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ACCA PasscardsPaper P1Governance Risk and Ethics
Passcards for exams up to June 2015
ACP1PC14indd 1 29052014 1729
Professional Paper P1Governance Risk and Ethics
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page i
All rights reserved No part of this publication may bereproduced stored in a retrieval system or transmitted inany form or by any means electronic mechanicalphotocopying recording or otherwise without the priorwritten permission of BPP Learning Media
copyBPP Learning Media Ltd
2014
First edition 2007 Eighth edition June 2014
ISBN 9781 4727 1129 8
e ISBN 9781 4727 1185 4
British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the
British Library
Your learning materials published by BPP LearningMedia Ltd are printed on paper obtained from traceablesustainable sources
Published by
BPP Learning Media LtdBPP House Aldine Place142ndash144 Uxbridge RoadLondon W12 8AA
wwwbppcomlearningmedia
Printed in Singapore by Ho Printing
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(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page ii
Page iii
ContentsPreface
Welcome to BPP Learning Mediarsquos ACCA Passcards for Professional Paper P1 Governance Risk and Ethics
They focus on your exam and save you time
They incorporate diagrams to kick start your memory
They follow the overall structure of the BPP Learning Media Study Texts but BPP Learning Mediarsquos ACCAPasscards are not just a condensed book Each card has been separately designed for clear presentationTopics are self contained and can be grasped visually
ACCA Passcards are just the right size for pockets briefcases and bags
Run through the Passcards as often as you can during your final revision period The day before the exam try togo through the Passcards again You will then be well on your way to passing your exams
Good luck
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iii
ContentsPreface
Page
1 Scope of corporate governance 1
2 Approaches to corporate governance 11
3 Corporate governance practice and reporting 21
4 Internal control systems 31
5 Risk attitudes and internal environment 39
6 Risks 47
7 Risk assessment and response 53
8 Information communication and monitoring 61
9 Personal ethics 6910 Professional ethics 75
11 Corporate social responsibility 83
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iv
1 Scope of corporate governance
Topic List
Definition
Concepts
Agency
Stakeholders
Main issues
This chapter sets out the foundations of good corporategovernance defining what corporate governance is thekey concepts and the stakeholders whom goodcorporate governance servesYou may need to considerthe conflicting interests of stakeholders and howstakeholders can control managersdirectors We alsosummarise major issues in corporate governance
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Definition Main issuesStakeholdersAgencyConcepts
Corporate governance is the system by which organisations are directed and controlled It is a set ofrelationships between directors shareholders and other stakeholders
Risk managementand reduction
Appropriate controlsystems
Framework topursue strategy
Guards againstmisuse of resources
Spirit of codes Accountability tostakeholders
Corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 2
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
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Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
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2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
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Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
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Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
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Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
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Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
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Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
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3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
All rights reserved No part of this publication may bereproduced stored in a retrieval system or transmitted inany form or by any means electronic mechanicalphotocopying recording or otherwise without the priorwritten permission of BPP Learning Media
copyBPP Learning Media Ltd
2014
First edition 2007 Eighth edition June 2014
ISBN 9781 4727 1129 8
e ISBN 9781 4727 1185 4
British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the
British Library
Your learning materials published by BPP LearningMedia Ltd are printed on paper obtained from traceablesustainable sources
Published by
BPP Learning Media LtdBPP House Aldine Place142ndash144 Uxbridge RoadLondon W12 8AA
wwwbppcomlearningmedia
Printed in Singapore by Ho Printing
31 Changi South Street 1Changi South Industrial EstateSingapore486769
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page ii
Page iii
ContentsPreface
Welcome to BPP Learning Mediarsquos ACCA Passcards for Professional Paper P1 Governance Risk and Ethics
They focus on your exam and save you time
They incorporate diagrams to kick start your memory
They follow the overall structure of the BPP Learning Media Study Texts but BPP Learning Mediarsquos ACCAPasscards are not just a condensed book Each card has been separately designed for clear presentationTopics are self contained and can be grasped visually
ACCA Passcards are just the right size for pockets briefcases and bags
Run through the Passcards as often as you can during your final revision period The day before the exam try togo through the Passcards again You will then be well on your way to passing your exams
Good luck
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iii
ContentsPreface
Page
1 Scope of corporate governance 1
2 Approaches to corporate governance 11
3 Corporate governance practice and reporting 21
4 Internal control systems 31
5 Risk attitudes and internal environment 39
6 Risks 47
7 Risk assessment and response 53
8 Information communication and monitoring 61
9 Personal ethics 6910 Professional ethics 75
11 Corporate social responsibility 83
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iv
1 Scope of corporate governance
Topic List
Definition
Concepts
Agency
Stakeholders
Main issues
This chapter sets out the foundations of good corporategovernance defining what corporate governance is thekey concepts and the stakeholders whom goodcorporate governance servesYou may need to considerthe conflicting interests of stakeholders and howstakeholders can control managersdirectors We alsosummarise major issues in corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 1
Definition Main issuesStakeholdersAgencyConcepts
Corporate governance is the system by which organisations are directed and controlled It is a set ofrelationships between directors shareholders and other stakeholders
Risk managementand reduction
Appropriate controlsystems
Framework topursue strategy
Guards againstmisuse of resources
Spirit of codes Accountability tostakeholders
Corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 2
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Page iii
ContentsPreface
Welcome to BPP Learning Mediarsquos ACCA Passcards for Professional Paper P1 Governance Risk and Ethics
They focus on your exam and save you time
They incorporate diagrams to kick start your memory
They follow the overall structure of the BPP Learning Media Study Texts but BPP Learning Mediarsquos ACCAPasscards are not just a condensed book Each card has been separately designed for clear presentationTopics are self contained and can be grasped visually
ACCA Passcards are just the right size for pockets briefcases and bags
Run through the Passcards as often as you can during your final revision period The day before the exam try togo through the Passcards again You will then be well on your way to passing your exams
Good luck
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iii
ContentsPreface
Page
1 Scope of corporate governance 1
2 Approaches to corporate governance 11
3 Corporate governance practice and reporting 21
4 Internal control systems 31
5 Risk attitudes and internal environment 39
6 Risks 47
7 Risk assessment and response 53
8 Information communication and monitoring 61
9 Personal ethics 6910 Professional ethics 75
11 Corporate social responsibility 83
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iv
1 Scope of corporate governance
Topic List
Definition
Concepts
Agency
Stakeholders
Main issues
This chapter sets out the foundations of good corporategovernance defining what corporate governance is thekey concepts and the stakeholders whom goodcorporate governance servesYou may need to considerthe conflicting interests of stakeholders and howstakeholders can control managersdirectors We alsosummarise major issues in corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 1
Definition Main issuesStakeholdersAgencyConcepts
Corporate governance is the system by which organisations are directed and controlled It is a set ofrelationships between directors shareholders and other stakeholders
Risk managementand reduction
Appropriate controlsystems
Framework topursue strategy
Guards againstmisuse of resources
Spirit of codes Accountability tostakeholders
Corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 2
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
ContentsPreface
Page
1 Scope of corporate governance 1
2 Approaches to corporate governance 11
3 Corporate governance practice and reporting 21
4 Internal control systems 31
5 Risk attitudes and internal environment 39
6 Risks 47
7 Risk assessment and response 53
8 Information communication and monitoring 61
9 Personal ethics 6910 Professional ethics 75
11 Corporate social responsibility 83
(000)ACP1PC14_FP(Ho)qxp 5282014 1238 AM Page iv
1 Scope of corporate governance
Topic List
Definition
Concepts
Agency
Stakeholders
Main issues
This chapter sets out the foundations of good corporategovernance defining what corporate governance is thekey concepts and the stakeholders whom goodcorporate governance servesYou may need to considerthe conflicting interests of stakeholders and howstakeholders can control managersdirectors We alsosummarise major issues in corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 1
Definition Main issuesStakeholdersAgencyConcepts
Corporate governance is the system by which organisations are directed and controlled It is a set ofrelationships between directors shareholders and other stakeholders
Risk managementand reduction
Appropriate controlsystems
Framework topursue strategy
Guards againstmisuse of resources
Spirit of codes Accountability tostakeholders
Corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 2
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
1 Scope of corporate governance
Topic List
Definition
Concepts
Agency
Stakeholders
Main issues
