ACCA Paper P1 Governance, Risk and Ethics Complete Text British library cataloguinginpublication data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN: 9781784152185 © Kaplan Financial Limited, 2015 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. 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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. ii KAPLAN PUBLISHING Contents Page Chapter Theory of governance Chapter Development of corporate governance 47 Chapter The board of directors 55 Chapter Directors' remuneration 105 Chapter Relations with shareholders and disclosure 123 Chapter Corporate governance approaches 139 Chapter Corporate social responsibility and corporate governance 159 Chapter Internal control systems 183 Chapter Audit and compliance 221 Chapter 10 Risk and the risk management process 263 Chapter 11 Controlling risk 309 Chapter 12 Ethical theories 355 Chapter 13 Professional and corporate ethics 383 Chapter 14 Ethical decision making 435 Chapter 15 Social and environmental issues 453 Chapter 16 Questions & Answers 487 KAPLAN PUBLISHING iii iv KAPLAN PUBLISHING chapter Introduction Paper Introduction v Introduction How to Use the Materials These Kaplan Publishing learning materials have been carefully designed to make your learning experience as easy as possible and to give you the best chances of success in your examinations. 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If you are subscribed to our online resources you will find: (1) Online referenceware: reproduces your Complete or Essential Text on line, giving you anytime, anywhere access KAPLAN PUBLISHING vii Introduction (2) Online testing: provides you with additional online objective testing so you can practice what you have learned further (3) Online performance management: immediate access to your online testing results. Review your performance by key topics and chart your achievement through the course relative to your peer group Syllabus Paper background The aim of ACCA paper P1, Governance, Risk and Ethics, is to apply relevant knowledge, skills and 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. Objectives of the syllabus • Define governance and explain its function in the effective management and control of organisations and of the resources for which they are accountable • Evaluate the professional accountant’s role in internal control, review and compliance • • Explain the role of the accountant in identifying and assessing risk • Demonstrate the application of professional values and judgement through an ethical framework that is in the best interests of society and the profession, in compliance with relevant professional codes, laws and regulations Explain and evaluate the role of the accountant in controlling and mitigating risk Core areas of the syllabus • • • • • viii Governance and responsibility Internal control and review Identifying and assessing risk Controlling and managing risk Professional values, ethics and social responsibility KAPLAN PUBLISHING Syllabus objectives We have reproduced the ACCA’s syllabus below, showing where the objectives are explored within this book. Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives. These correspond to the objectives at the beginning of each chapter. Syllabus learning objectives and chapter references: A GOVERNANCE AND RESPONSIBILITY The scope of governance (a) Define and explain the meaning of corporate governance.[2] Ch 1 (b) Explain, and analyse the issues raised by the development of the joint stock company as the dominant form of business organisation and the separation of ownership and control over business activity.[3] Ch 1 (c) Analyse the purposes and objectives of corporate governance in the public and private sectors.[2] Ch 1 (d) Explain, and apply in the context of corporate governance, the key underpinning concepts of:[3] Ch 1 (i) fairness (ii) openness/transparency (iii) innovation (iv) scepticism (v) independence (vi) probity/honesty (vii) responsibility (viii)accountability (ix) reputation (x) judgement (xi) integrity. KAPLAN PUBLISHING ix Introduction (e) Explain and assess the major areas of organisational life affected by issues in corporate governance.[3] Ch 1 (i) duties of directors and functions of the board (including performance measurement) (ii) the composition and balance of the board (and board committees) (iii) reliability of financial reporting and external auditing (iv) directors’ remuneration and rewards (v) responsibility of the board for risk management systems and internal control (vi) the rights and responsibilities of shareholders, including institutional investors (vii) corporate social responsibility and business ethics (f) Compare, and distinguish between public, private and non governmental organisations (NGO) sectors regard to the issues raised by, and scope of, governance.[3] Ch (g) Explain and evaluate the roles, interests and claims of, the internal parties involved in corporate governance:[3] Ch.1 (i) directors (ii) company secretaries (iii) subboard management (iv) employee representatives (e.g. trade unions) (h) Explain and evaluate the roles, interests and claims of, the external parties involved in corporate governance:[3] Ch 1 (i) shareholders (including shareholders’ rights and responsibilities) (ii) auditors (iii) regulators (iv) government (v) stock exchanges (vi) small investors (and minority rights) (vii) institutional investors (see also next point) (i) Analyse and discuss the role and influence of institutional investors in corporate governance systems and structures, for example the roles and influences of pension funds, insurance companies and mutual funds.