TÀI LIỆU ÔN THI ACCA MỚI NHẤT 2015 BPP p1 passcards

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ACCA Passcards
Paper P1
Governance, Risk and Ethics
Passcards for exams
up to June 2015

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Professional Paper P1
Governance, Risk and Ethics


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First edition 2007, Eighth edition June 2014
ISBN 9781 4727 1129 8
e ISBN 9781 4727 1185 4
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the
British Library
Published by
BPP Learning Media Ltd,
BPP House, Aldine Place,
142–144 Uxbridge Road,
London W12 8AA

Printed in Singapore by
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www.bpp.com/learningmedia
Your learning materials, published by BPP Learning
Media Ltd, are printed on paper obtained from traceable
sustainable sources.

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All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior

written permission of BPP Learning Media.
©
BPP Learning Media Ltd
2014


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Preface

Contents

Welcome to BPP Learning Media’s 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 Media’s ACCA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.
Topics 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 to
go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!

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Preface

1
2
3
4
5
6
7
8
9
10

Scope of corporate governance
Approaches to corporate governance
Corporate governance practice and reporting
Internal control systems
Risk attitudes and internal environment
Risks
Risk assessment and response

Information, communication and monitoring
Personal ethics
Professional ethics

11

Corporate social responsibility

Contents

Page
1
11
21
31
39
47
53
61
69
75
83


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1: Scope of corporate governance

Topic List
Definition
Concepts
Agency
Stakeholders
Main issues

This chapter sets out the foundations of good corporate
governance, defining what corporate governance is, the
key concepts, and the stakeholders whom good
corporate governance serves.You may need to consider
the conflicting interests of stakeholders and how
stakeholders can control managers/directors. We also
summarise major issues in corporate governance.


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Definition

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Concepts

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Agency

Stakeholders

Main issues

Corporate governance is the system by which organisations are directed and controlled. It is a set of
relationships between directors, shareholders and other stakeholders.
Risk management
and reduction

Appropriate control
systems

Framework to
pursue strategy

Corporate governance

Guards against
misuse of resources

Spirit of codes

Accountability to
stakeholders

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Definition

Fairness
Transparency
Independence
Innovation
Scepticism
Probity
Responsibility
Accountability
Reputation
Judgement
Integrity
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Concepts

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Agency

Stakeholders

Main issues

Take into account all stakeholders with legitimate interests
Openness, disclosure in financial statements, press releases, websites
Being free from constraints or influences that would prevent a correct course of
action being taken
Recognise that the needs of businesses and stakeholders can change over time
NEDs, auditors and audit committees should adopt an air of scepticism and an
enquiring mind
Truth-telling/not misleading
Management responsible for organisation, means of corrective action and
penalising mismanagement
Directors and companies answerable for consequences of actions to shareholders,
professionals to values, public sector to stakeholders
Jeopardised by poor risk management/corporate governance ethical behaviour,
may impact commercially
Taking decisions that enhance organisation’s prosperity
Straightforward dealing, honesty and completeness, basis of trust
1: Scope of corporate governance


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Concepts

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Agency

Stakeholders

Main issues

Agency

Agency in corporate governance

Agency is acting on behalf of another (principal) in
dealing with others.

Directors (agents) run company on behalf of
shareholders (principals).

Agency costs are the monies and resources
expended by principal in monitoring agent.

Agency problem – how to prevent directors excessively
rewarding themselves/
underperforming.

Agent’s responsibilities
Accountability
Fiduciary duty (trust and care)
Personal performance
Obedience

Skill
No conflict of interest
Confidentiality
Handing over benefits

Main solution is to link reward with company
performance:
Profit related pay
Shares
Share option plans

Transaction costs theory
Companies seek to keep business dealings in-house,
managers act opportunistically in their own interests.


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Definition

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Concepts

Stakeholders

Level of interest
Low

Stakeholder theory

Power

A broad range of stakeholders have claims on an
organisation. Stockholder/Shareholder view that
company just responsible to shareholders is
wrong as modern corporations are very large and
social/political/legal impact is therefore great.