This chapter sets out the foundations of good corporategovernance defining what corporate governance is thekey concepts and the stakeholders whom goodcorporate governance servesYou may need to considerthe conflicting interests of stakeholders and howstakeholders can control managersdirectors We alsosummarise major issues in corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 1
Definition Main issuesStakeholdersAgencyConcepts
Corporate governance is the system by which organisations are directed and controlled It is a set ofrelationships between directors shareholders and other stakeholders
Risk managementand reduction
Appropriate controlsystems
Framework topursue strategy
Guards againstmisuse of resources
Spirit of codes Accountability tostakeholders
Corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 2
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Definition Main issuesStakeholdersAgencyConcepts
Corporate governance is the system by which organisations are directed and controlled It is a set ofrelationships between directors shareholders and other stakeholders
Risk managementand reduction
Appropriate controlsystems
Framework topursue strategy
Guards againstmisuse of resources
Spirit of codes Accountability tostakeholders
Corporate governance
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 2
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 3
Fairness Take into account all stakeholders with legitimate interestsTransparency Openness disclosure in financial statements press releases websitesIndependence Being free from constraints or influences that would prevent a correct course of
action being takenInnovation Recognise that the needs of businesses and stakeholders can change over timeScepticism NEDs auditors and audit committees should adopt an air of scepticism and an
enquiring mindProbity Truth-tellingnot misleadingResponsibility Management responsible for organisation means of corrective action and
penalising mismanagementAccountability Directors and companies answerable for consequences of actions to shareholders
professionals to values public sector to stakeholders Reputation Jeopardised by poor risk managementcorporate governance ethical behaviour
may impact commerciallyJudgement Taking decisions that enhance organisationrsquos prosperityIntegrity Straightforward dealing honesty and completeness basis of trust
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 3
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Definition Main issuesStakeholdersAgencyConcepts
Agency Agency in corporate governanceAgency is acting on behalf of another (principal) indealing with others
Agency costs are the monies and resourcesexpended by principal in monitoring agent
Accountability Fiduciary duty (trust and care) Personal performance Obedience Skill No conflict of interest Confidentiality Handing over benefits
Agentrsquos responsibilities
Directors (agents) run company on behalf ofshareholders (principals)
Agency problem ndash how to prevent directors excessivelyrewarding themselves underperforming
Main solution is to link reward with companyperformance
Profit related pay Shares Share option plans
Transaction costs theoryCompanies seek to keep business dealings in-housemanagers act opportunistically in their own interests
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 4
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Definition Main issuesStakeholdersAgencyConcepts
1 Scope of corporate governancePage 5
Stakeholder theoryA broad range of stakeholders have claims on anorganisation StockholderShareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocialpoliticallegal impact is therefore great
Instrumental view ndash mainly economicresponsibilities with aim of maximising profits
Normative view ndash ethicalphilanthropicresponsibilities as well as economiclegal
StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation
Stakeholder power mappingLevel of interest
D
Power
Low High
Low
HighC
BA
A minimal effortB keep informed as can influence more powerful stakeholdersC keep satisfiedD strategy must be acceptable
Corporate governance accommodates views Repositioning of stakeholders Identify change blockersfacilitators Assess legitimacyurgency
Results of mapping
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 5
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
StakeholdersDefinition Main issuesAgencyConcepts
Proximity to organisationInternal ndash employeesmanagement
Connected ndash shareholders customers supplierslenders trade unions competitors
External ndash government local government publicpressure groups opinion leaders
Active and passive stakeholdersActive ndash seek to participate in organisationsactivities (managers shareholders regulatorspressure groups)
Passive ndash donrsquot seek to participate in policy-making(shareholders local communities government)
Primary and secondary stakeholders
Narrow and wide stakeholders
Primary ndash need participation to continue as goingconcern (customers suppliers government)
Secondary ndash their ceasing to participate wonrsquot affectcontinued existence (government managers)
Narrow ndash most affected by organisationrsquos strategy(shareholders employees suppliers major customers)
Wide ndash less affected by organisationrsquos strategy(government less significant customers community)
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 6
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
1 Scope of corporate governancePage 7
Voluntary and involuntary stakeholdersVoluntary ndash those who of their own choice haveinvolvement with the organisation ndash employeescustomers suppliers shareholders
Involuntary ndash engage with the organisation withoutchoosing to do so ndash neighbours wider public Knowledge of stakeholders
Known ndash Existence known to organisation
Unknown ndash Existence unknown to organisation(wildlife communities affected by suppliers)
Direct ndash stakeholders know effecthow affected by
Indirect ndash unaware of claims or cannot express themdirectly
Legitimacy of stakeholders
Recognition of stakeholders
Legitimate ndash valid claims
Illegitimate ndash invalid claims
Who decides legitimacy Basis
Recognised ndash Managers consider interests and viewswhen deciding strategy
Unrecognised ndash Managers dont consider claims whendeciding strategy
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 7
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Definition Main issuesStakeholdersAgencyConcepts
Secretary
Customers
Suppliers
Employees
Executive full-time managers non-executive monitoring
Arranges board meetings plans agenda deals with documents and registers generaladministration reports to chairman
Concerned with impact of board upon position supervise and co-ordinateimplementation of business strategy and risk management provide data for board
Commitment interest in pay and conditions need to implement control systems adoptculture and provide feedback
Pay and working conditions concerned with poor board communication lax risk andcontrol environment can be used to harness employee support
Co-operation needed for just-in-time supply poor payment record leads to creditrestriction and poor service
Increased expectations power to shop elsewhere ability to make views known ethicalrequirements
Directors
Sub-board management
Trade unions
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 8
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
1 Scope of corporate governancePage 9
Highlight governance and reporting issues independence required to supplyconfidence in information need for audit committee to reinforce position
Establish rules and standards carry out inspections May be enforcement costs orregulatory capture domination of regulator by regulated
Establish overall climate encourage private shareholdings provide subsidiesnationalise poorly performing industries run public sector organisations
Companies raise money investors transfer shares supply data about companyvalue and provide regulatory framework for governance
Can influence prices avoid speculative shares want short-term profits can influencecompanies through meetings and voting able to take direct action if dissatisfied
Hold small numbers of shares in companies trusts and funds Likely to beundiversified and concerned with information asymmetry
Services from public sector aid from charities
Provide funds to charities want them well-spent
External auditors
Regulators
Government
Stock exchanges
Institutional investors
Small investors
RecipientsDonors
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 9
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Definition Main issuesStakeholdersAgencyConcepts
Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companyrsquos best interestsuse powers for proper purpose avoid conflicts ofinterest and exercise duty of care
Accounting and auditingGreater transparency and reliability of accountsdecreasing investor risks Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest
Board supervisionNeed for board to meet regularly to consider effectivelyorganisationrsquos activities risks and control systems
Directors remuneration
Corporate social responsibility
Board compositionNeed to avoid domination by single individualsmallgroup of executive directors
Builds on stakeholders debate what responsibilitiesshould organisation and board fulfil
Directors being paid undeserved and excessiveremuneration and bonuses Allegations that directorshave been rewarded for making losses
(001)ACP1PC14_CH01qxp 5282014 1239 AM Page 10
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
2 Approaches to corporate governance
Topic List
Development of guidance
Basis of guidance
Major governance codes
Sarbanes-Oxley
Corporate social responsibility
Public sector governance
In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped including the important rules v principlesdebateYou may be asked about these in part (a) of aquestion before you consider specific corporategovernance arrangements later in the question We alsogive details of the major worldwide codes particularlythose that have international impact
Corporate social responsibility is a major topic in thisexam and the themes we cover here and in Chapter 11will occur in many questions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 11
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Internationalisation
Governance development
Investor treatment Financial reportingweaknesses
Individual countrycharacteristics
Corporate scandals
Openness Integrity Accountability
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 12
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
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10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
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10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
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11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
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11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
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Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
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11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
