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ACCA PasscardsPaper P1Governance, Risk and Ethics

Passcards for exams up to June 2015

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Professional Paper P1Governance, Risk and Ethics

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All rights reserved. No part of this publication may bereproduced, stored in a retrieval system or transmitted, inany form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the priorwritten permission of BPP Learning Media.

BPP Learning Media Ltd

2014

First edition 2007, Eighth edition June 2014ISBN 9781 4727 1129 8

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ContentsPreface

Welcome to BPP Learning Medias 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 Medias 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 togo through the Passcards again! You will then be well on your way to passing your exams.

Good luck!

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ContentsPreface

Page1 Scope of corporate governance 12 Approaches to corporate governance 113 Corporate governance practice and reporting 214 Internal control systems 315 Risk attitudes and internal environment 396 Risks 477 Risk assessment and response 538 Information, communication and monitoring 619 Personal ethics 6910 Professional ethics 7511 Corporate social responsibility 83

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1: Scope of corporate governance

Topic List

DefinitionConceptsAgencyStakeholdersMain issues

This chapter sets out the foundations of good corporategovernance, defining what corporate governance is, thekey concepts, and the stakeholders whom goodcorporate governance serves.You may need to considerthe conflicting interests of stakeholders and howstakeholders can control managers/directors. 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



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-telling/not 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 management/corporate governance ethical behaviour,

may impact commerciallyJudgement Taking decisions that enhance organisations prosperityIntegrity Straightforward dealing, honesty and completeness, basis of trust



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

Agents responsibilities

Directors (agents) run company on behalf ofshareholders (principals).Agency problem how to prevent directors excessively

rewarding 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-house,managers act opportunistically in their own interests.




Stakeholder theoryA broad range of stakeholders have claims on anorganisation. Stockholder/Shareholder view thatcompany just responsible to shareholders iswrong as modern corporations are very large andsocial/political/legal impact is therefore great. Instrumental view mainly economic

responsibilities with aim of maximising profits Normative view ethical/philanthropic

responsibilities as well as economic/legal

StakeholdersStakeholders are groups or individuals whoseinterests can affect or are directly affected by theactivities of a firm or organisation.

Stakeholder power mappingLevel of interest

DPower

Low HighLowHigh C

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 blockers/facilitators Assess legitimacy/urgency

Results of mapping


StakeholdersDefinition Main issuesAgencyConcepts

Proximity to organisationInternal employees/managementConnected shareholders, customers, suppliers,lenders, trade unions, competitorsExternal government, local government, public,pressure groups, opinion leaders

Active and passive stakeholdersActive seek to participate in organisation'sactivities (managers, shareholders, regulators,pressure groups)Passive dont seek to participate in policy-making(shareholders, local communities, government)

Primary and secondary stakeholders

Narrow and wide stakeholders

Primary need participation to continue as goingconcern (customers, suppliers, government)Secondary their ceasing to participate wont affectcontinued existence (government, managers)

Narrow most affected by organisations strategy(shareholders, employees, suppliers, major customers)Wide less affected by organisations strategy(government, less significant customers, community)



Voluntary and involuntary stakeholdersVoluntary those who of their own choice haveinvolvement with the organisation employees,customers, suppliers, shareholdersInvoluntary engage with the organisation withoutchoosing to do so neighbours, wider public Knowledge of stakeholders

Known Existence known to organisationUnknown Existence unknown to organisation(wildlife, communities affected by suppliers)Direct stakeholders know effect/how affected byIndirect unaware of claims or cannot express themdirectly

Legitimacy of stakeholders

Recognition of stakeholders

Legitimate valid claimsIllegitimate invalid claimsWho decides legitimacy? Basis?

