ACCA Paper P1 Governance, risk and ethics Pocket notes Governance, risk and ethics British library cataloguing-in-publication data A catalogue record for this book is available from the British Library Published by: Kaplan Publishing UK Unit The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-78415-246-8 © Kaplan Financial Limited, 2015 Printed and bound in Great Britain ii The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties Please consult your appropriate professional adviser as necessary Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials 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 Kaplan Publishing kaplan publishing paper P1 Contents Chapter 1: Theory of governance Chapter 2: Development of corporate governance 21 Chapter 3: The board of directors 27 Chapter 4: Directors’ remuneration .47 Chapter 5: Relations with shareholders and disclosure 55 Chapter 6: Corporate governance approaches 63 Chapter 7: Corporate social responsibility and corporate governance 71 Chapter 8: Internal control systems 85 Chapter 9: Audit and compliance 99 Chapter 10: Risk and the risk management process 111 Chapter 11: Controlling risk 121 Chapter 12: Ethical theories 135 Chapter 13: Professional and corporate ethics 147 Chapter 14: Ethical decision making 159 kaplan publishing iii Governance, risk and ethics Chapter 15: Social and environmental issues 165 Index iv I.1 kaplan publishing paper P1 Exam guidance – keys to success in this paper The aim of this paper is to apply relevant knowledge and skills and to exercise professional judgement in carrying out the role of the accountant relating to governance, internal control, compliance and the management of risk within an organisation, in the context of an overall ethical framework It is important to remember that this is a Professional level paper and you are expected not only to be able to reproduce the details of a particular code or theory but to be able to discuss the arguments for and against an idea or approach, often in the context of a particular scenario Paper P1 Governance, Risk and Ethics is underpinned by Paper F1 Accountant in Business It is also supported by the new on-line Professional Ethics module which all students registering from January 2007 are required to take, preferably before or at kaplan publishing the same time as Paper P1, Governance, Risk and Ethics If you are an existing student transferring to the new syllabus this module is not compulsory – however you are encouraged to take it to improve your understanding of ethical issues facing accountants The Ethics Module should also assist you in answering questions on the P1 paper Further information on the Ethics Module can be found on the ACCA website Although the syllabus is divided into five different areas, no area should be viewed in isolation from the others Corporate governance is a key topical area, but recent high-profile corporate failures have been due to deficiencies in internal control Effective risk management forms an important part of good governance An understanding of ethics is also important in explaining how corporate governance failures occur v Governance, risk and ethics The examination Corporate governance and responsibility Exam format Section A (50%) Professional values, ethics and social responsibility Internal control, review and compliance Core syllabus areas Identifying and assessing risk vi Controlling and managing risk • compulsory question • three to five parts, some with subsections • based on a long scenario and will cover all areas of the syllabus • will always contain an ethics element, and generally a significant amount of corporate governance marks • four to six professional marks will be available in this question • From 2011 be aware of the possibility of bringing in some simple arithmetic calculations into the Risk area of the syllabus kaplan publishing paper P1 Section B (50%) for answering questions on ethics and professionalism • choice of two questions from three, each worth 25 marks • more likely to assess a range of subject areas from the main syllabus headings Keys to exam success • short scenarios are likely to be used • At the beginning of the exam there will be 15 minutes reading and planning time during which you can annotate the question paper The ability to apply theory to the scenarios given • nswering exactly the question that has A been set • Providing specific and detailed answers • arning professional marks (for E presenting answers in section A in the prescribed format, with appropriate style, focus and use of language) • ddressing the requirement of the verb A used in the question • nswering both parts of a question A requirement (rule of “and”) • eading examiner’s articles published in R Student Accountant The syllabus does not ask for knowledge of particular codes with the exception of the Sarbanes-Oxley Act and the OECD and ICGN Reports on corporate governance However you will be expected to illustrate points with reference to an appropriate code, which may be a local one, to demonstrate your understanding Although knowledge of the UK’s Corporate Governance Code is not required it does provide a very useful basis for answering questions on corporate governance requirements The ACCA and IFAC codes of ethics are useful kaplan publishing Exam focus vii Governance, risk and ethics Examination tips Spend the first few minutes of the examination reading the paper Where you have a choice of questions, decide which ones you will Divide the time you spend on questions in proportion to the marks on offer One suggestion for this examination