acca p1 slides 2011
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Professional Accountant
ACCA Paper P1
2
Format of the Paper
Section A: 50 marks
• A number of questions relating to a single
scenario
Section B: 50 marks
• Two out of three 25 mark questions
3
Core Areas of Syllabus
• Governance and responsibility 35%
• Internal control and review 20%
• Identifying, assessing & controlling risk 25%
• Professional values and ethics 20%
4
Syllabus Summary
Governance & responsibility
Professional values & ethics
Risk managementInternal control &
review
5
1Chapter Theory of governance
6
Session Content
7
Company ownership and
control
8
“ the system by which companies are
directed and controlled “
Definition of corporate
governance
“ the system by which companies are
directed and controlled in the interests
of shareholders and other stakeholders”
9
Key concepts
• Fairness
• Openness / transparency
• Independence
• Probity / honesty
• Responsibility
• Accountability
• Reputation
• Judgement
• Integrity
10
Operational areas affected by
corporate governance
11
Agency theory
12
Agency theory and corporate
governance
13
Key concepts of agency theory
• Agent employed by principal
• Agency = relationship
• Agency costs
• Accountability
• Fiduciary responsibility
• Stakeholders
• Objectives
14
Cost of agency relationships
Examples include:
• Incentive schemes for directors
• Providing and reviewing data
• Meetings
• Accepting higher risks
• Monitoring behaviour
• Residual loss
15
Agency problem resolution
measures
• Meeting – Principal/key investors
• Voting at AGM
• Resolutions at AGM
• Accepting takeovers
• Divestment of shares
16
Agency accountability
• Act in shareholders‟ interests
• Provide good information
• Operate within legal structure
17
Transaction cost theory –
external transactions
18
Transaction costs can be
further impacted
19
Stakeholder theory
20
2ChapterDevelopment of corporate governance
21
Session Content
22
Development of corporate
governance codes
23
UK Combined Code
• Directors
• Director‟s remuneration
• Relations with shareholders
• Accountability and audit
• Institutional investors
24
UK Combined Code cont.
25
Reasons for developing a
governance code
• Reduce fraud / corruption
• Poor governance = poor performance
• Investors will pay a premium
• Decision factor for institutional investors
• Reduces risk
26
Practical problems with a
governance code
• Reactionary process
• Impact varies
• Restricts individual decision-making
power
• Bureaucracy
• Harms competitiveness
• Cannot stop fraud
27
3ChapterThe board of directors
28
Session Content
Essential text: p52
29
Development of governance
regarding board of directors
• Cadbury Report (1992)
• Higgs Report (2003)
• Tyson Report (2003)
30
Board structures
31
Advantages of two-tier board
• Clear separation
• Implicit shareholder involvement
• Wider stakeholder involvement
• Independence of thought, discussion &
decision
• Direct power over management
32
Problems with two-tier board
• Dilution of power
• Isolation of supervisory board
• Agency problems between boards
• Bureaucracy
• Reliant upon relationship between
chairman & CEO
33
Roles of NEDS
34
Threats to independence
35
NEDs on the board
Advantages:
• Monitoring
• Expertise
• Perception
• Communication
• Discipline
Disadvantages:
• Unity
• Quality
• Liability
36
Chairman & CEO
37
Splitting role of Chairman &
CEO
Reasons for:
• Representation
• Accountability
• Temptation
Reasons against:
• Unity
• Ability
• Human nature
38
Induction and CPD
39
Legal and regulatory framework
40
Conflict of interest
41
Performance evaluation
42
Board committees
43
4Chapter
Directors‟ remuneration
44
Session Content
45
Components of directors‟
remuneration package
46
Directors‟ remuneration – other
issues
47
5ChapterRelations with
shareholders and
disclosure
48
Session Content
49
Institutional investors
• Types
• Importance
• Potential problems
50
Potential problems
51
Institutional investors
• Types
• Importance
• Potential problems
• Solution: shareholder activism
• Institutional shareholder intervention
52
Institutional shareholder
intervention conditions
• Strategy
• Operational performance
• Acquisitions and disposals
• Remuneration policy
• Internal controls
• Succession planning
• Social responsibility
• Failure to comply with relevant codes
53
Disclosure – general principles
54
Disclosure: best practice
55
Mandatory vs voluntary
disclosure
56
Voluntary disclosure
57
6ChapterCorporate governance
approaches
58
Session Content
59
Approaches to corporate
governance
60
In favour of rules-based
approach
Organisation‟s perspective:
• Clarity of requirements
• Standardisation for all companies
• Binding requirements
Wider stakeholder perspective:
• Standardisation across all companies
• Sanction
• Greater confidence in compliance
61
Against a rules-based approach
Organisation‟s perspective:
• Exploitation of loopholes
• Underlying belief
• Flexibility is lost
• Checklist approach
Wider stakeholder perspective:
• „Regulation overload‟
• Legal costs
• Limits
• „Box-ticking‟
62
SOX / Sarbox
63
Family structure(vs joint stock)
Benefits:
• Fewer agency costs
• Ethics
• Fewer short-term decisions
Problems:
• Gene pool
• Feuds
• Separation
64
Insider-dominated structure(vs
outsider-dominated)Benefits:
• Fewer agency problems & costs
• Lower cost of capital
• Greater access to capital
• Less short-termism
• Greater input to decisions
Problems:
• Lack of minority shareholder protection
• Opaque operations
• Misuse of power
• Market does not decide or govern
65
International convergence
66
7ChapterCorporate social
responsibility and
corporate governance
67
Session Content
68
Corporate social responsibility
(CSR)
69
Nature of CSR
Carroll defined CSR as including 4 points:
• Economic responsibility
• Legal responsibility
• Ethical responsibility
• Philanthropic responsibility
70
Social responsiveness
• Reaction
• Defence
• Accommodation
• Proaction
71
Stakeholder classifications
• Internal & external
• Narrow & wide
• Primary & secondary
• Active & passive
• Voluntary & involuntary
