years. Audit committee: auditor committees should be established by all listed companies and should be responsible for the appointment, compensation and oversight of auditors. Corporate responsibility: the CEO and CFO should certify the appropriateness of the financial statements and that those financial statements fairly present the operations and financial condition of the issuer. Off balance sheet transactions: there should be appropriate disclosure of material off-balance sheet transactions Internal control reporting: annual reports should contain internal control reports that state the responsibility of management for establishing and maintaining an adequate internal control structure and procedure for financial reporting and should also contain an assessment of the effectiveness of the internal control structure and procedure for financial reporting. Whistleblowing provisions: employees of listed companies and auditors will be granted whistleblower against their employers if they disclose private employer information to parties involved in a fraud claim.

TB P88 / PK P70-29-b-P162 2) Corporate citizenship Definition: Corporate citizenship is the business strategy that shapes the values underpinning a companys mission and the choices made each day by its executives, managers and employees as they engage with society. Three core principles define the essence of corporate citizenship, and every company should apply them in a manner appropriate to its distinct needs: minimizing harm, maximizing benefit, and being accountable and responsive to stakeholders. Main elements involved being a good corporate citizenship - The basic values, policies and practices of a company and its business at home and abroad. - The management of environmental and social issues within the value chain of business partners. - The voluntary contributions made by a company to community development around the world. TB 92 / PK P62-22-a-P135

6 Corporate governance best practice

1) Board structure (Structure of corporate governance) - Unitary board: Advantages: a) All directors have equal legal responsibilities, which implies more involved approach and therefore NEDs can act in an independent and supervisory capacity. b) All directors can access to information which may end up making better decisions.


c) d)

Different perspectives and viewpoints of NEDs should lead to better decisions. Better relationship between different types of directors as a single board promotes easier co-operation.

Disadvantages: a) To be both manager and monitor is too awkward and demanding a task. b) The time requirements on NEDs may be onerous, both in terms of the time spent in board meetings and obtaining sufficient knowledge about the company. c) The general meeting is the only place where shareholder concern can be heard. TB P119-120 / PK P226-1-c-P237 - Multi-tier board: Advantages: a) Clear and formal separation between the monitors and those being monitored. b) The supervisory/policy board has the capacity to be an effective guard against management inefficiency or worse. c) The system encourages transparency within the company. Disadvantages: a) Confusion over authority and therefore a lack of accountability. b) The management board may restrict the information passed on to the supervisory board and the boards may only liase infrequently. The supervisory board may not be as independent as would be wished. c) TB P120 - Legal and regulatory frameworks a) Legal responsibilities: Directors have a duty of care to show reasonable competence and may have to indemnify the company against loss caused by their negligence. i. A director is expected to show the degree of skill of his knowledge and experience. ii. A director is required to attend board meetings b) Conflict and disclosure of interests: As agents, directors have a general duty to avoid a conflict of interest. i. The directors must retain their freedom of action and not fetter their discretion by agreeing to vote as some other person may direct. ii. The directors owe a fiduciary duty to avoid a conflict of duty and personal interest. iii. The directors must not obtain any personal advantage from their position. c) Time-limited appointment: Most corporate governance guidance suggests that service contracts greater than 12 months needs to be carefully considered and should ideally be avoided. If service contracts are too long, the amounts paying off directors for the remainder of the contract are essentially rewards of failure. Service contract: Set out terms and conditions of directors appointment, including the duration of the appointment or the required minimum period of notice. The company needs to keep the contracts and make them available for shareholder inspection. Retried by rotation: Directors are often required to retire from the board and seek re-election, generally once every three years. Insider dealing/trading: It is a criminal offence to use inside information to buy or sell shares in a stock market.


e) f)

TB P109-111


Role of chairman: a) Running the board and setting its agenda b) Ensuring the board receives accurate and timely information c) Ensuring effective communication with shareholders d) Ensuring that sufficient time is allowed for discussion of controversial issues e) Taking the lead in providing an induction programme for new directors f) Taking the lead in board development g) Facilitating board appraisal h) Reporting in and signing off accounts