[2] Ch x KAPLAN PUBLISHING Questions & Answers Establishes boundaries Ethical codes provide boundaries which, ethically, it will be incorrect to cross. For example, many accountants prepare personal taxation returns for their clients. However, it is also known that, ethically, it is incorrect to suggest illegal methods of saving tax or to knowingly prepare incorrect tax returns. Maintenance of ethical conduct in this situation ensures that the accountant continues to be trusted by both his clients and by the taxation authorities. Ethical codes do not always assist in resolving ethical dilemmas for the following reasons. Codes only Ethical codes are literally what they say – they are ‘only’ a code. As a general code it may not fit the precise ethical dilemma and, therefore, the code will be limited in use. Situation B The ethical threat appears to be a lack of independence and selfinterest regarding the setting of remuneration for these directors. Not only do they have common directorships, but they are also good friends. They could easily vote for higher than normal remuneration packages for each other on the remuneration committees knowing that the other director will reciprocate on the other remuneration committee. In corporate governance terms, one ethical safeguard is to ban these crossdirectorships. The ban would be enforceable as the directors of companies must be stated in annual accounts, hence it would be easy to identify crossdirectorships. The ban would also be effective as the conflict of interest would be removed. In professional terms, the directors clearly have a conflict of interest. While their professional code of ethics may mention this precisely as an ethical threat, AB and CD should follow the spirit of the code and resign their nonexecutive directorships. This again would remove the threat. 572 KAPLAN PUBLISHING chapter 16 Situation C There is a clear ethical threat to the directors of Company Z. They appear to be being bribed so that they do not query the management style of the chairman. The threat is that the directors will simply accept the benefits given to them rather than try to run Company Z in the interests of the shareholders. It is clearly easy to accept that option. Ethical safeguards are difficult to identify and their application depends primarily on the desire of the directors to take ethical actions. In overall terms, the chairman does not appear to be directly breaching ethical or governance codes. The main safeguard is therefore for the directors not to accept appointment as director to Company Z or resign from the board if already a director. The director could attempt to get the matter discussed at board level, although it is unlikely the chairman would allow this. Taking any other action is in effect ‘whistle blowing’ on all the directors and has the negative impact that the director would also have to admit to receiving ‘benefits’ from the company. Question 19 – NM River Valley (a) An approach to ethical conflict resolution As with any decision, a structured framework probably provides the best approach to making the decision. The IFAC provides such a framework for ethical conflict resolution and this could be used in this case. Relevant facts The first step is to gain as many relevant facts concerning the case as possible. In this scenario these will relate to identification of who the real beneficiaries of the project are. Even if it is the case that they are solely corporations this will have social implications since such companies bring employment and prosperity to the region. The number of people displaced through the project must also be determined more accurately as well as environmental costs of the project. These will enhance the financial investment appraisal that has already taken place. KAPLAN PUBLISHING 573 Questions & Answers Ethical issues involved One of the ethical issues involved will be a utilitarian decision where the needs of the few are sacrificed for the needs of the many. The price of a quarter of a million people compared to benefit to 40 million must be considered. Compensation for their sacrifice is another ethical dilemma as is the extent to which the corporations should pay for that compensation rather than the local government which would amount to the people simply paying themselves for their sacrifice since they originally paid the taxes of the local government. Fundamental principles related to the matter in question The decision making process should draw together all relevant information and this includes the need to consider fundamental principles relating to the matter in question. These would include the need for the accountant to act professionally since he is representing the company in these matters. It also raises the question of whether the accountant is operating in the public good since the public do not seem to support the project. This latter issue highlights the importance of determining the volume of people involved and the actual public benefits of the project should it take place. Established internal procedures There will be established internal procedures for the accountant to follow rather than the need to resort to Professor Hoi. These would include a whistleblower communication channel with direct access to the audit committee and nonexecutive directors should the serious misstatement of the business case prove to be well founded through examination of the above. All internal procedures must be exhausted prior to any direct action outside of the organisation. Alternative courses of action There are many alternative courses of action depending on the outcome to the investigation. These may include the need to independently report findings to the forum or media. They might also involve resigning from the project on ethical grounds. They might include doing nothing and simply accepting the sacrifice of the few as being necessary for the wider good. It is important for the accountant to accept the need to at least consider these issues as part of a professional ethical approach to decision making. 