Recognised Managers consider interests and viewswhen deciding strategyUnrecognised Managers don't consider claims whendeciding strategy



Secretary

CustomersSuppliers

Employees

Executive full-time managers, non-executive monitoringArranges board meetings, plans agenda, deals with documents and registers, generaladministration, reports to chairmanConcerned with impact of board upon position, supervise and co-ordinateimplementation of business strategy and risk management, provide data for boardCommitment, 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 supportCo-operation needed for just-in-time supply, poor payment record leads to creditrestriction and poor serviceIncreased expectations, power to shop elsewhere, ability to make views known, ethicalrequirements

Directors

Sub-board management

Trade unions



Highlight governance and reporting issues, independence required to supplyconfidence in information, need for audit committee to reinforce positionEstablish rules and standards, carry out inspections. May be enforcement costs orregulatory capture, domination of regulator by regulatedEstablish overall climate, encourage private shareholdings, provide subsidies,nationalise poorly performing industries, run public sector organisationsCompanies raise money, investors transfer shares, supply data about companyvalue and provide regulatory framework for governanceCan influence prices, avoid speculative shares, want short-term profits, can influencecompanies through meetings and voting, able to take direct action if dissatisfiedHold small numbers of shares in companies, trusts and funds. Likely to beundiversified and concerned with information asymmetryServices from public sector, aid from charitiesProvide funds to charities, want them well-spent

External auditors

Regulators

Government

Stock exchangesInstitutional investors

Small investorsRecipientsDonors



Duties of directorsCorporate governance guidelines reinforce legal andfiduciary duties to act in companys best interests,use powers for proper purpose, avoid conflicts ofinterest and exercise duty of care.

Accounting and auditingGreater transparency and reliability of accounts,decreasing investor risks. Tougher auditing standardsand requirements for auditors to avoid conflicts ofinterest.

Board supervisionNeed for board to meet regularly to consider effectivelyorganisations activities, risks and control systems.

Directors' remuneration

Corporate social responsibility

Board compositionNeed to avoid domination by single individual/smallgroup 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.


2: Approaches to corporate governance

Topic List

Development of guidanceBasis of guidanceMajor governance codesSarbanes-OxleyCorporate social responsibilityPublic sector governance

In this chapter we summarise the factors that haveinfluenced the ways corporate governance hasdeveloped, including the important rules v principlesdebate.You 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.


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






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 NED/auditor independence Provide accurate reporting Encourage owner involvement Direct behaviour

Key Principles






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, manager/ownerseparation.

Strong owner-manager linksLonger-term viewDiscrimination v minorityLack of monitoring/governance

Robust governance regimeHostile takeover threat constrains managementAgency problemShort-term priorities

Advantages/Disadvantages

Insider Outsider

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

Problems with principles





Sarbanes-OxleyBasis ofguidance


Majorgovernance codes

OECD principles

Shareholder/stakeholder rights Equitable treatment of all shareholders Stakeholders rights protected Timely/accurate 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 risk and internal control Smith report audit committees Higgs report non-executive directors






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 America's biggest companies.The Act is more prescriptive than codes in otherjurisdictions, impacting on review of controls,disclosures, audits, ethics and directors share trading.

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

Weaknesses at Enron

Corporate responsibilityChief executive/chief finance officer certify: Appropriateness of accounts Accounts fairly reflect operations and financial

conditionIf accounts have to be restated, they forfeit theirbonuses.

Auditing requirements



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 of

auditors 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 controlstructure/financial reporting procedures

Assess effectiveness of control structure/financialreporting procedures (with audit report)

State whether code of conduct for senior financialofficers has been adopted

Whistleblowing Off-balance sheet transactionsEmployees/auditors 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.






Basis ofguidance

Carroll's modelFour levels of responsibilities: Economic shareholders/employees/customers Legal comply with laws Ethical act in fair and just way Philanthropic 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.



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 arentinfluential

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






Basis ofguidance

Public sector Private sector Charitable status NGOs/quasi NGOs

Purposes and objectives Public service Profit Relief of poverty,research, etc

As defined by owners

Performance Central regulation Financial reportingstandards

SORP Set outcomes

Ownership Government Partners/shareholders

Donors Government

Stakeholders (including lobby groups)

The public, centralgovernment,service users

Shareholders,regulators, taxationauthorities

Service users Government,lobbying groups


3: Corporate governance practiceand reporting

Topic List

Role of boardBoard membershipNon-executive directorsDirectors' remunerationStakeholder relationshipsReporting

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.


