Essentials

Question 1

Corporate Governance

Answer 1

The system by which organisations are directed and controlled.

1. Protect shareholders rights
2. Enhance disclosure and transparency
3. Facilitate effective functioning of the board
4. Provide an efficient legal and regulatory enforcement framework

Question 2

Three elements of VFM

Answer 2

Economy - a measure of inputs to achieve a certain service or level of service.

Effectiveness - a measure of outputs (e.g. services/ facilities).

Efficiency - measure of outputs over inputs.

Question 3

Key concepts

Answer 3

1. Fairness
   Equality in dealing with internal stakeholders.
   Even handedness in dealing with external stakeholders.
2. Openness/ transparency*
   Underlying principle of corporate governance.
   Transparency is required in the agency relationship.
3. Innovation
   Covers innovation and experimentation in reporting to the benefit of investors and consumers.
4. Scepticism
   An attitude which includes a questioning mind, being alert to conditions which indicates possible misstatement due to fraud and error.
5. Independence*
   The avoidance of being unduly influenced by a vested interest.
6. Probity/ honesty
   Honesty in Financial reporting.
   Foundation ethical stance in both principles and rules based systems.
7. Responsibility*
   Acceptance of liability for the outcome of governance situations.
8. Accountability*
   Obligation of an individual or organisation to account for its actions and activities.
   Clarity in communication channels with internal and external stakeholders.
   Development and maintenance of risk management and control systems.
9. Reputation
   Developing and sustaining personal reputation through other moral virtues.
   Developing and sustaining the moral stance of the organisation and the accounting profession.
10. Judgement
    Ability to reach and communicate conclusions.
    Ability to weigh numerous issues and give each due consideration.
11. Integrity*
    Adherence to strict ethical standards despite other pressures to act otherwise.
    Underlying and underpinning principle of corporate governance and required of all those representing shareholder interest in agency relationships.

Question 4

Agency theory key concepts

Answer 4

1. An agent is employed by a principal and their agent to carry out a task on their behalf.
2. Agency costs are incurred by principals in monitoring agency behaviour.
3. By accepting to undertake a task on their behalf, agent becomes accountable to the principal by whom they are employed.
4. Directors have a fiduciary relationship to the shareholders of their organisation.
5. Stakeholders are any person or organisation that can affect or be affected by the policies.
6. Agent objectives are different to principal’s objectives.

Question 5

Diversity

Answer 5

Describes the range of visible and non-visible differences that exist between people.

Managing diversity creates a productive environment where everybody feels valued, where talents are fully utilised and organisational goals are met.

e.g. Race, ethnicity, gender, sexual orientation, socio economic status, age, physical ability, religious beliefs, political beliefs or other ideologies.

Benefits the board:

1. Effective decision making
2. Better utilisation of the talent pool
3. Enhancement of corporate reputation and investor relations

Question 6

Role of NEDs

Answer 6

1. Strategy
   Challenging strategy, offering advice and contributing toward strategic success.
2. Scrutiny
   Hold executive directors to account for decisions taken and results obtained.
3. Risk
   Ensure adequate system of internal controls and system of risk management in place.
4. People
   Oversee the appointment and remuneration of executive directors.

Question 7

Nominations committee

Answer 7

Responsibilities of nominations committee:

1. Review regularly the structure, size and composition of the board and make recommendations.
2. Consider the balance between executives and NEDs on the board of directors.
3. Ensure appropriate management of diversity to board composition.
4. Provide an appropriate balance of power to reduce domination in executive selection by the CEO/ chairman.
5. Evaluate the balance of skills, knowledge and experience of the board.
6. Full consideration to succession planning for directors.
7. Prepare a description of the role and capabilities required for any particular board appointment.
8. Identify and nominate for the approval by the board candidates to fill board vacancies as and when they arise.
9. Recommendations to the board concerning the standing for reappointment of directors.
10. Be seen to operate independently for the benefit of shareholders.

Question 8

Approaches to corporate governance

Answer 8

1. Rules based approach
   Installs the code into law with appropriate penalties for transgression.
2. Principles based approach
   Requires the company to adhere to the spirit rather than the letter of the code.
   Must either comply with the code or explain why it has not through reports to the appropriate body and its shareholders.