A:
B:
C:
D:

Normative view – ethical/philanthropic
responsibilities as well as economic/legal
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Main issues

Stakeholder power mapping

Stakeholders are groups or individuals whose
interests can affect or are directly affected by the
activities of a firm or organisation.

Instrumental view – mainly economic
responsibilities with aim of maximising profits

Stakeholders

Agency

Low
High

High
A

B

C

D

minimal effort
keep informed, as can influence more powerful stakeholders
keep satisfied
strategy must be acceptable

Results of mapping
Corporate governance accommodates views
Repositioning of stakeholders
Identify change blockers/facilitators
Assess legitimacy/urgency
1: Scope of corporate governance

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Agency

Stakeholders

Main issues

Proximity to organisation

Primary and secondary stakeholders

Internal – employees/management

Primary – need participation to continue as going
concern (customers, suppliers, government)

Connected – shareholders, customers, suppliers,

lenders, trade unions, competitors
External – government, local government, public,
pressure groups, opinion leaders

Narrow and wide stakeholders

Secondary – their ceasing to participate won’t affect
continued existence (government, managers)

Active and passive stakeholders

Narrow – most affected by organisation’s strategy
(shareholders, employees, suppliers, major customers)

Active – seek to participate in organisation's
activities (managers, shareholders, regulators,
pressure groups)

Wide – less affected by organisation’s strategy
(government, less significant customers, community)

Passive – don’t seek to participate in policy-making
(shareholders, local communities, government)


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Voluntary and involuntary stakeholders

Legitimacy of stakeholders

Voluntary – those who of their own choice have
involvement with the organisation – employees,
customers, suppliers, shareholders

Legitimate – valid claims

Involuntary – engage with the organisation without
choosing to do so – neighbours, wider public

Who decides legitimacy? Basis?

Illegitimate – invalid claims

Knowledge of stakeholders
Known – Existence known to organisation

Recognition of stakeholders
Recognised – Managers consider interests and views
when deciding strategy
Unrecognised – Managers don't consider claims when
deciding strategy

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Unknown – Existence unknown to organisation
(wildlife, communities affected by suppliers)
Direct – stakeholders know effect/how affected by
Indirect – unaware of claims or cannot express them
directly

1: Scope of corporate governance


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Definition

Directors
Secretary
Sub-board management
Employees
Trade unions
Suppliers
Customers

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Concepts

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Agency

Stakeholders

Main issues

Executive full-time managers, non-executive monitoring
Arranges board meetings, plans agenda, deals with documents and registers, general
administration, reports to chairman
Concerned with impact of board upon position, supervise and co-ordinate
implementation of business strategy and risk management, provide data for board
Commitment, interest in pay and conditions, need to implement control systems, adopt
culture and provide feedback
Pay and working conditions, concerned with poor board communication, lax risk and
control environment, can be used to harness employee support
Co-operation needed for just-in-time supply, poor payment record leads to credit
restriction and poor service
Increased expectations, power to shop elsewhere, ability to make views known, ethical
requirements


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External auditors

Highlight governance and reporting issues, independence required to supply
confidence in information, need for audit committee to reinforce position

Regulators

Establish rules and standards, carry out inspections. May be enforcement costs or
regulatory capture, domination of regulator by regulated

Government

Establish overall climate, encourage private shareholdings, provide subsidies,
nationalise poorly performing industries, run public sector organisations

Stock exchanges

Companies raise money, investors transfer shares, supply data about company
value and provide regulatory framework for governance

Institutional investors

Can influence prices, avoid speculative shares, want short-term profits, can influence
companies through meetings and voting, able to take direct action if dissatisfied

Small investors

Hold small numbers of shares in companies, trusts and funds. Likely to be
undiversified and concerned with information asymmetry

Recipients

Donors

Services from public sector, aid from charities

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Provide funds to charities, want them well-spent
1: Scope of corporate governance


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Definition

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Concepts

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Agency

Stakeholders

Main issues

Duties of directors

Directors' remuneration

Corporate governance guidelines reinforce legal and
fiduciary duties to act in company’s best interests,
use powers for proper purpose, avoid conflicts of
interest and exercise duty of care.