574 KAPLAN PUBLISHING chapter 16 (b) Extending corporate reporting into CSR The reasons why corporate reporting should extend into CSR can be viewed from a number of standpoints. In a purely commercial sense corporations are able to more fully meet the needs of shareholders and wider stakeholders and in meeting this need their reputations and returns may be enhanced. From a stakeholder perspective there are a number of deep issues relating to the structure and distribution of power. CSR could embrace full disclosure of the impact of organisational activity on society such as the negative impact on the local population and environment. This illumination leads to a wider appreciation of the costs and benefits of projects such as the dam and this in turn leads to a more frank, open and honest discussion of the real issues at events such as the World Water Forum. It would also improve the quality or appropriateness of presentations given such as that of Professor Hoi. The illumination leads to increased visibility of corporate operations. This is a goal worth pursuing in itself since it attempts to demystify or make transparent that which is obscured from stakeholders, most importantly shareholders. The need for transparency arises through the agency relationship between management and the owners of the corporation. A lack of transparency makes it difficult for shareholders to make correct decisions on ethical issues simply because they do not know the issues involved in such decisions. Transparency in turn leads to accountability. Accountability is a reckoning for actions taken by corporations. The immense power given and wielded by corporations must be balanced through a responsibility to use that power in a way that society deems appropriate. The dam project is a very visible example of the power to change lives and the natural world in which all citizens must live. A lack of accountability means that power can be used to the detriment of these citizens without paying an appropriate price for those actions. Better information through CSR should lead to better decisions and more appropriate solutions to problems. The scientists, engineers, governments and corporations can then share their knowledge in order to create solutions that are most appropriate. Simply widening the scope of knowledge in the decision should increase the likelihood of a best solution being found. KAPLAN PUBLISHING 575 Questions & Answers This collective decision making process, extending on a global basis through forums such as that identified in the question gradually reconstructs the power that exists in society away from single corporate decision making to a more inclusive world view. This reconstruction is both political and commercial, developing the organisation away from a purely pristine capitalist structure as defined by Gray, to one that has a greater social responsibility at its heart. This should be considered as a positive development and one that accountants should ethically consider appropriate. (c) Attributes of the accountant Accountants are perhaps uniquely capable of developing increased CSR in the public interest. The professional skills of the accountant in reporting, disclosure and audit, adapted as part of their work to any given industry or sector enables them to collect and disseminate information to stakeholders regarding CSR issues. Accounting also involves an essentially systemsbased approach to business where staged frameworks are applied in order to achieve required goals. These system skills assist in the development of environmental management systems through which reporting and monitoring is achieved. This view requires the accountant to use project based skills to implement systems where auditing techniques can be used. Investment appraisal is mentioned in the question as a purely financial decision. Skills in this area enable the accountant to use a foundation skills base and extend it to include CSR related information. As a profession including millions of professional, accounting is a body large enough to take on the task. Its formalisation through accounting bodies means that accountants have the infrastructure to take on the challenge on a global scale. Finally, an attribute of the accountant as a profession is to operate in the public interest. This scenario identifies the public in the widest context to include the very poor and disadvantaged. To meet their purpose accountants should consider who the public are and act accordingly. 