ReportingRole of board Stakeholderrelationships

Directors'remuneration

Non-executivedirectors

Boardmembership

Scope of board's 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 frameworksNomination of directorsNomination committee should oversee appointmentsand make recommendations to the board. Needs toconsider: Executives/non-executives Gaps in current board's skills Expanding board diversity (age, gender, race,

ethnicity, education, background) Continuity and succession planning


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 strategy/environment Response to problems Considering right matters Communication Effectiveness of board committees Quality of feedback Adequacy of decision-making

Board appraisal

Advantages of multi-tier boardsSupervisors/supervised separationDeters management fraudBetter links with stakeholdersBetter use of non-executive time

Disadvantages of multi-tier boardsLack of accountabilityDon't receive information from managersSupervisory board decision-making restrictedLess effective at questioning managers

Companies in some countries are run by two or moreboards, often with supervisory/management role split.

Multi-tier boards





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, doesn't 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 to

board committees Control systems

enforcement

Responsibilities of CEO

Running board Accurate board information Shareholder communication

(Chairman's Statement) New director induction Board appraisal Board development Signing off accounts

Responsibilities of chairman






Boardmembership

Number of NEDsUSA/UK Independent NEDs at least half of board,others sufficient for views to carry weight.

Independence of NEDs No business/financial/other connection No share options/pensions Appointment for specified term Ability to take independent advice

Advantages of NEDsExternal experience and knowledgeWider perspectiveComfort for investorsConfidant/enablerBoard members but objective

Disadvantages of NEDsIndependence?Restricted recruitmentDifficult to impose viewsCant prevent problemsLimited time

Non-executive directors (NEDs)NEDs have no executive (managerial) responsibilities.They should provide balance and help to reduceconflict between executive directors and shareholders.Majority of NEDs should be independent.Role: Strategy Scrutiny

Risk management Board personnel





Boardmembership

Service contractsIf service contracts are too long, premature terminationmay mean significant payments. Service contractsshouldn't be >12 months normally.

Remuneration committeeCommittee of independent NEDs determining: Remuneration policy Specific remuneration packages

PrinciplesUK's Greenbury committee suggests: Directors' remuneration set by independent board

members Bonuses related to measurable performance/enhanced

long-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.



Elements of remuneration packageBasic salary in contract of employmentPerformance-related bonuses limited possiblyto maximum % of pay, shouldn't be given fortransactions, or if excessive risks taken?Shares granted on condition can't be soldShare options purchased at specified exerciseprice, encouragement to improve company'sperformance and hence share prices, options(and shares) to be held for certain length of timeBenefits-in-kind is cost excessive and howcomparable are they with what employees aregiven?Pensions best practice to make only basicsalary pensionable

Need to attract and retain directors Interests of stakeholders Weighting and phasing of different parts of package Director/manager differentials Impact of director/manager resigning Performance measures

Factors affecting remuneration levels

Variety of financial/non-financial measures Focus on current not historic performance Avoid short-termism Reward individual effort

Performance measures





Boardmembership

Relationships with stakeholdersOECD stresses role of: Employees Creditors Suppliers Investors GovernmentPosition 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 year/every three years). Boards shouldconsider relationships with all shareholders, particularlyinstitutional shareholders. Annual general meetings nor-mal part of calendar, other general meetings discussissues of immediate/serious concern.

Proxy votingMyners report recommends: Clear agreements between beneficial owners

and investment managers Stock lending shouldn't happen Electronic voting Poll (including proxies) for all resolutions



Annual general meetings

Notice > 20 daysbefore

Businesspresentation

Question andanswer sessions

Shareholders vote onsubstantiallyseparate issues

Shareholders vote onreport and accounts





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 UK

Corporate Governance Code have been applied Statement of compliance/details of reasons for

non-compliance

Voluntary disclosuresDisclosures above statutory/best practice minimum.Disclosures 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


4: Internal control systems

Topic List

Control systemsNature of risksControl frameworkControl limitationsEnterprise risk managementAssessment 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 procedures.The risks organisations face should have a significantimpact upon the control frameworks they adopt.You mayneed to assess the effectiveness of control systems andthe difficulties of implementing sound systems.


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 achieved.Turnbull 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 achievements/outputs 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

Qualitative/quantitativemeasures

Short/long-termmeasures

Consistency ofmeasures

Managementintervention

Automatic controlmechanisms

Reliance on socialrelationships

Features of control systems


Controlsystems



Control limitations

Controlframework

Nature ofrisks

4: Internal control systemsPage 33

Risk classificationRisks can be classified in various ways:Fundamental affects society in generalParticular individual in controlSpeculative good or bad consequencesPure only outcomes harmful

Risk and uncertaintyUncertainty means possible outcomes and/or 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.