TB P112-113 - Role of CEO The UK Combined Code suggests that the major responsibilities of the CEO will be: a) Business strategy and management: The CEO will take the lead in developing objectives and strategy and will be primarily responsible for ensuring that the organisation achieves its objectives, optimising the use of resources. Investment and financing: The CEO will examine major investments and be responsible for identifying new initiatives. Risk management: The CEO will be responsible for managing the risk profile in line with the risk appetite accepted by the board and will be responsible for ensuring that appropriate internal controls are in place. Board committees: The CEO will make recommendations to be discussed by the board committees on remuneration policy, executive remuneration and terms of employment, also on the roles and capabilities relating to future director employments.

b) c)


TB P114 - Non-executive director a) Roles of NED (Contribution of NED) i. Strategy: they should aim to participate in setting the strategy of a company, in particular challenge the proposals of executive directors. ii. Scrutiny: they should scrutinise the performance of executive management in meeting goals and objectives, and monitor the reporting of performance. iii. Risk: they are responsible for seeing that risk issues are addressed within the company, in particular that financial information is accurate and financial management and systems of control are robust. People: they should be involved in the people side of running the company, including their roles in the remuneration and nomination committees.


TB P115 / PK P64-24-c-P142 / PK P226-1-d-P238 b) Problem with NED i. Having the same perspective as executive directors: NEDs may not be recruited from a diversity of backgrounds. ii. Lack of independence: it may be difficult to find NEDs who are free from any relationship that compromises independence. iii. Lack of business knowledge: Potential non-executive directors may have gained business knowledge through links with the company in the past. iv. Lack of human resource management: NEDs may not have proper induction into


the company, nor proper updating of their skills and knowledge of the company. Their performance may not be appraised regularly. v. vi. Limited time: the limited contribution to board meetings since they are unable to obtain a broad enough picture of what is happening throughout the organisation. Information available: NEDs contribution will be influenced by the quality of the organisations information systems, and also the willingness of executive directors to supply information about their activities. Role of board: their key role of warning the potential problems and hence preventing trouble may be ignored because board meeting may focus almost entirely on current operational matters and short-term operational results. Inability to resist pressures: NEDs have limited options when faced with a united group of executive directors who are determined to push through a policy with which the NEDs disagree.



PK P54-10-a-i-P98 c) Independence of NED Various safeguards can be put in place to ensure that non-executive directors remain independent. i. Non-executive directors should have no business, financial or other connection with the company, apart from fees and shareholdings. This includes participation in the companys share option or performance-related pay scheme or pension scheme. ii. Cross-directorships, where an executive director of Company A is a non-executive director of Company B, and an executive of Company B is a non-executive director of Company A, are particularly threat to independence. They should not take part in share option schemes and their service should not be pensionable. Appointments should be for a specified term and reappointment should not be automatic. Procedures should exist whereby non-executive directors may take independent advice, at the companys expense if necessary.

iii. iv. v.

TB P117-118 2) Role of nomination committee Nomination committee is responsible for recommending the appointments of new directors to the board. The nomination committee needs to consider: - The balance between executives and independent non-executives - The skills, knowledge and experience possessed by current board - The need for continuity and succession planning - The desirable size of the board - The need to attract board members from a diversity of backgrounds. TB P115 & P105 3) Directors remuneration - Roles of remuneration committee a) Complying with laws and best practice: the UK Combined Code suggests that the committee should be staffed by independent non-executive directors and should also ensure compliance with any relevant legislation.



Establishing general remuneration policy: the remuneration committee is responsible for establishing remuneration policy, acting on behalf of shareholders but for the benefit of both the board and shareholders. They should consider the pay scales for directors and what relation remuneration should have to measurable performance and when directors should receive performance-related benefits. Determining remuneration package: the committee needs to establish packages that will retain, attract and motivate directors whilst taking into account the interests of shareholders as well. Determining disclosure: disclosures normally include details of overall policies and the remuneration of individual directors.