Directors being paid undeserved and excessive
remuneration and bonuses. Allegations that directors
have been rewarded for making losses.

Board composition

Board supervision

Need to avoid domination by single individual/small
group of executive directors.

Need for board to meet regularly to consider effectively
organisation’s activities, risks and control systems.

Accounting and auditing

Corporate social responsibility

Greater transparency and reliability of accounts,
decreasing investor risks. Tougher auditing standards
and requirements for auditors to avoid conflicts of
interest.

Builds on stakeholders' debate, what responsibilities
should organisation and board fulfil.


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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 have
influenced the ways corporate governance has
developed, including the important rules v principles
debate.You may be asked about these in part (a) of a
question before you consider specific corporate
governance arrangements later in the question. We also
give details of the major worldwide codes, particularly
those that have international impact.

Corporate social responsibility is a major topic in this
exam, and the themes we cover here and in Chapter 11
will occur in many questions.


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Development of
guidance

Internationalisation

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guidance

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Major
governance codes

Investor treatment

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Sarbanes-Oxley

Financial reporting
weaknesses

Corporate social
responsibility

Individual country
characteristics

Public sector
governance

Corporate scandals

Governance development

Openness

Integrity

Accountability


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guidance

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Major
governance codes

Principles-based approach
Most corporate governance codes use a principlesbased approach with broad guidelines supplemented by
limited specific requirements. Encourage companies to
comply or explain.

Rules-based approach
Rules-based approach focuses on regulations and
targets that must be met without any leeway. It should be
easy to ascertain compliance, but in practice there may
be questionable situations which are not fully covered by
the rules.

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Sarbanes-Oxley

Corporate social
responsibility

Public sector
governance

Key Principles
Fulfil strategic objectives

Reinforce governance regulation
Minimise risk
Promote ethical behaviour
Underpin investor confidence
Fulfil stakeholder responsibilities
Establish management accountability
Maintain NED/auditor independence
Provide accurate reporting
Encourage owner involvement
Direct behaviour

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2: Approaches to corporate governance


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Development of
guidance

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guidance

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Major
governance codes

Advantages of principles
Avoids inflexible rules
Less burdensome
Allows scope for development
Comply or explain
Emphasis on investor judgement

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Sarbanes-Oxley

Corporate social
responsibility

Public sector
governance

Problems with principles
Principles too broad
Lack of consistency
Confusion over what is compulsory
Companies treat as non-binding
Markets don't understand disclosures

Insider systems

Outsider systems

Most companies listed on stock exchange are controlled

by a few individuals, for example family companies.

Shareholdings are widely dispersed, manager/owner
separation.

Outsider
Advantages/Disadvantages
✓ Robust governance regime
✓ Strong owner-manager links
✓ Hostile takeover threat constrains management
✓ Longer-term view
✗ Agency problem
✗ Discrimination v minority
✗ Short-term priorities
✗ Lack of monitoring/governance
Insider


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Development of
guidance

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Basis of
guidance

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Major
governance codes

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Sarbanes-Oxley

Corporate social
responsibility

Public sector
governance

UK Corporate Governance Code

OECD principles

Code derived originally from Cadbury, Greenbury and
Hampel reports, supplemented by:

Organisation for Economic Co-operation and
Development produced non-binding principles to
address the interests of global investors. Companies
should work towards achieving principles, and
principles are guidelines for individual countries to
develop own codes.

Turnbull report – risk and internal control
Smith report – audit committees
Higgs report – non-executive directors

ICGN report
International Corporate Governance Network has
provided practical guidance for boards to operate
efficiently and compete for scarce capital.