576 KAPLAN PUBLISHING chapter 16 Question 20 – Dirk Hausmann The AAA model is sanctioned by the IFAC and provides a rigorous structure to evaluate the wide ranging issues involved in making an ethical decision or coming to a conclusion in terms of what is right in the narrow or wider context for the individual or the organisation as a whole. It suggests a logical, sevenstep process for decision making which takes ethical issues into account Step 1: Establish the facts of the case The first step is to gather the facts relating to the situation. This means that when the decisionmaking process starts there is no ambiguity about what is under consideration. Much of the discussion in this situation revolves around rumour and opinion and so it is important for Dirk to gain actual written testimony or a clear picture of how events unfolded and who were the key players in the events of the previous day. Step 2: Ethical issues of the case. The second step is to consider the ethical issues involved. The establishment of these ethical principles will offer a guide as to what to do in a given situation. The principles may be understood through the company’s code of ethics or with reference to the IFAC model. The model states that integrity professionalism and confidentiality are among a limited range of key ethical principles that must not be sacrificed in the ethical decision deliberation. Dirk is faced with the decision as to whether to keep the information of this false rumour to himself. Step 3: Norms, principles and values related to the case This involves placing the decision in its social, ethical, and, in some cases, professional behaviour context. A corporate code should include procedures for individuals to follow such as the appropriate hierarchical structure through which concerns can be raised with those on the board of directors or below. The standard whistleblower clause should not be ignored in this instance as it may offer a way of passing the onerous requirement to actually make a decision to a higher level. A core principle of integrity would suggest that the rumour should not have been spread and Dirk should be honest about his findings. KAPLAN PUBLISHING 577 Questions & Answers Step 4: Identify alternative courses of action In this step each alternative course of action open to Dirk is identified. This involves stating each one, without consideration of the norms, principles, and values identified in Step 3, in order to ensure that each outcome is considered, however appropriate or inappropriate that outcome might be. Dirks’ alternatives include: (1) keep silent about the rumours that have been spread (2) notify the board of directors (3) seek another internal route to escalate the problem Step 5: Best course of action Then the norms, principles, and values identified in Step 3 are overlaid on to the options identified in Step 4. When this is done, it should be possible to see which options accord with the norms and which do not. Dirk should evaluate the variety of possible actions he could take. Raising the matter with someone internally, possible a senior manager, would be in line with the principles of integrity, as would notifying the board of directors. Step 6: Consequences of each possible course of action This step requires clear consideration of the consequences of each course of action. The purpose of the model is to make the implications of each outcome unambiguous so that the final decision is made in full knowledge and recognition of each one. 578 • Alternative (1): keeping silent would ensure that the shareholders remained pleased with the favourable trading results. However, Dirk may feel uncomfortable with this approach • Alternative (2): Notifying the board of directors may have adverse repercussions on Dirk’s trading team colleagues and even his whole department. The board would then have to decide if they communicated this matter outside the company • Alternative (3): If Dirk chooses to talk to another manager with the organisation he may feel that he has passed on the burden of the decision with regards to this matter, hence easing his own concerns. However, it may be the case that this approach is not successful and no further action is taken KAPLAN PUBLISHING chapter 16 Step 7: Decision Finally, in the last step a decision can be taken based on weighing up the consequences with the values and ethical beliefs. Alternatives (2) or (3) appear to be the ethical options. If no solution can be found then advice should be sought from governing bodies and even lawyers. In the end a decision simply must be reached or the Dirk should distance himself from the situation by resigning. Question 21 – C company (a) Triple bottom line Triple bottom line (TBL) accounting means expanding the normal financial reporting framework of a company to include environmental and social performance. The concept is also explained using the triple ‘P’ headings of ‘People, Planet and Profit’. People The people element of the TBL expands the concept of stakeholder interests from simply shareholders (as in financial reporting) to other groups including employees and the community where the company carries out its business. Actions of the company are therefore considered in light of the different groups, not simply from the point of view of shareholders. The C Company appears to be meeting this objective of the TBL for its own staff. The provision of flexible working hours, staff restaurant and sports facilities all indicate a caring attitude towards staff. However, the ability of C Company to take into account other stakeholder interests is unclear. Specific areas where C is not meeting the TBL include: – KAPLAN PUBLISHING Delaying payment for raw materials will adversely affect the cash flow of C’s suppliers. Some discussion or negotiation of terms may have been helpful rather than simply amending terms without consultation 579 Questions & Answers – Moving the administration headquarters ‘outoftown’ does not