Controlsystems



Control limitations

Controlframework

Nature ofrisks

CONTROL FRAMEWORK

Control activitiesControl environment

Orderly conduct of business Adherence to internal policies and laws Safeguarding assets Prevention/detection of fraud Accuracy/completeness of accounting records Quality of information and reporting

Purposes

Objectives Nature/extent of

risks Acceptable risks Likelihood risks

materialise

Ability to reducerisks

Costs/benefits ofcontrols

Changes in riskconditions

Control systems and risks


Controlsystems



Control limitations

Controlframework

Nature ofrisks


Costs > benefits Human error/Fraud Employee collusion

Managementbypass

Designed for routinetransactions

Depend on methodof data processing

LIMITATIONS OF CONTROLS


Controlsystems



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 risks,responsibilities 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



Internal EnvironmentObjective Setting

Event IdentificationRisk AssessmentRisk Response

Control ActivitiesInformation & Communication

Monitoring

STRATE

GIC

OPERAT

IONS

REPORT

ING

COMPLIA

NCE

ENTITY LEVELDIVISION

BUSINESS UNITSUBSIDIARY

COSO's Enterprise Risk Management framework


Controlsystems



Control limitations

Controlframework

Nature ofrisks

Objectives Risk links Compatibility Control mix Human resources

Framework Review Information

ASSESSMENT

Feedback Costs/benefits


5: Risk attitudes and internal environment

Topic List

Risk attributesStakeholders and riskInternal environmentRisk management responsibilitiesObjective 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.


Objectivesetting

Risk managementresponsibilities

Internalenvironment

Stakeholdersand risk

Risk attributes

Emotional satisfaction Risk-averse or risk-

seeking

Risk/return

Size Structure Development Past experience Focus on avoiding

risk

Organisational influences

Shareholder requirements

Personal views

Risk attributes

National influences Government protection


Objectivesetting


Internalenvironment


Risk attributes

5: Risk attitudes and internal environment Page 41

RISK

CONCERNS

Dividend impact Capital gain impact Dependent on their risk appetite/diversification 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


Objectivesetting


Internalenvironment


Risk attributes

Internal/control 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

Management's 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 Culture/code of conduct/HRM/reward 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



Embedding risk awarenessRisk assessment should evolve into a consistent activityembedded across all processes, focus on: Threats to shareholders/stakeholders (future growth

opportunities/core 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 information.Register lists and prioritises risks, and specifiesresponsible individuals and action taken.


Objectivesetting


Internalenvironment


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 process/key 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 understanding,report dangers



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 consultant called in to advise on particularaspects of risk managementRisk manager employee with specific responsibility fordealing appropriately with risksRisk management function employees in largerorganisations

Determine risk managementstrategy/policy

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 board/shareholders

Role of RM function


Objectivesetting


Internalenvironment


Risk attributes

MissionA general objective, visionary, often unwritten andvery open-ended, without any time limit for achievement.

Strategic high level goals, support mission Operational effectiveness and efficiency Reporting reliability Compliance with applicable laws

COSO model

Profitability Market share Growth Cash flow Customer satisfaction Quality Added value

Corporate objectivesObjective 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 objectives.Businesses should take a portfolio view of risks,looking at relevant risks over the whole organisation.


6: Risks

Topic List

Strategic and operational risksTypes of risksRisk 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.


Types of risksStrategic andoperational risks

Risk identification

Strategic risksFundamental risks to organisation's profits/existencearising from the sector its 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 industries/markets Level of competition Availability/price of resources Flexibility of production Ability to innovate/R&D Stage of product life cycle

Factors affecting strategic risks IT failures Human error Loss of key staff Fraud Business interruptions Internal audit weaknesses

Examples


Entrepreneurial risksRisks from carrying out business activities.Entrepreneurial risks must be taken if business is tomake profits.

Financial risksThreats to organisations continued existencethrough lack of available funds or taking onexcessive or unsuitable commitments. Risks alsoinclude credit risk from non-paying debtors andcurrency/interest rate risks.

Market risksRisks arising from markets within which a companyoperates, risks arising from movements in marketvalue of asset.