Question 9

Arguments in favour of a rules based approach

Answer 9

Organisation
1. Clarity in terms of what the company must do - legal requirement, clarity should exist and hence no interpretation is required.

2. Standardisation for all companies - no choice, this creates a standardised and possibly fairer approach for all businesses.
3. Binding requirements - the criminal nature makes it very clear that the rules must be complied with.

Wider shareholder perspective
1. Standardisation across all companies.

2. Sanction - criminal and therefore a greater deterrent.
3. Greater confidence in regulatory compliance.

Question 10

Arguments against a rules based approach

Answer 10

Organisation
1. Exploitation of loopholes - the exacting nature of the law lends itself to the seeking of loopholes.

2. Underlying belief - only play by the rules (no buy-in).
3. Flexibility is lost - no choice in compliance to reflect the nature of the organisation, it’s size or stage of development.
4. Checklist approach - can arise as companies seek to comply with all aspects of the rules and start “box ticking”.

Wider stakeholder perspective
1. Regulation overload - the volume of rules and amount of legislation may give rise to increasing costs for business and for the regulators.

2. Legal costs - to enact new legislation to close loopholes.
3. Limits - no room to improve or go beyond the minimum level set.
4. “Box ticking” rather than compliance.

Question 11

Stakeholders

Answer 11

Any person or group that can affect or be affected by the policies or activities of an organisation.

Claims (demands the stakeholder makes of an organisation) “want something”.
1. Direct stakeholder claims are usually unambiguous and are often made directly between the stakeholders and the organisation.

2. Indirect claims are made by stakeholders unable to express their claim directly to the organisation. They have no voice.

Question 12

Mendelow’s Matrix

Answer 12

Interest
Low High
Low Minimal effort Keep informed
Power
High Keep satisfied Key players

Power - the perceived ability of the stakeholder to affect organisational action.

Legitimacy - whether the company perceives the stakeholder action to be legitimate.

Urgency - whether the stakeholder claim calls for immediate action.

Question 13

Limitations of internal control systems

Answer 13

1. Poor judgement in decision making.
   Failures arise from individual decisions made in inadequate information or inexperienced staff.
2. Human error can cause failures.
   A well designed internal control environment can help control to a certain extent.
3. Control processes being deliberately circumvented by employees and others.
   Difficult to completely prevent deliberate circumvention.
4. Management overriding controls.
   Presumably the controls are inconvenient or inappropriate.
5. Unforeseeable circumstances.
   Control systems are designed to cope with a given range of variables and when out of range, the system is unable to cope.

Question 14

Criteria of good information

Answer 14

ACCURATE

Accurate
Complete
Cost beneficial
User targeted
Relevant
Authoritative
Timely
Easy to use

Question 15

Factors affecting the need for internal audit

Answer 15

1. The scale, diversity and complexity of the company’s activities.
   The larger the above, the more there is to monitor.
2. The number of employees.
   The larger organisations are, the more likely to need internal audit to underpin investor confidence than smaller concerns.
3. Cost/ benefit considerations.
   Management must be certain the benefits must outweigh the costs.
4. Changes in the organisational structures, reporting processes or underlying information systems.
   Any internal or external modification is capable of changing the complexity of operations and accordingly the risk.
5. Changes in key risks could be internal or external in nature.
   Introduction of a new product, entering a new market, a change in any of the PEST/ PESTEL factors or changes in the industry might trigger the need for internal audit.
6. Problems with existing internal control systems.
   Any problems signifies the need for a tightening of systems and increased monitoring.
7. An increased number of unexplained or unacceptable events.
   A clear demonstration of internal control weaknesses.

Question 16

Roles of the audit committee

Answer 16

Independent NEDs (at least 3 in larger companies) and 1 with relevant financial experience.

1. Review of internal control systems.
2. Oversee work of internal audit.
3. Monitor integrity of financial statements.
4. Review work of external audit.

Question 17

Strategic risk

Answer 17

Affects the whole company (can sink the ship).

1. Risks arising from the possible consequences of strategic
   decisions taken by the organisation.
2. Arise from the way an organisation is strategically positioned within its environment.
3. Should be identified and assessed at senior management and board of directors level.
4. PESTEL and SWOT techniques can be used to identify these risks.

Question 18

Operational risk

Answer 18

Affects the department (nuisance) from day to day activities.