necessarily help the community. For example, there will be increased pollution as C’s employees drive out to the administration building (note that there is no public transport). Also, while flexible working time is allowed, this may mean travel time has increased. This may place pressure on workers regarding collection of children on ‘school runs’ and mean more cars on the road increasing the risk of accidents. Provision of company buses out to the new headquarters would help decrease pollution but would not necessarily assist with the working hours issue – Finally, the proposal for the redevelopment of the old administration headquarters into a waste disposal centre is unlikely to benefit the community. There will be additional heavy lorries travelling through residential areas while the burning of rubbish provides the risk of fumes and smoke blowing over residential properties. Finding an alternative use, even if this was less profitable, would benefit the community overall Planet The planet element of TBL refers to the environmental practices of the company to determine whether they are sustainable or not. The TBL company attempts to reduce the ‘ecological footprint’ by managing resource consumption and energy usage. The company therefore attempts to limit environmental damage. It is not clear that the C company is meeting this section of the TBL. Specific areas of concern include the following. 580 – Lack of an energy audit. A review of energy consumption could identify areas for energy saving, even if this was only the use of low wattage light bulbs – The relocation of the administration office to an outoftown district may enhance working conditions for staff, but it also means that public transport cannot be used to reach the offices. This increases fuel use as employees must use their own transport – Finally, the insistence of the chairman in holding all divisional review meetings in person rather than using newer technology such as videoconferencing means increased use of air travel and therefore carbon dioxide emissions KAPLAN PUBLISHING chapter 16 Profit Profit is the ‘normal’ bottom line measured in most businesses. As noted above, a nonTBL company will seek to maximise this measure to improve shareholder return. A TBL company on the other hand will balance the profit objective with the other two elements of the TBL. At present, the C Company appears to be placing a lot of importance on the profit motive. Two specific decisions to increase profits are: – delaying payment to creditors to provide additional cash within C and therefore decrease the need for bank overdrafts, which in turn decreases interest payments – the proposal for the redevelopment of the old administration headquarters into a waste disposal site, which appears to be focused entirely on the amount of profit that can be made As noted above, involving creditors in the discussions and finding alternative uses for the old administration site (even at a lower profit) would show C’s commitment to the TBL. (b) Sustainability Sustainable development can be defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development 1987). Sustainability is an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future with reference to the continuity of economic, social, institutional and environmental aspects of human society, as well as the nonhuman environment. The three perspectives of sustainability are economic, social and environmental. The economic perspective recognises that the earth’s resources are finite and so economic development must be limited. Sustainability means that the organisation must plan for long term growth and be neutral in its use of resources. There is no evidence that the C Company has considered this perspective apart from the fact it is profit motivated and wants, therefore, to survive as a company. KAPLAN PUBLISHING 581 Questions & Answers The social perspective recognises that organisations have an impact on their communities and may also change the social mix of a community. By moving the administrative headquarters out of town, the C Company has had an impact on the community – in effect C is denying jobs in its headquarters to those members of the community who do not have access to private transport. The environmental perspective recognises that organisations have an impact on the environment and that lack of environmental concern means an overall decrease in earth’s resource base. The lack of videoconferencing for example, means that C’s executives use air travel unnecessarily, decreasing the amount of fossil fuels and increasing carbon dioxide emissions. 582 KAPLAN PUBLISHING Index A Absolutism 356-357 ACCA Conceptual Framework… 232-236 Accommodation 164 Accountability 11, 29, 33,135 Accountant’s role and influence… 392-398 Active stakeholders 170 Advocacy threat 233 Agency cost….28, 31 Agency problem resolution measures 31 Agency theory….27-29 Agency theory, key concepts… 29 Agency in the public sector… 18 Agent 28 ALARP principle 268 American accounting association (AAA) model 438 Annual general meeting 129 Annual report 132 Anthro capital 462 Assessing risks 293 Audit committee 242-251 Auditors… 25 Auditor independence 230 B Basic salary 110 Benefits in kind 112 Board committees 96 Board meetings 66 Board of directors… 23, 57-64 Board structures 68 Bounded rationality 35 Bribery… 421-426 Brundtland Commission 458 Business probity risk 278 Business risks 277-286 C Cadbury report 4, 49, 58, 124, 185 Carroll’s model… 161-164, 371-373 CEO 55, 75, 98 Chairman 74, 98 Codetermination 68 Cognitive