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Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
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11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
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Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
2 Approaches to corporate governancePage 13
Basis ofguidance
Principles-based approachMost corporate governance codes use a principles-based approach with broad guidelines supplemented bylimited specific requirements Encourage companies tocomply or explain
Rules-based approachRules-based approach focuses on regulations andtargets that must be met without any leeway It should beeasy to ascertain compliance but in practice there maybe questionable situations which are not fully covered bythe rules
Fulfil strategic objectives Reinforce governance regulation Minimise risk Promote ethical behaviour Underpin investor confidence Fulfil stakeholder responsibilities Establish management accountability Maintain NEDauditor independence Provide accurate reporting
Encourage owner involvement
Direct behaviour
Key Principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 13
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
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2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Insider systemsMost companies listed on stock exchange are controlledby a few individuals for example family companies
Avoids inflexible rules Less burdensome Allows scope for development Comply or explain Emphasis on investor judgement
Advantages of principles
Outsider systemsShareholdings are widely dispersed managerownerseparation
Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoringgovernance
Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities
AdvantagesDisadvantages
Insider Outsider
Principles too broad Lack of consistency Confusion over what is compulsory Companies treat as non-binding Markets dont understand disclosures
Problems with principles
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 14
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyBasis ofguidance
2 Approaches to corporate governancePage 15
Majorgovernance codes
OECD principles
Shareholderstakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timelyaccurate disclosure of material matters Board responsible for strategy and monitoring
PrinciplesICGN reportInternational Corporate Governance Network hasprovided practical guidance for boards to operateefficiently and compete for scarce capital
Organisation for Economic Co-operation andDevelopment produced non-binding principles toaddress the interests of global investors Companiesshould work towards achieving principles andprinciples are guidelines for individual countries todevelop own codes
UK Corporate Governance CodeCode derived originally from Cadbury Greenbury andHampel reports supplemented by
Turnbull report ndash risk and internal control Smith report ndash audit committees Higgs report ndash non-executive directors
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 15
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
The non-audit services auditors can provide aresignificantly restricted and auditors are subject tovarious other rules
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems
Sarbanes-OxleyThe Sarbanes-Oxley Act was a response to thecollapse of Enron one of Americas biggest companiesThe Act is more prescriptive than codes in otherjurisdictions impacting on review of controlsdisclosures audits ethics and directorsrsquo share trading
Lack of transparency in accounts Non-executive directors weak Lack of external audit scrutiny Directorsrsquo use of inside information Dishonesty and law-breaking
Weaknesses at Enron
Corporate responsibilityChief executivechief finance officer certify
Appropriateness of accounts
Accounts fairly reflect operations and financialcondition
If accounts have to be restated they forfeit theirbonuses
Auditing requirements
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 16
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
2 Approaches to corporate governancePage 17
Audit committeesEvery listed company should have an auditcommittee consisting of independent directors withmember(s) with financial expertise Audit committeeshould be responsible for
Appointment compensation and oversight ofauditors
Discussing key accounting policies with auditors Setting up complaints mechanisms
Internal control reports (s404)Annual accounts must contain internal control reportsthat
State management responsibility for controlstructurefinancial reporting procedures
Assess effectiveness of control structurefinancialreporting procedures (with audit report)
State whether code of conduct for senior financialofficers has been adopted
Whistleblowing Off-balance sheet transactionsEmployeesauditors will be granted whistleblowingprotection if they disclose private employerinformation to parties involved in a fraud claim
There should be appropriate disclosure of material off-balance sheet transactions
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 17
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Carrolls modelFour levels of responsibilities
Economic ndash shareholdersemployeescustomers Legal ndash comply with laws Ethical ndash act in fair and just way Philanthropic ndash generosity to employees
community
Collaboration time-consuming and expensive Culture clashes with certain stakeholders Collaboration on some issues conflict on
others Lack of consensus between different
stakeholders
Problems with stakeholder view
CSR and stakeholdersBusinesses benefit from goodwill and other aspectsof society and therefore owe those particularlyaffected by their activities certain duties in return
Significance of responsibilityLarge businesses in particular face expectations thatthey will act in a socially responsible fashion
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 18
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
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6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
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Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
2 Approaches to corporate governancePage 19
Ownership responsibilitiesBy buying shares shareholders buy a responsibility toensure that company is managed efficiently and in waysconsistent with public welfare Responsibilities of institu-tional shareholders have been stressed institutionalshareholders large shareholdings meaning theyshould be actively involved and pressure managers
Shareholders with small holdings arenrsquotinfluential
Shareholders can easily dispose of shares andthis loosens feelings of obligation
Ownership view problems
Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting
Impact of CSR
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 19
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Corporate socialresponsibility
Development ofguidance
Public sectorgovernance
Sarbanes-OxleyMajorgovernance codes
Basis ofguidance
Public sector Private sector Charitable status NGOsquasi NGOs
Purposes and objectives Public service Profit Relief of povertyresearch etc
As defined by owners
Performance Central regulation Financial reportingstandards
SORP Set outcomes
Ownership Government Partnersshareholders
Donors Government
Stakeholders (including lobby groups)
The public centralgovernmentservice users
Shareholdersregulators taxationauthorities
Service users Governmentlobbying groups
(002)ACP1PC14_CH02qxp 5282014 1239 AM Page 20
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
3 Corporate governance practiceand reporting
Topic List
Role of board
Board membership
Non-executive directors
Directors remuneration
Stakeholder relationships
Reporting
Corporate governance practice is a key area in thissyllabus and you can expect to be asked whether anorganisation is following good practice The role andactivities of the board will be significant elements inmany questions How corporate governance practiceserves the interests of stakeholders will also beimportant
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 21
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Scope of boards roleThe board should have a formal schedule of mattersreserved to it for decisions Board is also responsiblefor overseeing strategy monitoring risk controlsystems and management and ensuring effectivecommunication
Maximise talent pool Broader range of knowledge Access stakeholder constituencies Greater independence Corporate citizen
Advantages of diversity
Legal responsibilities Avoidance of conflict of interest Time limits on appointments Limits on service contracts Retirement by rotation Insider dealing
Legal and regulatory frameworks
Nomination of directorsNomination committee should oversee appointmentsand make recommendations to the board Needs toconsider
Executivesnon-executives Gaps in current boards skills Expanding board diversity (age gender race
ethnicity education background) Continuity and succession planning
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 22
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
3 Corporate governance practice and reportingPage 23
CPD and appraisalsAll board members should have training coveringstrategy management legal responsibilities andcompany related issues
There should be annual appraisals of the performanceof the whole board and of individual directors
Performance against objectives Contribution to strategyenvironment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making
Board appraisal
Advantages of multi-tier boards
Supervisorssupervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time
Disadvantages of multi-tier boards
Lack of accountabilityDont receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers
Companies in some countries are run by two or moreboards often with supervisorymanagement role split
Multi-tier boards
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 23
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board membershipCompanies need to consider optimumsize balance of executive and non-executive directors and diversity ofmembership
Division of responsibilitiesNo one individual should have unfettered control Ideally chairman andchief executive should be different people if not there should be a strongindependent element on the board with a recognised senior member
Board committeesBoard committees supervise specificareas doesnt absolve main boardfrom overall responsibilities Keycommittees
Nomination (this chapter)
Audit (Chapter 8)
Remuneration (this chapter)
Risk management (Chapter 5)
Strategic development
Investment analysis
Risk management
Recommendations toboard committees
Control systemsenforcement
Responsibilities of CEO
Running board
Accurate board information
Shareholder communication(Chairmans Statement)
New director induction
Board appraisal
Board development
Signing off accounts
Responsibilities of chairman
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 24
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