is to allocate 1.8 minutes to each mark available, so a 10-mark section of a question should be completed in approximately 18 minutes Spend some time planning your answer Stick to the question and tailor your answer to what you are asked Pay particular attention to the verbs in the question and make sure you identify all the requirements of a question Spend the last five minutes reading through your answers and making any additions or corrections viii If you get completely stuck with a question, leave space in your answer book and return to it later If you not understand what a question is asking, state your assumptions Even if you not answer in precisely the way the examiner hoped, you should be given some credit, if your assumptions are reasonable Do everything you can to make things easy for the marker The marker will find it easier to identify the points you have made if your answers are legible An essay answer should have a clear structure It should contain a brief introduction, a main section and a conclusion Be concise It is better to write a little about a lot of different points than a great deal about one or two points In case study questions, first identify the area in which there is a problem, outline the main principles/theories you are going to use kaplan publishing paper P1 to answer the question, and then apply the principles/ theories to the case Some questions ask you to present your answer in the form of a report or other document So use the correct format – there could be easy marks to gain here Key study tips Ensure you review prior knowledge from earlier papers Revise the course as you work through it and leave sufficient time before the exam for final revision Cover the whole syllabus and pay attention to areas where your knowledge is weak Practice exam standard questions under timed conditions potentially damaging to reputations which you can use to illustrate your answers Ensure you review the ACCA’s Student Accountant for any articles that your examiner may write These can form the basis of future exam questions Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send and email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions Read good newspapers and professional journals There are many examples of shareholders exerting influence, unethical corporate behaviour and events which are kaplan publishing ix Governance, risk and ethics x kaplan publishing Social and environmental issues Social and environmental audits Definition Social audit = process enabling organisation to assess and demonstrate its social, economic and environmental benefits and limitations Statement of purpose Review results from last year’s purpose + establish this year’s purpose and plan Review/plan Manage social audit and measure performance for next year’s plan Social audit External view Obtain view of external stakeholders – enhanced view of organisation Internal view Views of directors, staff, volunteers: assess ways of working and reward systems 170 kaplan publishing Chapter 15 Definition Environmental audit = assessment of impact of the organisation on the environment • The audit provides the raw data for environmental accounting • It generally leads into an environmental action plan Three elements of an environment audit: Agreed metrics Performance measured against those metrics Reporting on levels of compliance Exam focus Refer to examiner’s article, published in Student Accountant, on risk and environmental auditing kaplan publishing 171 Social and environmental issues Social and environmental reporting Social reporting issues • human rights Except in some highly regulated situations, the production of a social and environmental report is voluntary • work place, occupational health and safety • training and employee issues But what should companies report on? • fair pay for employees and suppliers • fair business practices • minority and equity issues • marketplace and consumer issues Environmental reporting issues 172 • measures of emissions pollution, waste and greenhouse gases) • consumption (e.g of energy, water and non renewable mineral deposits) kaplan publishing Chapter 15 Integrated reporting Integrated Reporting demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing An Integrated Report should be a single report which is the organisation’s primary report in most jurisdictions the Annual Report or equivalent Central to Integrated Reporting is the challenge facing organisations to create and sustain value inthe short, medium and longer term An integrated report is a concise communication about how an organisation’s kaplan publishing 173 Social and environmental issues Five other types of sustainable capital These are: Manufactured capital Material goods, or fixed assets which contribute to the production process rather than being the output itself – e.g tools, machines and buildings Intellectual capital This form of capital can be described as the value of a company or organisation’s employee knowledge, business training and any proprietary information that may provide the company with a competitive advantage (NB: Some of the subsets of intellectual capital include human capital, information capital, brand awareness and instructional capital.) 