• Legitimate & illegitimate
72
Stakeholder mapping:
Mendelow
Minimal effort Keep informed
Keep satisfied Key players
Level of interest
Power
High
High
Low
Low
73
Organisational motivations
regarding stakeholders
Instrumental view:
• To not do so would have an impact on
primary objectives of organisation
• Devoid of any moral obligation
Normative view:
• Moral duty towards others
• Act in general sense of what is right
74
8Chapter
Internal control systems
75
Session Content
76
Objectives of an internal control
system
To ensure as far as practicable:
- Orderly and efficient conduct, including
adherence to internal policies
- Safeguarding assets
- Prevention / detection of fraud & error
- Accuracy and completeness of records
- Timely preparation of financial information
77
Sound control systems
78
Roles
79
Elements of an effective internal
control system
• Control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring
80
Management levels
81
9Chapter
Audit and compliance
82
Session Content
83
Internal audit
84
Factors affecting need for
internal audit
• Scale, diversity and complexity of
company‟s activities
• Number of employees
• Cost / benefit
• Changes in organisational structures
• Changes in key risks
• Problems with existing internal control
systems
• Recent „events‟
85
Risks if auditors are not
independent
86
Threats to independence
87
Audit committee roles
88
Audit committee: internal
control
• Review the company‟s internal financial
controls
• Review all the company‟s internal control
and risk management systems
• Give approval to internal control and risk
management statements in annual report
• Receive reports from management about
effectiveness of control systems
• Receive reports on tests carried out on
controls by internal auditors
89
Audit committee: internal audit
90
Audit committee duties: external
audit
• Recommendation on appointment, re-
appointment and removal of auditors
• Oversee selection process
• Approve terms of engagement and
remuneration
• Ensure independence and objectivity
• Review scope of audit
• Ensure appropriate plans at start of audit
• Carry out post-completion audit review
91
10Chapter
Risk and the risk
management process
92
Session content
93
Why incur risk ?
94
Risk management process
95
Enterprise risk management
96
Strategic and operational risk
97
Risks facing a business (ACCA‟s)
• Risks
Market Credit LiquidityHealth &
Safety /
Environmental
Technological
Legal DerivativesReputationBusiness
probity
98
Sector-specific risks
99
Impact on stakeholders
100
Analysing risks
101
Risk mapping
104
Role of the board
105
Risk attitudes
106
Risk committee
107
The risk manager
108
Risk awareness
109
Embedding risk in systems
110
Embedding risk in culture
111
Risk management strategies -
TARA
112
Risk avoidance and retention
113
Diversifying / spreading risk
114
Types of diversification
115
Risk auditing
116
Stages of a risk audit
117
External reporting
118
12Chapter
Ethical theories
119
Session content
120
Approaches to ethics
• Absolutism vs relativism
• Dogmatic vs pragmatic
121
Approaches to ethics
122
Kohlberg‟s CMD
3. Post-conventional
3.2 Universal ethical principles
3.1 Social contract and individual rights
2. Conventional
2.2 Social accord and system maintenance
2.1 Interpersonal accord and conformity
1. Pre-conventional
1.2 Instrumental purpose and exchange
1.1 Obedience and punishment
123
Gray, Owen and Adam‟s: Seven
positions on social responsibility
124
Variables determining cultural
context
125
Ethical stances
126
13Chapter
Professional and
corporate ethics
127
Session content
128
Profession vs professionalism
129
Profession
130
Accountants‟ role and influence
131
Limits on influence of
accounting
• Extent of organisational reporting
• Conflicts of interest in selling services
• Long-term relationship with clients
• Overall size of accountancy firms
• Focus on growth and profit
132
Influence
133
Corporate ethics
134
Professional practice and codes
of ethics
135
ACCA professional code of
ethics
• Integrity
• Objectivity
• Professional competence
• Confidentiality
• Professional behaviour
136
Conflicts of interest and ethical
threats
137
Approaches to conflict
resolution
138
Ethical conflict resolution
1. Gather facts
2. Establish ethical issues
3. Refer to fundamental principles
4. Flow internal procedures
5. Investigate alternative courses of action
6. Consult within firm
7. Obtain advice from institute
8. Withdraw from role
139
14Chapter
Ethical decision making
140
Session content
141
Applying ethical decision
making
142
American Accounting
Association Model7 questions in the model:
1. What are the facts of the case ?
2. What are the ethical issues of the case ?
3. What are the norms, principles and values related to
the case?
4. What are the alternative courses of action ?
5. What is the best course of action that is consistent
with the norms, principles and values identified in
step 3 ?
6. What are the consequences of each possible course
of action ?
7. What is the decision ?
143
Tuckers 5 question model
The decision should be:
• Profitable
• Legal
• Fair
• Right
• Sustainable or environmentally sound
144
Ethical decision making
145
Ethical behaviour
146
Factors affecting moral intensity
• Concentration of effort
• Proximity
• Temporal immediacy
• Magnitude of consequence
• Social consensus
• Probability of effect
147
15Chapter
Social and environmental
issues
148
Session content
149
Sustainability
150
Definitions
• Sustainable development is
development that meets the needs of
the present without compromising the
ability of future generations to meet their
own needs
• Sustainability is an attempt to provide
the best outcomes for the human and
natural environments both now and into
the indefinite future
151
Accounting for sustainability
152
Footprints
• Environmental footprint:
– Resource consumption
– Pollution emissions
– Measurement
• Social footprint:
– Social capital
– Human capital
– Constructed capital
153
Management systems
154
Social and environmental audit
155
Elements of a social audit
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