ACCA APPROVED CONTENT PROVIDER ACCA Passcards Paper P1 Governance, Risk and Ethics Passcards for exams up to June 2015 ACP1PC14.indd 29/05/2014 17:29 (000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM Page i Professional Paper P1 Governance, Risk and Ethics (000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM First edition 2007, Eighth edition June 2014 ISBN 9781 4727 1129 e ISBN 9781 4727 1185 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 Ho Printing 31 Changi South Street Changi South Industrial Estate Singapore 486769 www.bpp.com/learningmedia Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources Page ii 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 (000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM Page iii 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! Page iii (000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM Page iv Preface 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 11 21 31 39 47 53 61 69 75 83 (001)ACP1PC14_CH01.qxp 5/28/2014 12:39 AM Page 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 (001)ACP1PC14_CH01.qxp Definition 5/28/2014 12:39 AM Concepts Page 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 (001)ACP1PC14_CH01.qxp Definition Fairness Transparency Independence Innovation Scepticism Probity Responsibility Accountability Reputation Judgement Integrity Page 5/28/2014 12:39 AM Concepts Page 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 (001)ACP1PC14_CH01.qxp 5/28/2014 Definition 12:39 AM Concepts Page 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 (001)ACP1PC14_CH01.qxp Definition 5/28/2014 12:39 AM Page 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 Page 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 (010)ACP1PC14_CH10.qxp 5/28/2014 Company codes T H R E A T S Importance of independence Independence promotes: Reliability of financial information Credibility of financial information Value for money of audit Credibility of profession 12:48 AM Professional codes Self-interest Self-review Advocacy Familiarity Intimidation Page 78 Ethical threats and safeguards Accountants in business Public interest Professional safeguards Entry requirements Training requirements CPD requirements Professional standards Professional monitoring Disciplinary procedures External review Safeguards in practice Peer review Independent consultation Partner/staff rotation Discussion/disclosure to audit committee Reperformance by another firm (010)ACP1PC14_CH10.qxp 5/28/2014 12:48 AM Page 79 Employment with assurance client Close business relationships Partner on client board Financial interests Family and personal relationships Recruitment SELF-INTEREST THREAT Gifts and hospitality Loans and guarantees Lowballing High % of fees Recent service with assurance client % or contingent fees Overdue fees General other services Preparing accounting records and financial statements SELF- REVIEW THREAT Other services Corporate finance Page 79 Internal audit services Valuation services Tax services 10: Professional ethics (010)ACP1PC14_CH10.qxp Company codes 5/28/2014 12:48 AM Professional codes Page 80 Ethical threats and safeguards Accountants in business Public interest Familiarity threat Advocacy threat Where accountants take client's part, act as their advocate or will only earn fees from client if successful outcome is achieved (contingent fees) Examples include provision of legal service and corporate finance advice Conflicts of interest These can arise from accountants acting for clients with whom they are in dispute, eg over quality of work It can also arise through disputes between two clients for whom accountants are acting Family relationships between client and firm Personal relationships between client and firm Long association with client Recent service with client Future employment with client Intimidation threat Close business relationships Family relationships Personal relationships Staff employed by client Litigation (010)ACP1PC14_CH10.qxp Company codes 5/28/2014 12:48 AM Professional codes Page 81 Ethical threats and safeguards Accountants in business Public interest Preparation and reporting of information Bribery and corruption Information should describe clearly nature of business transactions, classify and record information in timely and proper manner, and represent facts accurately Bribery is giving value in return for influence, corruption also includes systems abuse, bid giving and cartels Acting with expertise Competent performance by accountant may be threatened by lack of time, lack of information, insufficient training, inadequate resources Financial interests Share ownership, share options and profit-related bonuses provide incentives to manipulate information Accountants may be offered inducements to act illegally Page 81 Problems with bribery Lack of honesty/good faith Conflicts of interest Misallocation of resources Poor international risk management Loss of reputation Measures to combat bribery include code of conduct, risk assessment, conduct of business rules and whistleblowing questionable transactions 10: Professional ethics (010)ACP1PC14_CH10.qxp Company codes 5/28/2014 12:48 AM Professional codes Page 82 Ethical threats and safeguards Accountants in business Public interest Public interest Professionalism The collective well-being of the community of people and institutions the accountant serves But lack of statutory definition can make it difficult to enforce Critics have claimed profession acts against public interest in a number of ways Compliance with relevant laws and regulations, and avoidance of actions that may bring discredit on profession Influence of profession Against public interest Accounting standards allow excessive leeway Ineffective auditing standards Emphasise confidentiality over public interest Critics have accused the profession of: Getting the numbers wrong Failing to realise the assumptions used in preparing accounts support a capitalistauthoritarian view of society (011)ACP1PC14_CH11.qxp 5/28/2014 12:49 AM Page 83 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 upon the natural and human environment This has been highlighted as an important topic and it illustrates how various aspects of control systems (management systems, internal audit and external reporting) are applied (011)ACP1PC14_CH11.qxp 5/28/2014 Corporate citizenship Ethical stances 12:49 AM Corporate citizenship Page 84 Social responsibility Social and environmental impacts Environmental audits Core principles The business strategy shaping the values underpinning mission and choices made as the corporation engages with society Corporate social responsibility discussions are often in terms of corporate citizenship, focusing on rights (carrying on business lawfully) as well as responsibilities Minimising harm Maximising benefit Accountability and responsiveness to stakeholders Limited view Voluntary philanthropy, corporate citizen engages with local communities and employees, mainly for self-interest Equivalent view Focus on a broad range of stakeholders and response to demands of society and legal requirements Extended view Active social and political citizenship, promotion of social, civil and political rights, filling void caused by lack of government action (011)ACP1PC14_CH11.qxp 