1. Refer to potential losses that might arise in business operations.
2. Include risks of fraud or employee malfeasance, poor quality or lack of inputs for production.
3. Can be managed by internal control systems.

Question 19

The concept of related risk factors

Answer 19

Related risks are risks that vary because of the presence of another risk or where two risks have a common cause. This means when one risk increases, it has an affect on another risk (related) e.g. Risk correlation.

Positively correlated risks
Positively related in that one will fall with the reduction of the other and increase with the rise of the other.

Negatively correlated risks
Negatively related in that if one rose as the other fell.

Question 20

Risk mapping

Answer 20

The map identifies whether a risk will have a significant impact on the organisation and links that into the likelihood of the risk occurring.
Likelihood
Low High
High Further analysis Highest priority
required?
Reduce Avoid
Probability

                 Low Risks can probably       Further analysis
                         be accepted                   required?
                         Accept                            Transfer

Question 21

Risk auditing

Answer 21

1. Risk audit is a systematic way of understanding the risks that an organisation faces.
2. Risk audit is not a mandatory requirement for all organisations.
3. In some highly regulated industries, a form of ongoing risk assessment and audit is compulsory in most governance jurisdictions.
4. Some organisations employ internal specialists to carry out risk auditing, others utilise external consultants to perform the work.

Question 22

Stages of a risk audit

Answer 22

1. Identify risks and construct risk register.
2. Assess risk by applying the probability/ impact assessment (likelihood of occurrence and impact on the organisation).
3. Review controls over risk which involves TARA.
4. Report on inadequately controlled risks (to the board or risk management committee if exists).

Question 23

Deontological

Answer 23

Deontological
1. What is correct will depend on the conditions at the time non-consequential theory.

2. What is correct will depend on the conditions at the time motivation or principle is important.
3. What is correct will depend on the conditions at the time action deemed right or wrong when the morals for taking the action are known.

Question 24

Key maxims for deontological approach

Answer 24

1. Consistency
   Act only according to that maxim, at the same time desire it should become universal law.

The action can only be right if everyone can follow the same underlying principle.

2. Human dignity
   Act so that you treat dignity, whether in your own person or in that of another, always as an end never as a means only.

Everybody uses humans in some way (provide goods and services) but this does not mean that the other human should be seen as a provider of those goods or services. Their own needs and expectations are important and this must always end remembered.

3. Universality
   Act only so that the will through its maxims could regard itself at the same time as universally law giving.

The test is whether an action is moral or suitable when viewed by others, not by the person undertaking that action.
The basic test is that if a person would be uncomfortable if their actions were reported in the press (even if no other humans could accept the principle) the the action is likely to be of doubtful moral status.

Question 25

Teleological approach

Answer 25

1. What is correct will depend on the conditions at the time consequentialist theory. 2. What is correct will depend on the conditions at the time decision is right or wrong on the consequences or outcomes of that situation. 3. What is correct in any given situation will depend on the conditions at the time as long as the outcome is right then the action itself is irrelevant.

Question 26

Teleological perspectives

Answer 26

1 Egoism What is best for me? An action is morally right if the decision maker freely decides in order to pursue either their short term desires or longer term interests. The egoist will do what appears right in society be use it makes them feel better. Egoism does not always work because actions on all members of society cannot be determined. 2.Utilitarianism What is best for the greatest number? An action is morally right if it results in the greatest amount of good for the greatest number of people affected by that action. It applies to society as a whole and not the individual. It is valuable in business decisions because it introduces the concept of utility - or the economic value of actions. It is highly subjective.