6: RisksPage 49


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, tariffs,exchange controls and nationalisation.



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 property.Dangers include fire, wind, water leakage andvandalism.

Technological risksRisks of loss through the inadequacies/disruption 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.


6: RisksPage 51

Trading risksRisks of disruption in the course of trade. Physical goods/documentation lost/stolen Trade customer refuses goods/cancels order Liquidity 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 members/employees of an organisationwill behave in ways detrimental to the organisation,eg failure to adapt to change.

Reputation risksRisk of loss of reputation arising from adverseconsequences of another risk.


Riskidentification


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


7: Risk assessment and response

Topic List

Risk assessmentRisk responsesControl activities

In this very important chapter, we deal with how risks aremanaged, in particular how risks are reduced by controlactivities.


Riskassessment

Riskresponses

Controlactivities

Risk managementeffectiveness

Risk managementcosts

Stakeholderpressures

Comprehensivecoverage

Risk assessment

Accurate analysis Responsive tochanging risks


7: Risk assessment and responsePage 55

Likelihood/Consequences matrix Risk quantificationUse Likelihood/Consequences 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 HighLowLow

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.


Riskassessment

Riskresponses

Controlactivities

Accounting ratios Objective/subjective 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 easily,assessment depends on knowledge and skills ofassessor.

Related risksRisks may be related/correlated 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 risks,where two or more different risks vary together.


Riskresponses


Controlactivities

Riskassessment

ConsequencesLow High

Low AcceptCost of action/benefits

TransferInsurance/contingency planning

High ReduceControls to limit riskoccurrence/impact

AvoidImmediate action required,

possible abandonment of activities

Likelihood/Consequences matrix

Likelihood Stop/Drop Not taking profitable opportunity on grounds of excessive risk

Go Going ahead with activity and incurring lossesALARP Reducing risks to as low as reasonably practicable levels


Riskassessment

Riskresponses

Controlactivities

Risk sharing Forwards Joint ventures Futures Swaps

Risk transfer Options Securitisation Insurance

Debt/equity mix International

Diversification

Natural hedging Internal netting Working capital management

Internal strategies

Financial risk management


Riskresponses


Controlactivities

Riskassessment

Classification of controlsCorporate are general policy, culture, values, overallmonitoringManagement include planning, performance monitoring,risk 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 payment/deliveries madeDetect pick up errorsCorrect minimise or negate errors eg back-upNon-discretionary can't be bypassedGeneral relate to environment

Approval and control of documents Controls over computerised applications and IT

environment

Checking arithmetical accuracy Control accounts Trial balances Reconciliations Physical counts Comparing internal and external data Limiting direct physical access

Types of control procedure


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 flexibility,responsiveness and creativity.

Difficult to estimate risk exposure Difficult to estimate impact of controls Comparison of financial costs v non-financial benefits

Benefits v costs


8: Information, communication and monitoring

Topic List

Internal communicationMonitoringInternal auditAudit committeeBoard review and reporting

This chapter emphasises the importance of informationflows and communication between managers and staff.The 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.


Internalcommunication

Monitoring Board review and reporting

Audit committeeInternal audit

Directors' information requirementsDirectors need information about risks linked toachievement of organisation's 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 management/information 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



Monitoring

8: Information, communication and monitoringPage 63

Board review and reporting


Strong control environment Prioritisation Communication structure/reporting

Effective/efficient 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 effectively.This 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





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 organisation's riskmanagement.

Accounting and internal control systems Financial and operating information Economy, efficiency and effectiveness Compliance with laws and regulations Safeguarding of assets Implementation of organisation's objectives Risk auditing Special investigations

Internal audit areas



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 don't audit their previous departments IA staff don't 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





Role of audit committeeThe audit committee's 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, complianceRelationship with external auditors includingappointment/removal, independence, scope, liaisonReview of internal audit including standards,independence, scope, resources, reporting, workplans, liaison with external auditors, resultsReview of internal control including systemsadequacy, legal compliance, fraud risk, auditors'reports, disclosuresReview of risk managementInvestigations



Monitoring


Board review and reporting


Strategic Consequences/likelihoodsRisks

Identifying,evaluating andmanaging risks

Control systemeffectiveness

Actions toreduce risk

Need for moremonitoring

Risk assessment Clear objectives Assessment of significant

risks Acceptable risks

understood

Controlenvironment/activities 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





Annual review of controlsReview should be wider-ranging than normal review: Changes in risks faced Changes in organisation's ability to respond to risks Scope and quality of managements monitoring Work of/need 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


9: Personal ethics

Topic List

Ethical theoriesIndividual influencesSituational influencesApproaching ethical problems

Dont think of this chapter as too theoretical.You may seequestions where you have to determine what wouldinfluence an individual's ethical decision-making, or useTucker or the AAA model to assist the decision-makingprocess.