174 Human capital This can be described as consisting of people’s health, knowledge, skills and motivation Enhancing human capital through education and training is central Social capital This can be described as being concerned with the institutions that help us maintain and develop human capital in partnership with others; e.g families, communities, businesses Natural capital This can be described as any stock or flow of energy and material within the environment that produces goods and services e.g climate regulation, climate change, CO2 emissions kaplan publishing Chapter 15 Value creation process kaplan publishing 175 Social and environmental issues Exam focus Recent P1 questions on this topic include: Topic Pilot D07 J08 D08 J09 D09 J10 D10 J11 D11 J12 D12 J13 D13 J14 D14 Environmental Q1 footprint Sustainability Integrated reporting 176 Q1 Q1 Q1 Q2 Q1 Q1 Q1 Q3 Q1 kaplan publishing Index I.1 Index A C Absolutism 136 Accountants’ role 150 Active stakeholders 78 Advocacy 104 Agency costs 14 Agency theory 12 Agent 12 ALARP Principle 113 American Accounting Association 160 Annual General Meeting 58 Assessing risks 118 Audit committee 105, 106, 107, 108, 109 Auditor independence 103 Carroll 74, 75 Chairman 36 Chief executive 36 Cognitive moral development 139 Combined Code 23 Competence 153 Conceptual framework 153, 154 Confidentiality 153 Consequentialist theory 137 Consistency 138 Context-related factors 163 Conventional 139 Corporate citizen 81 Corporate ethics 152 Corporate governance 2, 4, 8, 21, 64 Corporate social responsibility (Carroll) 74 Corporate social responsiblity 72 Correlated risk factors 117 Corruption 156 COSO 91 CPD 39 Cultural context 142 B Board committees 43 Board diversity 31 Board of directors 28 Board structures 29 Bounded rationality 16 Bribery 156 Business risks 115 I.2 kaplan publishing Index D Deep ecologists 141 Deontological 137, 138 Dialogue 59 Directors’ remuneration 49, 52 Disclosure 59, 60 Disqualification 41 Diversifying 130 Dogmatic 136 E Egoism 138 EMAS 169 Embedding risk 126, 127 Enlightened self-interest 72 Environmental audit 171 Environmental footprint 167 Environmental reporting 172 Ethical behaviour 162 Ethical conflict resolution 157 Ethical decision making 161 Ethical decision making frameworks 160 Ethical dilemmas 155 kaplan publishing Ethical stances 144 Ethical threats 104 Ethical threats and safeguards 154 Expedient 140 External auditors 108 Extra-ordinary General Meeting 58 F Familiarity 104 Family owned 68 Full cost accounting 168 Fundamental principles 153 G Generic risks 117 Good information 94 Governance Gray, Owens and Adams 140 H Human capital 174 Human dignity 138 I.3 Index I.4 I J Independence threats 34 Induction 39 Information characteristics 95 Information flows 92 Information quality 94 Inside 68 Insider trading 41 Institutional investors 56 Instrumental 80 Integrated reporting 173 Integrity 153 Intellectual capital 174 Internal audit 100, 101, 102, 107 Internal controls 106 Internal control system 87 Internal management control 87 International Corporate Governance Network (ICGN) 69 Intimidation 104 Involuntary stakeholder 78 ISO 14000 169 Joint-stock 68 K Key concepts M Mandatory disclosure 60 Manufactured capital 174 Mendelow 79 Moral behaviour 161 Moral framing 162 Moral intensity 162 Moral issue 161 Multiple jurisdictions 69 N Narrow stakeholder 77 Natural capital 174 NEDs 32, 33 Nominations committee 45 Non-consequentialist theory 137 kaplan publishing Index Normative 80 O Objectivity 153 Operational risks 114 Opportunism 16 Organisation for Economic Co-operation and Development (OECD) 69 Organisation structure 68 Outside 68 P Passive stakeholder 78 Performance evaluation 40 Performance related pay 51 Philanthropic 74, 142 Positions on social responsibility 140 Post-conventional 139 Pragmatic 136 Pre-conventional 139 Primary stakeholder 77 Principal 12 Principles-based 64 kaplan publishing Pristine capitalist 140 Profession 148 Professional behaviour 153 Professional codes of ethics 153 Professionalism 148 Public interest 149 Public Sector governance 10 R Radical feminists 141 Relativism 136 Removal 41 Remuneration committee 48 Residual loss 14 Retirement by rotation 42 Risk 112 Risk acceptance 128 Risk appetite 122 Risk attitude 122, 123 Risk auditing 132 Risk avoidance 130 Risk capacity 122 I.5 Index Risk committee 125 Risk identification 113 Risk management 113, 128 Risk manager 125 Risk map 118 Risk perception 120 Risk retention 130 Risk transference 128 Rules-based 64 S Sarbanes-Oxley (SOX) 66 Secondary stakeholder 77 Self-interest 104 Self-review 104 Service contracts 41 Shareholder ownership 82 Social audit 170 Social capital 174 Social contract 140 Social ecologists 140 Social footprint 167 Socialists 141 I.6 Social reporting 172 Social responsiveness 75 Sound control systems 89 SOX 67 Specific risks 117 Stakeholder 76, 79 Stakeholder claims 76 Stakeholders 77, 80 Stakeholder theory 18, 76 Strategic risks 114 Sustainability 166 Sustainable development 166 T TARA 128 TBL accounting 168 Teleological 138 Teleological 137 Transaction cost theory 16, 17 Tucker’s questions 160 Turnbull 23 Two-tier boards 30 kaplan publishing Index U UK Corporate Governance Code 24, 45, 108 Universality 138 Utilitarianism 138 V Value creation process 175 Voluntary 60, 78 Voluntary disclosures 61 kaplan publishing I.7 Index I.8 kaplan publishing ... governance An understanding of ethics is also important in explaining how corporate governance failures occur v Governance, risk and ethics The examination Corporate governance and responsibility... of a particular scenario Paper P1 Governance, Risk and Ethics is underpinned by Paper F1 Accountant in Business It is also supported by the new on-line Professional Ethics module which all students... Chapter 13: Professional and corporate ethics 147 Chapter 14: Ethical decision making 159 kaplan publishing iii Governance, risk and ethics Chapter 15: Social and environmental issues