5/28/2014 Corporate citizenship Ethical stances 12:49 AM Page 85 Social responsibility Social and environmental impacts Environmental audits Wider view of ethical responses Better for reputation Prevents more legal regulation Minimum compliance Government imposes wider constraints Short-term shareholder interest Long-term shareholder interest Ethical stance Multiple stakeholder Building relationships Which stakeholders? Which obligations? Page 85 Shaper of society Constitution requirements Accountability Financial viability 11: Corporate social responsibility (011)ACP1PC14_CH11.qxp 5/28/2014 Corporate citizenship Ethical stances 12:49 AM Page 86 Social responsibility Social and environmental impacts Environmental audits Pristine capitalists Private property rights paramount, companies exist to make profits and achieve economic efficiency Expedients Acknowledgement of business excesses, acceptance of limited social and moral responsibilities Social contract proponents Survival depends on delivery of benefits to society/groups that determine its power, behaviour adheres to society norms Social ecologists Modification needed of economic processes, resulting in resource exhaustion, waste, pollution Socialists Society's framework should promote equality, not requirements of capitalism Radical feminists Need for emphasis on feminine values such as co-operation and reflection, fundamental readjustment of society required Deep ecologists Human rights to existence don't exceed other species' rights Economic systems should not trade species survival v economic imperatives (011)ACP1PC14_CH11.qxp Corporate citizenship 5/28/2014 Ethical stances 12:49 AM Page 87 Social responsibility Social and environmental impacts Depletion of natural resources Adverse visual and aural impacts Indirect impacts through supply chain How organisations affect the environment Waste disposal Page 87 Positive/negative health impacts Environmental audits Air and water emissions Contribution to climate change Raising/lowering local quality of life 11: Corporate social responsibility (011)ACP1PC14_CH11.qxp Corporate citizenship 5/28/2014 12:49 AM Social responsibility Ethical stances Environmental costs Waste management Remediation Compliance activities Permit fees Environmental training R&D Maintenance Legal costs Environmental assurance bonds Environmental certification Natural resource inputs Record keeping and reporting Page 88 Social and environmental impacts Environmental audits Contingencies £ X X X X X X X X X X X X X Remediation/compensation Future regulatory impacts Essential product improvements Employee health and safety Environmental knowledge acquisition Non-sustainable inputs Impaired assets Stakeholders and reputation risk Increasingly stakeholders are aware of environmental impacts and require businesses to more to deal with them Being known as a poor corporate citizen can pose a serious reputation risk (011)ACP1PC14_CH11.qxp 5/28/2014 12:49 AM Sustainability Sustainability is ensuring that economic development meets the needs of the present without compromising the future Sustainability for organisations means developing strategies by which an organisation only uses resources at rate that can be replenished, and emissions of waste don't exceed environment’s ability to absorb them Strong sustainability Fundamental change in perceptions required Harmony with natural world Sustain all species Continue to pursue economic growth? Page 89 Page 89 For whom? Other species % of current population In what way? Natural/social/economic How long? Availability of raw materials Dependent on climate change At what cost? Presentation Substitution/compensation possible Weak sustainability Catastrophe prevention Sustaining humanity Regulate resource usage Maintenance of existing system 11: Corporate social responsibility (011)ACP1PC14_CH11.qxp Corporate citizenship 5/28/2014 12:49 AM Ethical stances Page 90 Social responsibility Social and environmental impacts Environmental audits The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to use when reporting on economic, environmental and social dimensions of their activities, products and services Full cost accounting Full cost accounting ultimately allows the incorporation of all costs/benefits into accounting equation, including environmental and social externalities Sustainability report Vision and strategy Profile Governance structure and management systems GRI content index Performance indicators GRI indicators Direct economic impact – on key stakeholders Environmental – use of natural resources, emissions, transport usage, compliance with standards Labour practices – employment practices, health and safety, training, diversity Human rights – strategy, non-discrimination, workers’ rights, low-paid labour Society – community contribution, political activities, competitive attitudes Products – customer health and safety, advertising, privacy (011)ACP1PC14_CH11.qxp 5/28/2014 12:49 AM Advantages of external reporting Enhances transparency and accountability Promotes improvement in control systems Addresses investor worries about risk Enhances reputation Limits damage if incidents occur EMAS Emphasis on verified improvement and disclosure Requirements include: Environmental policy statement On-site environmental review Environmental management system Environmental audits and actions Public environmental statement Page 91 Page 91 Integrated reporting Integrated reporting links reporting on sustainability issues with reporting on financial results and operations It emphasises reporting on goals and strategies as well as issues and impacts Businesses should show their relationships with capitals used (financial, manufactured, human, intellectual, natural, social) Environmental control systems Control systems should cover relevant functions and activities: Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation R&D Performance reporting 11: Corporate social responsibility (011)ACP1PC14_CH11.qxp 5/28/2014 Corporate citizenship 12:49 AM Ethical stances Page 92 Social responsibility Social and environmental impacts Environmental audits Environmental audit Audit review Assesses how organisation is safeguarding the environment It should enhance management control of environmental practice and compliance with internal policies and external reputation Auditors will concentrate on a number of aspects that affect environmental impact: Types of audit Environmental impact assessment of major projects Surveys of organisation's impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits Board knowledge Compliance procedures Environmental information systems Performance targets and review Implementation of previous recommendations True and fair reporting Audit work Establish metrics Compare planned/desirable and actual performance Report results ... of BPP Learning Media © BPP Learning Media Ltd 2014 (000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM Page iii Preface Contents Welcome to BPP Learning Media’s ACCA Passcards for Professional Paper P1. ..(000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM Page i Professional Paper P1 Governance, Risk and Ethics (000)ACP1PC14_FP(Ho).qxp 5/28/2014 12:38 AM First edition... 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