Question 27

Kohlberg's cognitive moral development (CMD) theory

Answer 27

3: Post conventional Individual develops more autonomous decision making based on principles of right and justice. 3.2 Universal ethical principles Individuals make decisions based on self chosen principals which they believe everyone should follow. A purchasing manager stops buying products that have been tested on animals as it does not respect the animals right to be free from suffering. 3.1 Social contract and individual rights Right and wrong are determined by reference to basic rights, values and contracts of society. A food manufacturer makes full disclosure of the ingredients in its products although there is no statutory requirement. 2. Conventional Individual does what is expected of them by others. 2.2 Social accord and system maintenance The consideration of the expectation of others is broadened to social accord in general terms rather than immediate peers. A manager raises working conditions of employees above the statutory minimum to the standard expected. 2.1 Interpersonal accord and conformity Actions are defined by what is expected of individuals by their peers and those close to them. An employee justifies using the company telephone and email for personal use as all other employees already do this. 1. Pre-conventional Individual shows concern for self-interest and external rewards and punishments. 1.2 Instrumental purpose and exchange Right is defined according to whether there is fairness in exchanges. Individuals are concerned with their own immediate interests. One employee covers for the absence of a colleague, on the understanding the colleague will cover for them if necessary. Employee only carrying out the action as it benefits them. 1.1 Obedience and punishment Right and wrong are defined according to expected rewards and/or punishment from figures of authority. Unethical decision taken because employee believes either they will be rewarded or the company will not punish them.

Question 28

Gray, Owens and Adams

Answer 28

1. Pristine capitalist - Underpinning value is shareholder wealth maximisation. - Anything that reduces shareholder wealth is theft from shareholders. - Agents (directors) that take actions that may reduce the value of the return to shareholders are acting without mandate and destroying value to shareholders. 2. Expedients - Recognise some social responsibility expenditure may be necessary to strategically position an organisation so as to maximise profits. - Concept of "enlightened self interest". - A company might adopt an environmental policy or give money to charity if it believes it will create a favourable image that will help in its overall strategic positioning. 3. Proponents of social contract - Businesses enjoy a licence to operate granted by society if the business acts appropriately. - This licence is granted in such a way as to be deserving of that licence. - Businesses need to be aware of the norms in society to continually adapt to them - If an organisation acts unacceptably, the license can be withdrawn. 4. Social ecologist - Recognise a business has a social and environmental footprint therefore bears responsibility for minimising that footprint. - An organisation might adopt socially and/or environmentally responsible policies because it has a responsibility to do so. 5. Socialist - Actions of business are those of the capitalist class oppressing other classes of people. - Business should be conducted so as to repress imbalances in society. - Providing benefits to stakeholders well beyond the owners of capital. 6. Radical feminist - Society and business should be based on feminine characteristics such as equity, dialogue, compassion and fairness. - Argue that society and business are based on values considered as masculine in nature such as aggression, achievement and conflict. - Representing a major challenge to the way business is done all over the world hence requiring a complete change in business and social culture. 7. Deep ecologist - Humans have no more intrinsic right to exist than any other species. - A full recognition of each stakeholders claim would not allow business to continue as it currently does.

Question 29

Professional code of ethics

Answer 29

1. Integrity Member should be straightforward and honest in all professional business relationships. 2. Objectivity Members do not allow bias or conflict of interest in business judgements. 3. Professional competence Duty to maintain professional knowledge and skill at an appropriate level. 4. Confidentiality Information on clients not disclosed without appropriate specific authority. 5. Professional behaviour Members must comply with relevant laws and prevent actions discrediting the profession.

Question 30

Conflicts of interest

Answer 30

1. Self-interest Occurs when the audit firm or a member of the audit team could benefit from a financial interest or other self-interest conflict with an audit client. For example: - direct financial interest or material indirect financial interest in an audit client - undue dependence on total fees from an audit client - a close business relationship with an audit client 2. Self-review When the audit firm or an individual audit team member is put in a position of reviewing subject matter for which the firm or individual was previously responsible and which is significant in the context of the audit engagement. For example: - member of the audit team being or having recently been a director, officer or other employee of the audit client in a position to exert direct and significant influence over the subject matter of the audit engagement 3. Advocacy When the audit firm or a member of the audit team promotes or may be perceived to promote an audit client's position or opinion. For example: - dealing in or being a promoter of shares or other securities in an audit client and - acting as an advocate on behalf of an audit client in litigation or in resolving disputes with third parties 4. Familiarity When it's directors, officers or employees, an audit firm or a member of the audit team becomes too sympathetic to the client's interests. For example: - a member of the audit team having a close family member who as a director, officer or other employee of the audit client is in a position to exert direct and significant influence over the subject matter of the audit engagement 5. Intimidation threat When a member of the audit team may be deterred from acting objectively and exercising professional scepticism by threats, actual or perceived from the directors, officer or employees of an audit client. For example: - threat of replacement over a disagreement regarding the application of an accounting principle - pressure to reduce inappropriately the extent of work performed in order to reduce fees