3 Corporate governance practice and reportingPage 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Number of NEDsUSAUK ndash Independent NEDs at least half of boardothers ndash sufficient for views to carry weight
Independence of NEDs No businessfinancialother connection No share optionspensions Appointment for specified term Ability to take independent advice
Advantages of NEDs
External experience and knowledgeWider perspectiveComfort for investorsConfidantenablerBoard members but objective
Disadvantages of NEDs
IndependenceRestricted recruitmentDifficult to impose viewsCanrsquot prevent problemsLimited time
Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilitiesThey should provide balance and help to reduceconflict between executive directors and shareholdersMajority of NEDs should be independent
Role Strategy Scrutiny
Risk management Board personnel
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 25
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Service contractsIf service contracts are too long premature terminationmay mean significant payments Service contractsshouldnt be gt12 months normally
Remuneration committeeCommittee of independent NEDs determining
Remuneration policy Specific remuneration packages
PrinciplesUKs Greenbury committee suggests
Directors remuneration set by independent boardmembers
Bonuses related to measurable performanceenhancedlong-term shareholder value
Full transparency in annual accounts
Remuneration statementConsider and disclose
Remuneration policy Arrangements for individual directorsConsider allowing members to vote onremuneration statement in accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 26
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
3 Corporate governance practice and reportingPage 27
Elements of remuneration packageBasic salary ndash in contract of employment
Performance-related bonuses ndash limited possiblyto maximum of pay shouldnt be given fortransactions or if excessive risks taken
Shares ndash granted on condition cant be sold
Share options ndash purchased at specified exerciseprice encouragement to improve companysperformance and hence share prices options(and shares) to be held for certain length of time
Benefits-in-kind ndash is cost excessive and howcomparable are they with what employees aregiven
Pensions ndash best practice to make only basicsalary pensionable
Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Directormanager differentials Impact of directormanager resigning Performance measures
Factors affecting remuneration levels
Variety of financialnon-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort
Performance measures
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 27
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Relationships with stakeholdersOECD stresses role of
Employees Creditors Suppliers Investors Government
Position of stakeholders should be
Protected by law Enhanced by participation (eg employees share
ownership profit-sharing arrangements seat onboard)
Relationships with shareholdersDirectors should be required to submit to regular re-election (every yearevery three years) Boards shouldconsider relationships with all shareholders particularlyinstitutional shareholders Annual general meetings nor-mal part of calendar other general meetings discussissues of immediateserious concern
Proxy votingMyners report recommends
Clear agreements between beneficial ownersand investment managers
Stock lending shouldnt happen Electronic voting Poll (including proxies) for all resolutions
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 28
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
3 Corporate governance practice and reportingPage 29
Annual general meetings
Notice gt 20 daysbefore
Businesspresentation
Question andanswer sessions
Shareholders vote onsubstantiallyseparate issues
Shareholders vote onreport and accounts
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 29
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
ReportingRole of board Stakeholderrelationships
Directorsremuneration
Non-executivedirectors
Boardmembership
Board composition directors NEDs evaluationof board performance
Committee reports Relations with auditors and shareholders Review of internal controls Going concern Sustainability reporting Business review
Major disclosuresReportingLondon Stock Exchange requires
Narrative statement of how principles in UKCorporate Governance Code have been applied
Statement of compliancedetails of reasons fornon-compliance
Voluntary disclosuresDisclosures above statutorybest practice minimumDisclosures should follow certain principles
Planned process Transparency in disclosures made Consultation with users All relevant information considered Disclosures subject to review
Wider information provision Different forms of information Greater assurance about management Reflect investor interests
Benefits
(003)ACP1PC14_CH03qxp 5282014 1240 AM Page 30
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
4 Internal control systems
Topic List
Control systems
Nature of risks
Control framework
Control limitations
Enterprise risk management
Assessment of systems
In this chapter we look at the key elements of soundcontrol systems The overall environment and ethos oforganisation is as important as the specific proceduresThe risks organisations face should have a significantimpact upon the control frameworks they adoptYou mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 31
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Internal management control
Cybernetic control system
Management planning organising and directing sothat organisational objectives are achievedTurnbull report listed key aims Facilitate effective and efficient operation Ensure quality of reporting Ensure compliance with laws and regulations
Process of control within system
Identification of system objectives Setting targets for system objectives Measuring system achievementsoutputs Comparing achievements with targets Identifying corrective action Implementing corrective action
Embedded in operations Form part of culture Capable of quick response
Characteristics of control systems
Ease of targetachievement
Qualitativequantitativemeasures
Shortlong-termmeasures
Consistency ofmeasures
Managementintervention
Automatic controlmechanisms
Reliance on socialrelationships
Features of control systems
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 32
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 33
Risk classificationRisks can be classified in various waysFundamental ndash affects society in generalParticular ndash individual in controlSpeculative ndash good or bad consequencesPure ndash only outcomes harmful
Risk and uncertaintyUncertainty means possible outcomes andor chancesof each occurring are unknown
Risk and corporate governanceCorporate governance reports aim to addressshareholder concerns that directors are notachieving adequate returns for risks incurred andprovide mechanisms for controlling directors whoare taking excessive risks Directors responsibilityfor monitoring and disclosing risk management isstressed
Predictability of cash flows Limitation of effects of bad events Increased shareholder confidence Weigh costs
Benefits of risk management
Risk and returnBusinesses have to take some risks to trade(entrepreneurship) Businesses may tolerate higherrisk levels provided they receive higher returns
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 33
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
CONTROL FRAMEWORK
Control activitiesControl environment
Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Preventiondetection of fraud Accuracycompleteness of accounting records Quality of information and reporting
Purposes
Objectives
Natureextent ofrisks
Acceptable risks
Likelihood risksmaterialise
Ability to reducerisks
Costsbenefits ofcontrols
Changes in riskconditions
Control systems and risks
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 34
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
4 Internal control systemsPage 35
Costs gt benefits Human errorFraud Employee collusion
Managementbypass
Designed for routinetransactions
Depend on methodof data processing
LIMITATIONS OF CONTROLS
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 35
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Enterprise risk management (ERM)ERM is framework suggested by COSO for dealingwith risk It is a fundamental process operated atorganisation level that helps staff understand risksresponsibilities and authority levels ERM should
Apply in strategy setting Apply in all areas and over whole organisation Identify events affecting entity Manage risk according to risk appetite Provide reasonable assurance Support organisational objectives
Align risk appetite and strategy Link growth risk and return Choose best risk response Minimise surprises and losses Manage risks over whole organisation Allows organisation to seize opportunities
ERM benefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 36
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
4 Internal control systemsPage 37
Internal EnvironmentObjective Setting
Event IdentificationRisk AssessmentRisk Response
Control ActivitiesInformation amp Communication
Monitoring
STRATEGIC
OPERATIONS
REPORTING
COMPLIANCE
ENTITY LEVELDIVISION
BUSINESS UNITSUBSIDIARY
COSOs Enterprise Risk Management framework
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 37
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Controlsystems
Enterprise riskmanagement
Assessment ofsystems
Control limitations
Controlframework
Nature ofrisks
Objectives Risk links Compatibility Control mixHuman
resources
Framework Review Information
ASSESSMENT
Feedback Costsbenefits
(004)ACP1PC14_CH04qxp 5282014 1242 AM Page 38
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
5 Risk attitudes and internal environment
Topic List
Risk attributes
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
This chapter covers the underlying factors that helpdetermine how organisations respond to the risks theyface These factors include attitudes to risk theenvironment and culture and the organisational structureincluding responsibilities for dealing with risks
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 39
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Emotional satisfaction
Risk-averse or risk-seeking
Riskreturn
Size Structure Development Past experience Focus on avoiding
risk
Organisational influences
Shareholder requirements
Personal views
Risk attributes
National influences Government protection
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 40
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
5 Risk attitudes and internal environment Page 41
RISK
CONCERNS
Dividend impact Capital gain impact Dependent on their risk appetitediversification Threat to repayment Security imposed Threat of other debts Job threats Health and safety worries Ability to take action Losses on sales Unwilling credit suppliers Disruption of relationships Delivery failures Lack of value Poor quality Poor employment policies Adverse impact on the environment
Debt providers