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Principles
Shareholder/stakeholder rights
Equitable treatment of all shareholders
Stakeholders rights protected
Timely/accurate disclosure of material matters
Board responsible for strategy and monitoring
2: Approaches to corporate governance


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Development of
guidance

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Basis of
guidance

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Major

governance codes

Sarbanes-Oxley
The Sarbanes-Oxley Act was a response to the
collapse of Enron, one of America's biggest companies.
The Act is more prescriptive than codes in other
jurisdictions, impacting on review of controls,
disclosures, audits, ethics and directors’ share trading.

Auditing requirements
The non-audit services auditors can provide are
significantly restricted and auditors are subject to
various other rules:
Compulsory partner rotation
Retention of audit papers
Quality control standards
Review internal control systems

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Sarbanes-Oxley

Corporate social
responsibility

Public sector
governance

Weaknesses at Enron
Lack of transparency in accounts

Non-executive directors weak
Lack of external audit scrutiny
Directors’ use of inside information
Dishonesty and law-breaking

Corporate responsibility
Chief executive/chief finance officer certify:
Appropriateness of accounts
Accounts fairly reflect operations and financial
condition
If accounts have to be restated, they forfeit their
bonuses.


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Audit committees

Internal control reports (s404)

Every listed company should have an audit
committee consisting of independent directors, with
member(s) with financial expertise. Audit committee
should be responsible for:

Annual accounts must contain internal control reports
that:

Appointment, compensation and oversight of
auditors
Discussing key accounting policies with auditors
Setting up complaints mechanisms

State management responsibility for control
structure/financial reporting procedures
Assess effectiveness of control structure/financial
reporting procedures (with audit report)
State whether code of conduct for senior financial
officers has been adopted

Whistleblowing

Off-balance sheet transactions

Employees/auditors will be granted whistleblowing
protection if they disclose private employer
information to parties involved in a fraud claim.

There should be appropriate disclosure of material offbalance sheet transactions.

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2: Approaches to corporate governance

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Development of
guidance

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Basis of
guidance

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Major
governance codes

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Sarbanes-Oxley

Corporate social
responsibility

Public sector
governance

Significance of responsibility

CSR and stakeholders

Large businesses in particular face expectations that
they will act in a socially responsible fashion.

Businesses benefit from goodwill and other aspects
of society and therefore owe those particularly
affected by their activities certain duties in return.

Carroll's model
Four levels of responsibilities:
Economic – shareholders/employees/customers
Legal – comply with laws
Ethical – act in fair and just way
Philanthropic – generosity to employees/
community

Problems with stakeholder view
Collaboration time-consuming and expensive
Culture clashes with certain stakeholders
Collaboration on some issues, conflict on
others
Lack of consensus between different
stakeholders


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Ownership responsibilities
By buying shares, shareholders buy a responsibility to
ensure that company is managed efficiently and in ways
consistent with public welfare. Responsibilities of institutional shareholders have been stressed, institutional
shareholders' large % shareholdings meaning they
should be actively involved and pressure managers.
Ownership view problems
Shareholders with small % holdings aren’t
influential
Shareholders can easily dispose of shares and
this loosens feelings of obligation

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Impact of CSR

Objectives
Mission statements
Ethical codes
Governance codes
Stakeholder board representation
Corporate social reporting

2: Approaches to corporate governance


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guidance

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Basis of
guidance

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Major
governance codes

Public sector
Purposes and objectives Public service

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Sarbanes-Oxley

Private sector
Profit

Corporate social
responsibility

Charitable status

Public sector
governance

NGOs/quasi NGOs

Relief of poverty,
research, etc

As defined by owners

Performance

Central regulation Financial reporting
standards

SORP

Set outcomes

Ownership

Government

Donors

Government

Stakeholders
(including lobby groups)

The public, central Shareholders,
Service users

government,
regulators, taxation
service users
authorities

Partners/
shareholders

Government,
lobbying groups