Ethical theories Approachingethical problems

Situationalinfluences

Individualinfluences

Lack of objective standardsNon-cognitivism no possibility of acquiring objectiveknowledge of moral principles.Moral relativism right and wrong are culturallydetermined.

Objective standardsCognitivism 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 ethicsDeontological 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


9: Personal ethics Page 71




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 (money/possessions v

people/relationships)

MoralityActions are influenced not only by people's 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 developmentKohlberg's three levels ethics determined by:

Rewards/punishments (Pre-conventional)Others' expectations/law (Conventional)

1

2

3 Individual's own decisions (Post-conventional)

Locus of control

Education and employmentPeople's education/work background seems to be moresignificant with globalisation.

Influence individuals believe they have over their ownlives. Internal individuals have significant influence External lives shaped by luck/circumstances





Moral intensityCan be used to decide how ethically significant anissue is.

Moral framingHow issues are perceived in organisations. Use oflanguage can be important (fairness/honesty), but alsosignificant is the degree to which managers are willingto frame issues in moral terms.

Organisational cultureBasic assumptions that define organisation's view ofitself and its environment.

Values Beliefs Behaviours Taken for granted assumptions

Components of organisational culture

Magnitude of consequences Society's view of problem Probability of effect Speed consequences will occur Nearness of those affected Level of suffering of those affected

Criteria

National/cultural contextEthical decision may be shaped by nation in which ithappens.


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 reward/punishing ethical behaviour may

deter it

BureaucracyA system including detailed rules and procedures,that underpins reward and authority systems.

Rules override individual beliefs Morality in terms of following procedures Distancing individuals from consequences Denial of individuals 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.





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 appropriate

recommendations Justifying recommendations in practical business

and ethical terms

Profitable Legal Fair

Right Sustainable

Tucker's model of decision-making

Facts Ethical issues Norms/principles/

values Alternative courses

of action

Best course ofaction

Consequences Decision

American Accounting Association


10: Professional ethics

Topic List

Company codesProfessional codesEthical threats and safeguardsAccountants in businessPublic 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 dilemmas.However, in this paper its also important to understandwhy codes take the form they do and how much impactthey have. Independence will be a key issue in manyquestions.


Company codes Public interestAccountantsin business

Ethical threats andsafeguards

Professionalcodes

Code of conductCode seeks to establish organisation's values, promotebusiness objectives, emphasise responsibilities tostakeholders, control individuals' behaviour.However, issuing a code isn't enough, a code needs tobe backed by: Commitment of senior management Staff understanding of importance of ethics Staff commitment to ethics

Detailed guidance Recruitment/Selection/Induction Training Reward schemes Whistle-blowing procedures Ethical departments/audits

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.


10: Professional ethics Page 77

Company codes Public interestAccountants in business


Professionalcodes

Professional codesProfessional codes stress theimportance of the public interest.Most then set out: Fundamental principles Conceptual framework Threats to compliance Safeguards

Fundamental principlesProfessional competence/due care maintain knowledge/comply withstandardsIntegrity straightforwardness/honestyProfessional behaviour avoid actions discrediting professionConfidentiality don't disclose to third parties unless legal/professionaldutyObjectivity avoid influence by bias/conflicts of interest/undue influence

AdvantagesEmphasise public interest/confidenceOnus on active thoughtInternational applicationCan include detailed guidance/prohibitionsPrescribe minimum behaviour

DisadvantagesLack of focusPermit box-tickingDon't capture regional variationsNot legally enforceableExamples interpreted as rules

Professional codes



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 Partner/staff rotation Discussion/disclosure 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



SELF- REVIEW THREAT

General otherservices

Recent servicewith assurance

client

Other services

Corporatefinance Internal audit

services

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



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 client's 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.