Wider community
Suppliers
Shareholders
Employees
Customers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 41
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Internalcontrol environmentThe control environment is the attitude awareness andactions of management in relation to internal controls providing the background for the operation of other controls
Risk management philosophy Risk appetite Integrity Ethics Organisational environment
Risk environment
Managements philosophy and operating style Control culture Organisational structure Methods of imposing control Integrity ethical values and competence
Elements of internal environment
Clear risk management strategies Culturecode of conductHRMreward systems support
objectives and risk limitation Senior management commitment to competence
integrity and trust Clear authority and responsibility Communication procedures Staff have knowledge skills and tools
Strong internal environment
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 42
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
5 Risk attitudes and internal environment Page 43
Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes focus on
Threats to shareholdersstakeholders (future growthopportunitiescore business)
Consistent action-orientated risk assessment
Internal communications programme Training Involvement in risk identification Incentives Key personnel persuasion Infrastructure support
Changing risk culture Definitions and objectives Regulatory requirements Links to strategic decision-making Key areas Risk classification Risk responsibilities Important controls Assurance reporting Training
Risk policy statement
Risk registerFormal collection of risk and response informationRegister lists and prioritises risks and specifiesresponsible individuals and action taken
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 43
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
Board
Senior managers
Internal audit
External audit
Line managers
Staff
Determines risk management strategy and monitors overall risks setsand reviews internal control
Build on overall framework specifying risk management methods andco-ordinate responses may staff risk management group
Audit risk management processkey risk area controls
Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas use performanceindicators for monitoring implement responses
Follow risk management procedures have good understandingreport dangers
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 44
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
5 Risk attitudes and internal environment Page 45
Risk committeeCommittee of directors separate from auditcommittee responsible for monitoring andsupervising risk identification and management
Can be staffed by executive directors Allows audit committee to concentrate on
financial risks
Risk management personnelRisk specialist ndash consultant called in to advise on particularaspects of risk management
Risk manager ndash employee with specific responsibility fordealing appropriately with risks
Risk management function ndash employees in largerorganisations
Determine risk managementstrategypolicy
Review reports on risk Monitor overall exposure Monitor changes in circumstances Assess effectiveness of RM systems Review statement on internal control
Role of RM committee
Helping determine risk management strategies Champions of risk management Building risk awareness culture Establishing risk policy and structures Developing and reviewing risk management processes Co-ordinating functional responses Preparing report for boardshareholders
Role of RM function
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 45
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Objectivesetting
Risk managementresponsibilities
Internalenvironment
Stakeholdersand risk
Risk attributes
MissionA general objective visionary often unwritten andvery open-ended without any time limit for achievement
Strategic ndash high level goals support mission Operational ndash effectiveness and efficiency Reporting ndash reliability Compliance ndash with applicable laws
COSO model
Profitability Market share Growth Cash flow Customer satisfaction Quality Added value
Corporate objectives
Objective setting and riskStrategic objectives and mission will influence riskmanagement
However businesses should also determine riskappetite (willingness to take risks) and riskstrategy
These in turn should influence business objectivesBusinesses should take a portfolio view of riskslooking at relevant risks over the whole organisation
(005)ACP1PC14_CH05qxp 5282014 1243 AM Page 46
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
6 Risks
Topic List
Strategic and operational risks
Types of risks
Risk identification
In this chapter we look at the risks that organisationsface We draw various important distinctions betweendifferent kinds of risk and emphasise the link betweenrisk and return We also look at examples of the key risksthat organisations have to counter
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 47
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Types of risksStrategic andoperational risks
Risk identification
Strategic risksFundamental risks to organisations profitsexistencearising from the sector itrsquos in and the nature of what itdoes Strategic risks arise out of decisions aboutresources products acquisitions and investments
Operational risksRisks of loss from failures in internal business andcontrol processes
Stakeholders State of economy Nature of industriesmarkets Level of competition Availabilityprice of resources Flexibility of production Ability to innovateRampD Stage of product life cycle
Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses
Examples
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 48
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Entrepreneurial risksRisks from carrying out business activitiesEntrepreneurial risks must be taken if business is tomake profits
Financial risksThreats to organisationrsquos continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments Risks alsoinclude credit risk from non-paying debtors andcurrencyinterest rate risks
Market risksRisks arising from markets within which a companyoperates risks arising from movements in marketvalue of asset
6 RisksPage 49
Types of risksStrategic andoperational risks
Risk identification
Product risksRisks of financial loss due to producing a poorquality product They include need to compensatedissatisfied customers possible loss of sales andneed for expenditure on quality control procedures
Legal risksRisks of fines or threats of closedown or incurringcosts to fight legal actions
Political risksPolitical risk is the risk that political action will affectorganisation Examples include quotas tariffsexchange controls and nationalisation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 49
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Types of risksStrategic andoperational risks
Risk identification
Fraud risksRisks of loss through fraudulent activities of employeesor managers Fraud risks are often increased by poorcorporate governance procedures allowing senior staffto commit fraud because mechanisms to challengetheir behaviour are ineffective
Knowledge management risksRisks of losses due to failure to secure knowledgeresources adequately Risks include abuse ofintellectual property power failures leading to loss ofinformation loss of key staff
Property risksRisks from damage destruction or theft of propertyDangers include fire wind water leakage andvandalism
Technological risksRisks of loss through the inadequaciesdisruption ofIT systems and resources risks arising frominformation strategy pursued
Health and safety risksRisks include loss of employees time and having topay compensation or legal costs Risks arisebecause of lack of policy poor culture lack ofemergency procedures
Environmental risksRisk arising out of environmental effects ofoperations Organisations can suffer fines badpublicity non-co-operation
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 50
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
6 RisksPage 51
Trading risksRisks of disruption in the course of trade
Physical ndash goodsdocumentation loststolen Trade ndash customer refuses goodscancels order Liquidity ndash inability to finance activities
Disruption risksRisk of disruption to operations caused by ITfailures employee problems supplier loss legalaction
Resource wastage risksRisks include incurring excessive costs or waste ofemployees time and resources
Crystallisation of risks Poor customer service Failure to innovate Poor ethics
Poor reputation
Organisational risksRisks that membersemployees of an organisationwill behave in ways detrimental to the organisationeg failure to adapt to change
Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 51
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskidentification
Types of risksStrategic andoperational risks
Physical inspection
Enquiries
Brainstorming
Checklists
Benchmarking
Risk condition identification
Risk identificationNeed to know whether likely perils are present and be aware of possibility of unlikely risks Identification canfocus on targeting unacceptable risks or risk levels
External events eg economic conditions
Internal events eg human errors
Conditions resulting in risks
Trends and root causes
Event interdependencies
Event identification
(006)ACP1PC14_CH06qxp 5282014 1243 AM Page 52
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
7 Risk assessment and response
Topic List
Risk assessment
Risk responses
Control activities
In this very important chapter we deal with how risks aremanaged in particular how risks are reduced by controlactivities
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 53
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskassessment
Riskresponses
Controlactivities
Risk managementeffectiveness
Risk managementcosts
Stakeholderpressures
Comprehensivecoverage
Risk assessment
Accurate analysis Responsive tochanging risks
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 54
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
7 Risk assessment and responsePage 55
LikelihoodConsequences matrix Risk quantificationUse LikelihoodConsequences matrix as basis forsetting priorities for risk management
Need an idea of possible results or losses togetherwith distributions and confidence limits
Average or expected result or loss Frequency of losses Chances of losses Largest predictable loss
Key calculationsConsequences
HighLow
Low
Loss of suppliers
Loss of lower-levelstaff
High
Likelihood
Loss of key customersFailure of computer systems
Loss of senior or specialiststaffLoss of sales to competitorLoss of sales due tomacroeconomic factors
Sensitivity analysisExamine impact of key variable changes such assales price + volume initial + operating costs cost ofcapital
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 55
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskassessment
Riskresponses
Controlactivities
Accounting ratiosObjectivesubjective risks
Consolidation of risk
Debt ratio Gearing Interest cover Cash flow ratio Current ratio Quick ratio