PK P227-2-a-P241 - Information requirements The information will be required to assess executive directors pay on a reasonable basis: a) Remuneration packages given by similar organisations b) Market levels of remuneration c) Individual performance d) Organisation performance PK P201-2-b-P214 - Remuneration package: a) Basic salary: will be in accordance with the terms of the directors contract of employment, it is determined by the experience of the director and market rate. Salary is not generally related to performance. Shareholder interests can be promoted by ensuring that contracts of employment are not of excessive length. If remuneration packages are heavily weighted towards basic salary, they may be criticised for not providing enough incentives. b) Performance related bonuses: impose limits as a fixed percentage of salary or pay. Make sure shareholders interests are not subject to manipulation of profits and do not focus on short-term results. Shares: directors may be awarded shares in the company with limits (a few years) on when they can be sold in return for good performance. (for long-term performance) Share options: give directors the right to purchase shares at a specified exercise price over a specified time period in the future. If the price of the shares rises by the time the options can be exercised, the directors will be able to purchase shares at lower than their market value. The UK Combined Code states that share options should not be exercised in less than three years. (long-term performance) Benefit in kind: could include transport, health provisions, life insurance, holidays, expenses and loans. The remuneration committee should consider the benefit to the directors and the cost to the company of the complete package. It may be difficult to relate these elements to performance. A number of jurisdictions prohibit loans to directors of listed companies. Pensions: the UK Combined Code states that only basic salary should be pensionable. The Code emphasises that the remuneration committee should consider the pension consequence and associated costs to the company of basic salary increases and any other changes in pensionable remuneration, especially for directors close to retirement.

c) d)





TB P122-123 / PK P47-1-b-P74 / PK P171-1-d-P184 / PK P227-2-b-P241 4) Role of risk committee - Determining overall exposure to risk - Monitoring overall exposure to risk - Reviewing reports on key risks - Monitoring the effectiveness of the risk management systems TP P51-6-c-P88

7 Elements of control environment

1) Purpose of internal control (The UK Turnball report) - Facilitate the effective and efficient operation by enabling it to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the companys objectives. This includes the safeguarding of assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed. - Help ensure the quality of internal and external reporting. This requires the maintenance of proper records and processes that generate a flow of timely, relevant and reliable information from within and without the organisation. - Help ensure compliance with applicable laws and regulations.

TB P138 2) Key characteristics of internal control system (sound control system) - Be embedded in the operations of the company and form part of its culture. - Be capable of responding quickly to evolving risks within the business. - Include procedures for reporting immediately to management significant control failings and weaknesses together with control action being taken. TB P138 3) Control environment The control environment is the overall attitude, awareness and actions of directors and management regarding internal controls and their importance in the entity. The control environment encompasses the management style, and corporate culture and values shared by all employees. It provides the background against which the various other controls are operated. TB P141 / PK P199-1-a-P208

8 The main control procedures

1) Control procedures (framework): are those policies and procedures in addition to the control environment which are established to achieve the entitys specific objectives. (SPAMSOAP) Segregation of duties: separation of CEO/Chairman Physical: secure the custody of assets: Authorisation and approval. All transactions should require authorisation or approval by an appropriate responsible person. eg. Remuneration committee staffed by independent NEDs. Management should provide control through analysis and review of accountants: provision of internal auditor services Supervision of the recording and operations of day-to-day transactions Organisation: identify reporting lines, levels of authority and responsibility. Arithmetical and accounting: to check the correct and accurate recording and processing of



transactions. - Personnel: selection, training and qualifications of personnel. TB P142&145 2) Effectiveness of control system Board members need to consider: - The nature and extent of the risks which faces the company and which it regards as acceptable for the company to bear within its particular business - The threat of such risk becoming a reality - If that happened, the companys ability to reduce the incidence and impact on the business and to adapt to changing risks - The costs and benefits related to operating relevant controls PK P60-19-a-P126 3) Internal audit - Need for internal audit (considerations to establish internal audit) Turnball states that the need for internal audit will depend on: a) The scale, diversity and complexity of the companys activities b) The number of employees c) Cost-benefit considerations d) Changes in the organisation structures, reporting process or underlying information systems e) Problems with internal control systems f) An increased number of unexplained or unacceptable events TB P153 / PK P55-13-a-P107 - Definition Internal audit is an independent appraisal function established within an organisation to examine and evaluate its activities as a service to the organisation. TB P152 - Recruiting internal auditors a) Other experience b) Independence of operational departments c) Prejudices and biases TB P156 / PK P55-13-b-P108 - Objectives of internal audit & performance measure a) Review of the accounting and internal control systems b) Examination of financial and operating information c) Review of the economy, efficiency and effectiveness of operations d) Review of compliance with laws and regulations e) Review of the safeguarding of assets f) Review of the implementation of corporate objectives g) Identification of significant business and financial risks, monitoring the organisations overall risk management policy and strategies. h) Special investigations into particular areas TB P153-154 / PK P53-8-b-P94 - Internal and external audit