Question 31

Corruption and bribery

Answer 31

Corruption is bribery and any other behaviour in relation to persons entrusted with responsibilities in the public or private sector which violates their duties and is aimed at obtaining undue advantages of any kind for themselves as for others. ``` For example: Bribery including excessive hospitality Facilitation payments Buying votes Illicit payments to political parties Misappropriation of public funds ``` Corruption is wrong because - it is a misuse of power and position and has a disproportionate impact on the poor and disadvantaged - it undermines the integrity of all involved and damages the fabric of the organisations to which they belong

Question 32

American Accounting Association (AAA)

Answer 32

The American Accounting Association model provides a framework within which an ethical decision can be made 1. What are the facts of the case? When the decision making process starts, there is no ambiguity about what is under consideration. 2. What are the ethical issues in the case? Involves examining the facts of the case and asking what ethical issues are at stake. 3. What are the norms, principals and values related to the case? Involves placing the decision in its social, ethical and in some cases professional behaviour context. 4. What are the alternative courses of action? To do something or not do something. 5. What is the best course of action that is consistent with the norms, principles and values identified in Step 3? Which course of action is most in keeping with Step 3. 6. What are the consequences of each possible course of action? The purpose is to make the implications of each outcome unambiguous so the final decision is made in full knowledge and recognition of each one. 7. What is the decision?

Question 33

Tucker's 5 question model

Answer 33

Tucker provides a 5-question model against which ethical decisions can be tested. Therefore used after the AAA model to ensure the decision reached is correct. 1. Profitable? (Long term vs. Short term) 2. Legal? 3. Fair? 4. Right? 5. Sustainable or environmentally sound?

Question 34

Sustainability

Answer 34

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (WCED 1987). Sustainability An attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future.

Question 35

Environmental footprint

Answer 35

An attempt to evaluate the size of a company's impact on the environment in three respects 1. The company's resource consumption. 2. Any harm to the environment brought about by pollution emissions. 3. A measurement of the resource consumption and pollution emissions in terms of harms to the environment in either qualitative, quantitative or replacement terms. N.B. If resource exceeds provision then can be termed unsustainable.

Question 36

Social and environmental auditing

Answer 36

1. Social auditing - Enables an organisation to assess and demonstrate its social, economic and environmental benefits and limitations. - Measures the extent to which an organisation achieves the shared values and objectives set out in its mission statement. - Provides the process for environmental auditing. 2. Environmental auditing - Aims to assess the impact of the organisation on the environment. - Involves the implementation of appropriate environmental standards such as ISO 14001 and EMAS. - Provides the raw data for environmental accounting. An environmental audit contains 3 elements: 1. Agreed metrics (what should be measured and how). 2. Performance measured against those metrics. 3. Reporting on the levels of complicate or variance.

Question 37

Integrated reporting

Answer 37

Integrated Reporting (IR) is seen by the International Integrate PhD Reporting Council (IIRC) as the basis for a fundamental change in the way in which entity's are managed and report to stakeholders. The IR framework sets out the purpose of an integrated report as follows:- 1. The primary purpose of an integrated report is to explain to providers of financial capital how an entity created value over the short, medium and longer term. 2. An integrated report benefits all stakeholders interested in an entity's ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulator and policymakers. Objectives:- 1. Improve the quality of information available to providers of financial capital. 2. Provide a more cohesive and efficient approach to corporate reporting that draws on different reporting studs and communicates the full range of 3. To enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship and natural). 4. Support integrated thinking, decision making and actions that focus on the creation of value over the short, medium and long term.

Question 38

How to prepare an integrated report

Answer 38

1. Strategic focus and future orientation Highlighting significant risks, opportunities and dependencies flowing from the organisation's market position and business model and giving the management's view of how the organisation balances short, medium and long term interests. 2. Connectivity of information Show a holistic picture of the combination, inter-relatedness and dependencies between the factors that affect the organisation's ability to create value over time. 3. Stakeholder relationships Should provide insight into the nature and quality of the organisation's relationships with its key stakeholders. 4. Materiality Identifying relevant matters based on their ability to affect value creation. 5. Conciseness Should give sufficient context to understand the organisation's strategy, governance and prospects without being burdened by less relevant information. 6. Reliability and completeness Should include all material matters, both positive and negative, in a balanced way and without material error.