Key ratios
Ratios can demonstrate risks to companies andshareholders particularly liquidity or solvency risks
Objective risks can be assessed with high accuracy
Subjective risks cannot be quantified easilyassessment depends on knowledge and skills ofassessor
Related risksRisks may be relatedcorrelated because theircauses are the same or one risk links to another
Need to aggregate at organisation levels risksidentified and quantified at operational level
Need also to consider impact of correlated riskswhere two or more different risks vary together
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 56
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskresponses
7 Risk assessment and responsePage 57
Controlactivities
Riskassessment
Consequences
Low High
Low Accept
Cost of actionbenefits
Transfer
Insurancecontingency planning
High Reduce
Controls to limit riskoccurrenceimpact
Avoid
Immediate action requiredpossible abandonment of activities
LikelihoodConsequences matrix
Likelihood StopDrop ndash Not taking profitable opportunity on grounds of excessive risk
Go ndash Going ahead with activity and incurring losses
ALARPndash Reducing risks to as low as reasonably practicable levels
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 57
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskassessment
Riskresponses
Controlactivities
Risk sharing Forwards Joint ventures
Futures Swaps
Risk transfer Options Securitisation
Insurance
Debtequity mix
International
Diversification
Natural hedging
Internal netting
Working capital management
Internal strategies
Financial risk management
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 58
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskresponses
7 Risk assessment and responsePage 59
Controlactivities
Riskassessment
Classification of controlsCorporate are general policy culture values overallmonitoringManagement include planning performance monitoringrisk evaluationAdministrative include organisation structure authorityand reporting lines communication channelsAccounting are recording of transactions andsafeguarding records transactions and assetsPrevent stop errors happening including checks ofdocumentation before paymentdeliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary cant be bypassedGeneral relate to environment
Approval and control of documents
Controls over computerised applications and ITenvironment
Checking arithmetical accuracy
Control accounts
Trial balances
Reconciliations
Physical counts
Comparing internal and external data
Limiting direct physical access
Types of control procedure
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 59
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Riskassessment
Riskresponses
Controlactivities
Assurance from internal controlsInternal controls can only provide reasonable assurance that managementobjectives will be achieved because of theirlimitations
Benefits of controlsBenefits may be financial(less costs)
Benefits may be non-financial(efficiency and effectiveness improvements less internalaudit resource required)
Costs of controlsCosts include direct costs (salary) opportunitycosts (time) and perhaps reduced flexibilityresponsiveness and creativity
Difficult to estimate risk exposure
Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
Benefits v costs
(007)ACP1PC14_CH07qxp 5282014 1243 AM Page 60
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
8 Information communication and monitoring
Topic List
Internal communication
Monitoring
Internal audit
Audit committee
Board review and reporting
This chapter emphasises the importance of informationflows and communication between managers and staffThe principles of good communication also apply toformal reports in the accounts on risk and internalcontrol We also cover the monitoring activities requiredto ensure control systems remain effective
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 61
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Directors information requirementsDirectors need information about risks linked toachievement of organisations objectives andcontrol mechanisms that should respond tochanges in business environment
Directors should
Compare different sources of data Consider adequacy of communication
channels Provide feedback Review managementinformation systems
Guidance from chief executive Circulation of risk policies Staff involvement in policy development Workshops and training Whistleblowing procedures
Communication methods
Communication of policiesTurnbull report recommends policies are communicated infollowing areas Customer relations Service levels Health safety and environment Asset security and business continuity Expenditure Accounting financial and other reporting
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 62
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Internalcommunication
Monitoring
8 Information communication and monitoringPage 63
Board review and reporting
Audit committeeInternal audit
Strong control environment Prioritisation Communication structurereporting
Effectiveefficient monitoring
Elements of monitoringOngoing monitoring includes routine day-to-dayreviews
Separate evaluation includes annual review ofcontrols plus internal audit evaluations
Monitoring ensures that internal controls continue to operate effectivelyThis process involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions
Audit committee liaison with auditors Internal audit work on control Monitoring programs in information systems Reports of potential failures Supervisory controls Management self-assessment Quality control on internal audit
Monitoring procedures
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 63
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Internal auditInternal audit is an independent appraisal activity established within an organisation which examines andevaluates the adequacy and effectiveness of other controls
Need for internal auditNeed depends on complexity of activities employeenumbers cost-benefit considerations Necessary when
Changes in organisational structure Changes in key risks Problems with internal control systems Increased number of unexplained or unacceptable
eventsObjectives depend on information and recommendationsrequired by organisation also state of organisations riskmanagement
Accounting and internal control systems Financial and operating information Economy efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisations objectives Risk auditing Special investigations
Internal audit areas
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 64
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
8 Information communication and monitoringPage 65
IndependenceIA should be independent of activities andmanagement being audited
Threats to independenceThreats include involvement in systems design andconsultancy familiarity with other staff and reportingto finance director whose activities are being audited
IA staff dont audit their previous departments IA staff dont audit systems they designed Unrestricted access to records staff personnel Report to audit committee Rotation of IA staff
Dealing with threats
Objectivity In
Impartiality de
Unbiased views pe
Valid opinion nd
Access to all areas en
Relevant skills ce
Audit senior managers
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 65
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Role of audit committeeThe audit committees work should improve publicconfidence in corporate governance by helping tocreate a climate of control and improving the quality offinancial reporting The committee should also
Enable NEDs to play positive role Help finance director Strengthen position and independence of external
auditors
Audit committee membershipAudit committee should consist of independent non-executive directors and should include member(s)with significant and recent financial experience
Duties of audit committeeReview of financial statements including changesin policies judgemental areas compliance
Relationship with external auditors includingappointmentremoval independence scope liaison
Review of internal audit including standardsindependence scope resources reporting workplans liaison with external auditors results
Review of internal control including systemsadequacy legal compliance fraud risk auditorsreports disclosures
Review of risk management
Investigations
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 66
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Internalcommunication
Monitoring
8 Information communication and monitoringPage 67
Board review and reporting
Audit committeeInternal audit
Strategic ConsequenceslikelihoodsRisks
Identifyingevaluating andmanaging risks
Control systemeffectiveness
Actions toreduce risk
Need for moremonitoring
Risk assessment Clear objectives Assessment of significant
risks Acceptable risks
understood
Controlenvironmentactivities Risk management policy Effective culture Senior management
commitment Clear authority lines Communication
Information andcommunication Quality of reports Changing information needs Balanced reporting Whistleblowing channels
Monitoring Effective processes Flexibility Follow-up Significant event
reporting
Regular review
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 67
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Internalcommunication
Monitoring Board review and reporting
Audit committeeInternal audit
Annual review of controlsReview should be wider-ranging than normal review Changes in risks faced Changes in organisations ability to respond to risks Scope and quality of managementrsquos monitoring Work ofneed for internal audit Extent and frequency of reports to board Significant controls failings and weaknesses
External reporting on risk managementBoard should disclose existence of process formanaging risks how the board reviewed the effectiveness of the process and whether theprocess accords with the Turnbull guidance
Responsibility for internal control Responsibility for review of effectiveness System manages not eliminates risk System provides reasonable assurance v
loss Summary of review Process for dealing with problems Weaknesses resulting in material losses
Contents of report
Internal risk reportingNeeds to be comprehensive and carried out systematicallyand regularly Most serious risks may need to be reporteddaily Reports should show Risk levels before controls implemented Actual risks vs predicted risks Feedback on action taken Level of residual risks
(008)ACP1PC14_CH08qxp 5282014 1244 AM Page 68
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
9 Personal ethics
Topic List
Ethical theories
Individual influences
Situational influences
Approaching ethical problems
Donrsquot think of this chapter as too theoreticalYou may seequestions where you have to determine what wouldinfluence an individuals ethical decision-making or useTucker or the AAA model to assist the decision-makingprocess
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 69
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Lack of objective standardsNon-cognitivism ndash no possibility of acquiring objectiveknowledge of moral principles