Internal audit Purpose Add value and improve an organisations operations. The board of directors Employees of the organisation

External audit Express an opinion on the financial statements Shareholders Independent of the company and its management

Reporting to Relationship with the company

TB P157 4) Audit committee - Membership of audit committee The UK Smith report recommends that the audit committee should consist entirely of independent non-executive directors including at least one member with significant and recent financial experience. (The UK Combined Code states at least 3 members) TB P163 - Roles of audit committee (Advantage of setting up audit committee) a) Review of financial statements and systems b) Liaison with external auditors c) Review of internal audit d) Review of internal control e) Review of risk management f) Investigation TB P164-165 / PK P49-2-a-P76 / PK P201-3-a-P216 - Disadvantage of setting up audit committee a) Lack of transparency b) Brake on business PK P63-23-a-P138 5) Reporting on internal control Per the Turnball report the board should disclose as a minimum in the accounts, the existence of a process for managing risks, how the board had reviewed the effectiveness of the process and that the process accords with the Turnball guidance. The board should also include: - An acknowledgement that they are responsible for the companys system of internal control and reviewing its effectiveness - An explanation that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives - A summary of the process that the directors have used to review the effectiveness of the system of internal control and consider the need for an internal audit function and how the directors deal with the significant problems disclosed in the annual accounts - Information about those weakness in internal control TB P248 / PK P60-19-c-P128

9 Risk analysis framework

1) Different types of risks in business - Strategic risks: are risks that relate to the fundamental and key decision that the directors


take about the future of the organisation. Operational risks: relate to matters that can go wrong on a day-to-day basis while the organisation is carrying out the business. Financial risk currency risk Transaction risk / Translation risk / Economic risk Interest risk Market risk Credit risk Liquidity risk Legal & political risk Technological risk Health & safety risk Environment risk Fraud risk Property risk Trading risk Reputation risk

TB P177 / PK P57-15-a-P112 / PK P58-16-P116 / PK P58-17-a-P118 / PK P59-18-a-122 / PK P173-3-a-P190 / PK P200-1-c-P210 2) Risk analysis / Framework for assessment - Risk identification This implies knowledge of what conditions create risk and what events can impact upon implementation of strategy or achievement of objectives. Methods of doing this include inspections, enquiries, brainstorming, etc. Risk analysis Risk analysis means determining what the consequences and effects will be of a risk materialising. This includes not just financial losses, but opportunity costs, loss of time. Risk profiling This involves making an assessment of the likelihood and the consequences of the risk materialising. This will help the organisation to decide whether the risk is acceptable in accordance with its appetite. If it isnt acceptable, profiling will help the organisation decide what it should do about the risk. Risk quantification This stage involves trying to calculate the level of risks and consequences. Organisations may wish to quantify the expected results, the chances of losses and the largest expected losses. Risk consolidation Risk consolidation means aggregating at the corporate level risks that have been identified or quantified at the subsidiary or division level. The consolidation process will support board decision on what constitute appropriate control systems to counter risks and cost-benefit analysis of controls.

PK P57-14-a-P110 / PK P225-1-b-P236


Main strategies for dealing with (manage) risks

Risk appetite Risk appetite is the amount of risk that the company is prepared to accept in exchange for returns.



PK P57-15-b-P114 2) Purpose of risk management - Alignment of risk appetite and strategy - Develop a consistent framework for dealing with risk - Develop risk response strategies PK P173-4-a-P194 3) Importance of risk management - Improve financial position - Minimize surprise and losses - Maintain reputation PK P173-4-a-P194 4) Framework of risk management - Internal or control environment - Objective setting - Event identification - Risk assessment - Risk response - Control activities - Information and communication - Monitoring TB P210 5) Four strategies Consequence (Hazard) Low Low Acceptance Risks are not significant. Keep under view, but costs of dealing with risks unlikely to be worth the benefit. Transfer Passing the risk onto another party High

L I k e l I Reduction Avoidance h Take some action to deal with Take immediate action to reduce o frequency of losses severity and frequency of losses. o d TB P230 / PK P57-14-b-P111 / PK P59-18-a-P123 6) Four principles for effective risk management - Risk identification - Risk evaluation - Risk management measures - Risk control and review PK P202-4-a-P219


The key ethical positions

Ethical decision-making models - American Accounting Association Model



a) b) c) d) e) f) g) -

What are the facts of the case? What are the ethical issues in the case? What are the norms, principles and values related to the case? What are the alternative courses of action? What is the best course of action that is consistent with the norms, principles and values identified? What are the consequences of each course of action? What is the decision?

