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