Moral relativism ndash right and wrong are culturallydetermined
Objective standardsCognitivism ndash objective universal principles exist andcan be known ethics can be regarded as absolute
PluralismDifferent views may exist but it should be possible toreach a consensus morality is a social phenomenon
EgoismAct is ethically justified if decision-makers pursueshort-term desires or long-term interests (justificationfor free market)
Teleological Consequentalist ethics
Deontological ethics
Moral judgements based on outcomes orconsequences Utilitarianism means acting for thegreatest good to the greatest number
Kant stated that acts can be judged in advance bymoral criteria
Do what others should be doing Treat people as autonomous beings and not as
means to an end Act as if acting in accordance with universal laws
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 70
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
9 Personal ethics Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
National and cultural beliefsDifferences lie in four main areas Role of individual v collective good Acceptance of power distribution Desire to avoid uncertainty Masculinity v femininity (moneypossessions v
peoplerelationships)
MoralityActions are influenced not only by peoples ownintegrity but also how much awareness they have oftheir actions moral consequences
Psychological factorsFocus is on how people think and how they decidewhat is morally right and wrong
Moral developmentKohlbergs three levels ndash ethics determined by
Rewardspunishments (Pre-conventional)
Others expectationslaw (Conventional)
1
2
3 Individuals own decisions (Post-conventional)
Locus of control
Education and employmentPeoples educationwork background seems to be moresignificant with globalisation
Influence individuals believe they have over their ownlives Internal ndash individuals have significant influence External ndash lives shaped by luckcircumstances
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 71
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
Moral intensityCan be used to decide how ethically significant anissue is
Moral framingHow issues are perceived in organisations Use oflanguage can be important (fairnesshonesty) but alsosignificant is the degree to which managers are willingto frame issues in moral terms
Organisational cultureBasic assumptions that define organisations view ofitself and its environment
Values Beliefs Behaviours Taken for granted assumptions
Components of organisational culture
Magnitude of consequences Societys view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected
Criteria
Nationalcultural contextEthical decision may be shaped by nation in which ithappens
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 72
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
9 Personal ethics Page 73
Systems of rewardEthical positions can be affected for better or worse byremuneration Basis of reward may encourage undesirable practices Failing to rewardpunishing ethical behaviour may
deter it
BureaucracyA system including detailed rules and proceduresthat underpins reward and authority systems
Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individualsrsquo moral status
Bureaucracy characteristics
Work rolesThe work role individuals have will determine what theybelieve to be ethical
Organisational fieldOrganisations share a common businessenvironment and hence common norms andvalues
AuthorityManagers can encourage good or bad behaviour by theexample they set whether they set targets that encouragepoor behaviour or fail to stop unethical behaviour
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 73
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Ethical theories Approachingethical problems
Situationalinfluences
Individualinfluences
How to gain marksMarks will be awarded for
Analysis of the situation
Recognition of ethical issues
Explanations of relevant ethical guidance
Making clear logical and appropriaterecommendations
Justifying recommendations in practical businessand ethical terms
Profitable Legal Fair
Right Sustainable
Tuckers model of decision-making
Facts Ethical issues Normsprinciples
values Alternative courses
of action
Best course ofaction
Consequences Decision
American Accounting Association
(009)ACP1PC14_CH09qxp 5282014 1246 AM Page 74
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
10 Professional ethics
Topic List
Company codes
Professional codes
Ethical threats and safeguards
Accountants in business
Public interest
In this chapter we focus on professional and businessethics Knowledge of the ethical threats is as importantas it was in earlier auditing papers and you need toadopt a logical approach to solving ethical dilemmasHowever in this paper itrsquos also important to understandwhy codes take the form they do and how much impactthey have Independence will be a key issue in manyquestions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 75
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Code of conductCode seeks to establish organisations values promotebusiness objectives emphasise responsibilities tostakeholders control individuals behaviourHowever issuing a code isnt enough a code needs tobe backed by Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics
Detailed guidance RecruitmentSelectionInduction Training Reward schemes Whistle-blowing procedures Ethical departmentsaudits
Other measures
Ethical principles Commitment required from employees Compliance with law Treatment of customers Treatment of suppliers Commitment to fair competition Commitment to environment Commitment to community Corporate citizenship
Contents of codes
Problems with codesCodes may be seen as inflexible and unfair sets ofrules that are not relevant to the ethical situationsemployees encounter
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 76
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
10 Professional ethics Page 77
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Professional codesProfessional codes stress theimportance of the public interestMost then set out Fundamental principles Conceptual framework Threats to compliance Safeguards
Fundamental principlesProfessional competencedue care ndash maintain knowledgecomply withstandardsIntegrity ndash straightforwardnesshonestyProfessional behaviour ndash avoid actions discrediting professionConfidentiality ndash dont disclose to third parties unless legalprofessionaldutyObjectivity ndash avoid influence by biasconflicts of interestundue influence
Advantages
Emphasise public interestconfidenceOnus on active thoughtInternational applicationCan include detailed guidanceprohibitionsPrescribe minimum behaviour
Disadvantages
Lack of focusPermit box-tickingDont capture regional variationsNot legally enforceableExamples interpreted as rules
Professional codes
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 77
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
THREATS
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review
Professional safeguards
Peer review Independent consultation Partnerstaff rotation Discussiondisclosure to audit committee Reperformance by another firm
Safeguards in practiceImportance of independenceIndependence promotes Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 78
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
10 Professional ethics Page 79
SELF- REVIEW THREAT
General otherservices
Recent servicewith assurance
client
Other services
Corporatefinance
Internal auditservices
Tax services
Valuation services
Preparing accounting recordsand financial statements
Close businessrelationships
Financialinterests
Recruitment
Lowballing
High of fees
or contingentfees
Overdue fees
Loans and guarantees
Gifts and hospitality
Family and personal relationships
Partner on client board
Employment with assurance client
SELF-INTEREST THREAT
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 79
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Company codes Public interestAccountantsin business
Ethical threatsand safeguards
Professionalcodes
Advocacy threat
Conflicts of interest
Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client
Familiarity threat
Close business relationships Family relationships Personal relationships Staff employed by client Litigation
Intimidation threat
Where accountants take clients part act as theiradvocate or will only earn fees from client ifsuccessful outcome is achieved (contingent fees)Examples include provision of legal service andcorporate finance advice
These can arise from accountants acting for clientswith whom they are in dispute eg over quality ofwork It can also arise through disputes between twoclients for whom accountants are acting
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 80
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
10 Professional ethics Page 81
Company codes Public interestAccountants in business
Ethical threats andsafeguards
Professionalcodes
Acting with expertiseCompetent performance by accountant may bethreatened by lack of time lack of information insufficient training inadequate resources
Financial interests
Preparation and reporting of informationInformation should describe clearly nature ofbusiness transactions classify and record informationin timely and proper manner and represent factsaccurately
Share ownership share options and profit-relatedbonuses provide incentives to manipulateinformation Accountants may be offeredinducements to act illegally
Lack of honestygood faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation
Problems with bribery
Bribery and corruptionBribery is giving value in return for influencecorruption also includes systems abuse bid givingand cartels
Measures to combat bribery include code of conductrisk assessment conduct of business rules andwhistleblowing questionable transactions
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 81
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Company codes Public interestAccountantsin business
Ethical threats andsafeguards
Professionalcodes
Public interestThe collective well-being of the community of peopleand institutions the accountant serves But lack ofstatutory definition can make it difficult to enforce
Critics have claimed profession acts against publicinterest in a number of ways
Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest
Against public interest
ProfessionalismCompliance with relevant laws and regulations andavoidance of actions that may bring discredit onprofession
Influence of professionCritics have accused the profession of Getting the numbers wrong Failing to realise the assumptions used in
preparing accounts support a capitalist-authoritarian view of society
(010)ACP1PC14_CH10qxp 5282014 1248 AM Page 82
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
11 Corporate social responsibility
Topic List
Corporate citizenship
Ethical stances
Social responsibility
Social and environmental impacts
Environmental audits
In this chapter we examine organisations impact uponthe natural and human environment This has beenhighlighted as an important topic and it illustrates howvarious aspects of control systems (managementsystems internal audit and external reporting) areapplied