Tuckers 5 question model a) Profitable? b) Legal? c) Fair? d) Right? e) Sustainable or environmentally sound?

TB P292 2) ACCA Code of Ethics and Conduct - Integrity: members should be straightforward and honest in all business and professional relationships. PK P227-3-b-P245 - Objectivity: members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements. PK P55-13-d-P109 - Professional competence and due care: members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services. Confidentiality: members should respect the confidentiality of information acquired as a result of professional and business relationships, should not disclose any such information to third parties without proper or specific authority or unless there is a legal or professional right or duty to disclose and should not be used for the personal advantage . Professional behaviour: members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

TB P290 / PK P64-24-a-P140 3) The public interest: is considered to be the collective well-being of the community of people and institutions the professional accountant serves. TB P273 4) Threats to independence - Self-interest threat - Self-review threat - Advocacy: advocating for the client in a lawsuit - Familiarity - Intimidation: threats of replacement due to disagreement TB P291




Environmental footprints Environmental footprints can be defined as the evidence of the impact a businesss activities have upon the environment including its resource environment and pollution emission. TB 314 / PK 226-1-e-P239 Sustainability For organisations, sustainability involves developing strategies so that the organisation only uses resources at a rate that allows them to be replenished. At the same time emissions of waste are confined to levels that do not exceed the capacity of the environment to absorb them.


TB P318 7) Full cost accounting FCA is at its simplest a system that allows current accounting and economic numbers to incorporate all potential/actual costs and benefits into the equation including environmental (and perhaps social) externalities to get the prices right. TB P324 8) Environmental audit Environmental audit is a systematic, documented, periodic and objective evaluation of how well an entity, its management and equipment are performing, with the aim of helping to safeguard the environment by facilitating management control of environmental practices and assessing compliance with entity policies and external regulations. TB P332


Kohlbergs framework

Kohlberg explains the ethical development of individuals in terms of progression through three levels of moral development with two planes within each level. Level 1 External rewards/punishment and self-interest Level 2 Conventional In terms of individual development, this level can be defined as individuals learning to live up to what is expected of them. Level 3 Post-conventional The most advanced level relates to individual development towards making their own ethical decisions in terms of what they believe to be right, not just acquiescing in what others believe to be right. TB P264 / PK P65-26-b-P147


Gray, Owen, Adams seven positions on corporate social responsibility

Pristine capitalists: support liberal economic democracy, private property system is the best system, companies exist to make profits and seek economic efficiency. Businesses therefore have no moral responsibilities beyond their obligations to shareholders and creditors. Expedients: believe in a modified liberal democracy, economics systems do generate some excesses, therefore business have to accept some (limited) social legislation and moral requirements. Some social responsibilities may be appropriate if such behaviour is in the businesss economic interests. Proponents of the social contract: believe in a contract between society and organisations. Both parties must therefore interact to their joint benefit.



Social ecologists: economic processes that result in resource exhaustion, waste and pollution must be modified. Socialists: see the relationship reflected in business reporting as one class (capitalists) manipulating and oppressing another class (workers and the socially oppressed). Within this frame, equality is difficult to achieve. Radical feminists: see a trade off between masculine qualities such as aggression and conflict and feminine values of cooperation and reflection. Deep ecologists: believe that human beings have no greater rights to resources or life than other species.

TB P271-272 / PK P171-1-b-P182

Verb in the Questions

Define: Give the meaning of Explain: Make clear Indentify: Recognise or select Describe: Give the key features Contrast: Make a comparison between things on the basis of the differences between them Analyse: Give reasons for the current situation or what has happened Assess: Determine the strengths/weakness/importance/significance/ability to contribute Discuss: Examine in detail by using arguments for and against Construct the case: Present the arguments in favour, supported by evidence Evaluate: Determine the value of Recommend: Advise the appropriate actions to pursue in terms the recipient will understand

Format for Professional Mark

Report / Memo To: From: Date: Subject: Letter XXX (Company) Address Line 1 Address Line 2 Date Dear XXX Re: Statement: Thank you for .