Company codes Public interestAccountants in business


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 honesty/good 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 influence,corruption also includes systems abuse, bid givingand cartels.

Measures to combat bribery include code of conduct,risk assessment, conduct of business rules andwhistleblowing questionable transactions.




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


11: Corporate social responsibility

Topic List

Corporate citizenshipEthical stancesSocial responsibilitySocial and environmental impactsEnvironmental 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.


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 rights,filling void caused by lack of government action.


11: Corporate social responsibilityPage 85


Environmentalaudits


Ethicalstances


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



Environmentalaudits


Ethical stances


Pristine capitalistsExpedientsSocial contract proponentsSocial ecologistsSocialists

Radical feminists

Private property rights paramount, companies exist to make profitsand achieve economic efficiencyAcknowledgement of business excesses, acceptance of limited socialand moral responsibilitiesSurvival depends on delivery of benefits to society/groups thatdetermine its power, behaviour adheres to society normsModification needed of economic processes, resulting in resourceexhaustion, waste, pollution

Society's framework should promote equality, not requirements ofcapitalism

Need for emphasis on feminine values such as co-operation andreflection, 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 economicimperatives




Environmentalaudits


Ethicalstances


How organisations affectthe environment

Depletion ofnatural resources

Adverse visual andaural impacts

Air and wateremissions

Wastedisposal

Positive/negativehealth impacts

Raising/loweringlocal quality of life

Contribution toclimate change

Indirect impactsthrough supplychain



Environmentalaudits


Ethical stances


Environmental costs

Waste management XRemediation XCompliance activities XPermit fees XEnvironmental training XR&D XMaintenance XLegal costs XEnvironmental assurance bonds XEnvironmental certification XNatural resource inputs XRecord keeping and reporting X

__

X__

__

Remediation/compensation 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.



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 don'texceed environments ability to absorb them.

For whom? Other species % of current populationIn what way? Natural/social/economicHow long? Availability of raw materials Dependent on climate changeAt what cost? Presentation Substitution/compensation 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



Environmentalaudits


Ethical stances


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 costs/benefits into accounting equation,including environmental and social externalities.

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

GRI indicators



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

Environmental control systemsControl systems should cover relevant functions andactivities: Policy development and objectives Life-cycle assessment Compliance Waste and pollution minimisation R&D 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 operations.It emphasises reporting on goals and strategies as wellas issues and impacts. Businesses should show theirrelationships with capitals used (financial, manufactured,human, intellectual, natural, social).



Environmentalaudits


Ethical stances


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 organisation's impact on targets SWOT analysis Quality management programme Eco-audit BS7750 compliance Supplier audits

Types of audit

Establish metrics Compare planned/desirable and actual

performance Report results

Audit work


Book CoverTitleCopyrightPrefaceContentsChapter 1: Scope of corporate governanceDefinitionConceptsAgencyStakeholdersMain issues

Chapter 2: Approaches to corporate governanceDevelopment of guidanceBasis of guidanceMajor governance codesSarbanes-OxleyCorporate social responsibilityPublic sector governance

Chapter 3: Corporate governance practice and reportingRole of boardBoard membershipNon-executive directorsDirectors' remunerationStakeholder relationshipsReporting

Chapter 4: Internal control systemsControl systemsNature of risksControl frameworkControl limitationsEnterprise risk managementAssessment of systems

Chapter 5: Risk attitudes and internal environmentRisk attributesStakeholders and riskInternal environmentRisk management responsibilitiesObjective setting

Chapter 6: RisksStrategic and operational risksTypes of risksRisk identification

Chapter 7: Risk assessment and responseRisk assessmentRisk responsesControl activities

Chapter 8: Information, communication and monitoringInternal communicationMonitoringInternal auditAudit committeeBoard review and reporting

Chapter 9: Personal ethicsEthical theoriesIndividual influencesSituational influencesApproaching ethical problems

Chapter 10: Professional ethicsCompany codesProfessional codesEthical threats and safeguardsAccountants in businessPublic interest

Chapter 11: Corporate social responsibilityCorporate citizenshipEthical stancesSocial responsibilitySocial and environmental impactsEnvironmental audits

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