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 83
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Corporate citizenshipThe business strategy shaping the values under-pinning mission and choices made as the corporation engages with society Corporatesocial responsibility discussions are often interms of corporate citizenship focusing on rights(carrying on business lawfully) as well as responsibilities
Limited view
Extended view
Equivalent view
Minimising harm Maximising benefit Accountability and responsiveness to stakeholders
Core principles
Voluntary philanthropy corporate citizen engages with local communities andemployees mainly for self-interest
Focus on a broad range of stakeholders and response to demands of society andlegal requirements
Active social and political citizenship promotion of social civil and political rightsfilling void caused by lack of government action
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 84
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
11 Corporate social responsibilityPage 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
Minimum compliance Government imposes wider constraints
Wider view of ethical responses Better for reputation Prevents more legal regulation
Short-term shareholderinterest
Long-term shareholderinterest
Ethical stance
Multiple stakeholder Shaper of society Building relationships Which stakeholders Which obligations
Constitution requirements Accountability Financial viability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 85
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Pristine capitalists
Expedients
Social contract proponents
Social ecologists
Socialists
Radical feminists
Private property rights paramount companies exist to make profitsand achieve economic efficiency
Acknowledgement of business excesses acceptance of limited socialand moral responsibilities
Survival depends on delivery of benefits to societygroups thatdetermine its power behaviour adheres to society norms
Modification needed of economic processes resulting in resourceexhaustion waste pollution
Societys framework should promote equality not requirements ofcapitalism
Need for emphasis on feminine values such as co-operation andreflection fundamental readjustment of society required
Deep ecologistsHuman rights to existence dont exceed other species rightsEconomic systems should not trade species survival v economicimperatives
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 86
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
11 Corporate social responsibilityPage 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethicalstances
Corporatecitizenship
How organisations affectthe environment
Depletion ofnatural resources
Adverse visual andaural impacts
Air and wateremissions
Wastedisposal
Positivenegativehealth impacts
Raisingloweringlocal quality of life
Contribution toclimate change
Indirect impactsthrough supplychain
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 87
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental costspound
Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XRampD XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X__
X____
Remediationcompensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets
Contingencies
Stakeholders and reputation riskIncreasingly stakeholders are aware of environmentalimpacts and require businesses to do more to dealwith them Being known as a poor corporate citizencan pose a serious reputation risk
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 88
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
11 Corporate social responsibilityPage 89
SustainabilitySustainability is ensuring that economicdevelopment meets the needs of the presentwithout compromising the future
Sustainability for organisations meansdeveloping strategies by which an organisa-tion only uses resources at rate that can bereplenished and emissions of waste dontexceed environmentrsquos ability to absorb them
For whom Other species of current populationIn what way NaturalsocialeconomicHow long Availability of raw materials Dependent on climate change
At what cost Presentation Substitutioncompensation possible
Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth
Strong sustainability
Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system
Weak sustainability
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 89
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to usewhen reporting on economic environmental and social dimensions of their activities products and services
Vision and strategy Profile Governance structure and management
systems GRI content index Performance indicators
Sustainability report
Full cost accountingFull cost accounting ultimately allows the incorpora-tion of all costsbenefits into accounting equationincluding environmental and social externalities
Direct economic impact ndash on key stakeholders Environmental ndash use of natural resources emissions
transport usage compliance with standards Labour practices ndash employment practices health and
safety training diversity Human rights ndash strategy non-discrimination workersrsquo
rights low-paid labour Society ndash community contribution political activities
competitive attitudes Products ndash customer health and safety advertising
privacy
GRI indicators
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 90
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
11 Corporate social responsibilityPage 91
EMAS Emphasis on verified improvement and disclosureRequirements include Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement
Environmental control systemsControl systems should cover relevant functions andactivities Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation RampD Performance reporting
Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur
Advantages of external reporting Integrated reportingIntegrated reporting links reporting on sustainabilityissues with reporting on financial results and operationsIt emphasises reporting on goals and strategies as wellas issues and impacts Businesses should show theirrelationships with capitals used (financial manufacturedhuman intellectual natural social)
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 91
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
(011)ACP1PC14_CH11qxp 5282014 1249 AM Page 92
- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
-
- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
-
- Chapter 2 Approaches to corporate governance
-
- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
-
- Chapter 3 Corporate governance practice and reporting
-
- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
-
- Chapter 4 Internal control systems
-
- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
-
- Chapter 5 Risk attitudes and internal environment
-
- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
-
- Chapter 6 Risks
-
- Strategic and operational risks
- Types of risks
- Risk identification
-
- Chapter 7 Risk assessment and response
-
- Risk assessment
- Risk responses
- Control activities
-
- Chapter 8 Information communication and monitoring
-
- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
-
- Chapter 9 Personal ethics
-
- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
-
- Chapter 10 Professional ethics
-
- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
-
- Chapter 11 Corporate social responsibility
-
- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
-
Social andenvironmental impacts
Environmentalaudits
Socialresponsibility
Ethical stances
Corporatecitizenship
Environmental auditAssesses how organisation is safeguarding the environment It should enhance management controlof environmental practice and compliance with internal policies and external reputation
Audit reviewAuditors will concentrate on a number of aspects thataffect environmental impact
Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Environmental impact assessment of major
projects Surveys of organisations impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits
Types of audit
Establish metrics Compare planneddesirable and actual
performance Report results
Audit work
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- Book Cover
- Title
- Copyright
- Preface
- Contents
- Chapter 1 Scope of corporate governance
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- Definition
- Concepts
- Agency
- Stakeholders
- Main issues
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- Chapter 2 Approaches to corporate governance
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- Development of guidance
- Basis of guidance
- Major governance codes
- Sarbanes-Oxley
- Corporate social responsibility
- Public sector governance
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- Chapter 3 Corporate governance practice and reporting
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- Role of board
- Board membership
- Non-executive directors
- Directors remuneration
- Stakeholder relationships
- Reporting
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- Chapter 4 Internal control systems
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- Control systems
- Nature of risks
- Control framework
- Control limitations
- Enterprise risk management
- Assessment of systems
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- Chapter 5 Risk attitudes and internal environment
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- Risk attributes
- Stakeholders and risk
- Internal environment
- Risk management responsibilities
- Objective setting
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- Chapter 6 Risks
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- Strategic and operational risks
- Types of risks
- Risk identification
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- Chapter 7 Risk assessment and response
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- Risk assessment
- Risk responses
- Control activities
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- Chapter 8 Information communication and monitoring
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- Internal communication
- Monitoring
- Internal audit
- Audit committee
- Board review and reporting
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- Chapter 9 Personal ethics
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- Ethical theories
- Individual influences
- Situational influences
- Approaching ethical problems
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- Chapter 10 Professional ethics
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- Company codes
- Professional codes
- Ethical threats and safeguards
- Accountants in business
- Public interest
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- Chapter 11 Corporate social responsibility
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- Corporate citizenship
- Ethical stances
- Social responsibility
- Social and environmental impacts
- Environmental audits
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