moral development 363 Commodity price risk 277 Company constitution… 88 Company secretary 22 Compliance risk 277 Comply or explain… 141 Computer simulations… 300 Conceptual framework 410 Confidentiality 406 Conflict of interest… 89-91, 408 Conflict resolution 414 Consequentialist 360 KAPLAN PUBLISHING Consistency 359 Context-related factors… 444, 446 Continuing professional development (CPD) 81 Control activities 203-207 Control environment 201 Conventional 363 Corporate and personal ethical stances 373 Corporate board 69 Corporate Code of Ethics… 399-401 Corporate citizen 175-176 Corporate ethics 373, 399 Corporate governance 4-8 Corporate governance and risk… 265 Corporate governance approaches… 140-142 Corporate governance development… 48 Corporate social responsibility 160-164 Correlation of risk… 288 Corruption… 417-426 COSO 188,192, 273 Credit risk 277 Cross directorship… 73 CSR Strategy development… 165 Cultural context 371 Currency risk 277 D Decision trees… 299 Deep ecologist 368, 370 Defence 164 Deferred share bonus… 113, 115 Definitive stakeholders… 173 Deontological approach 358-360 Derivatives risk 278 Directors’ remuneration 105-119 Directors service contract… 86 Disclosure of interests 91 Disclosure: best practice 131 Disclosure: general principles… 130 Disqualification of directors… 88 Diversification 330 Diversity….64-66 Divergent governance… 147-148 Dogmatic approach 358 Due care 406 E Eco-Management and Audit Scheme… 467 Economic responsibility 161 Economic risk 277 Economic value added… 111 Effective board 62 Effective internal control system 201 Egoism 361 Embedding risk 322-324 Employees… 24 Employee representatives 21 I.1 Index Equivalent view… 177 Entrepreneurial risk… 278 Enterprise risk management 271-274 Environmental accounting 473 Environmental auditing 472 Environmental footprint… 459 Environmental reporting… 475 Environmental risk 278 Ethical behaviour 437, 444 Ethical conflict resolution 415 Ethical decision making 436, 441 Ethical dilemmas 414 Ethical judgement… 437 Ethical knowledge… 437 Ethical responsibility 162 Ethical safeguards… 411 Ethical sensitivity 437 Ethical stances 373 Ethical threats 231, 235-238, 408, 411 Ethics education framework 436 Expedients 367, 369 Extended view… 177 External auditors 248 External corporate governance stakeholders 25, 169 Extraordinary general meeting 129 Human capital… 478 Human dignity 359 I Fairness Familiarity threat 233 Family structures 149 Fiduciary duty 83 Fiduciary responsibility 28 Financial capital… 478 Financial risk 278 Fraudulent trading 89 FRC… 59 Full cost accounting 463 Fundamental ethical principles 405 Illegitimate stakeholders… 171 Independence 10, 71, 238, 249 Induction 78-81 Information asymmetry… 135 Information characteristics 213-217 Information communication and flows 203, 208 Information systems for management control… 212-213 Innovation… 10 Insider dealing 91 Insider dominated structures… 150 Institutional investors 26,124 Instrumental view of stakeholders 174 Integrated reporting… 477-484 Integrity 12, 405 Intellectual capital… 478 Internal audit 222-230 Internal control activities… 203-207 Internal control definitions… 189 Internal control effectiveness… 200-203 Internal control objectives… 190 Internal control reporting… 251 Internal control statement (s404)… 145 Internal control and risk management… 187, 210 Internal stakeholders… 169 International convergence… 152 Internal corporate governance stakeholders 21 Internal management control 196 International corporate governance network (ICGN) 154-155 Interest rate risk 277 Intimidation threat 233 ISO 14000 467 Involuntary stakeholders… 170 Issue-related factors… 444 G J General meetings… 128 Gearing risk 278 Generic risks 287-288 ‘Golden hellos’… 114 Governance codes… 16, 53 Governance structures 149 Gray, Owens and Adams… 366-370 Greenbury 49, 106 Joint stock company… 4, Judgment 12 F H Hampel 49 Hazard 294 Health and safety risk… 278 Higgs 50, 58 Honesty 10 I.2 K Key concepts King report on corporate governance 198 Kohlberg 363-365, 441 L Latent stakeholders… 173 Legal and regulatory framework… 82 Legal responsibility 162 Legitimate stakeholders… 171 Likelihood of occurrence 293 Limited view… 176 KAPLAN PUBLISHING Index Liquidity risk 278 Litigation risk 277 Loyalty bonus… 114 M Management… 24 Management board 68 Mandatory versus voluntary disclosure 132-135 Manufactured capital… 478 Market risks 277 Mendelow model 171-173 Monitoring 203 Moral behaviour 445 Moral framing 445 Moral intensity 445 Moral issue 445 N Narrow stakeholder 170 National government… 17 Natural capital… 479 NEDs 70-74 NED independence 71-72 NED’s remuneration… 119 Need for internal audit 229 NGO’s… 19, 147 Nominations committee 97-98 Normative view of stakeholders 174 O Objectivity 405 OFR… 133 Openness Operational risks 276 Opportunism 35 Organisation for economic cooperation and development (OECD) 127,153, 266 Ownership and property 177 P Passive stakeholders… 170 Penalties 83 Pension contributions 112 Performance evaluation 92-95 Performance related elements of remuneration… 110 Personal ethics… 373 Philanthropic responsibility 162 Physical controls 205 Political risk 277 Positions on social responsibility 366 Post-conventional… 363 Power and wealth distribution 397 Pragmatic approach 358 Pre-conventional… 363 Primary stakeholders… 170 KAPLAN PUBLISHING Principal 28 Principal-agent relationship… 30 Principles based approach… 140, 415 Pristine capitalist 367,368 Private company 14 Proaction 164, 387 Probity 10 Product reputation risk 277 Product risk 277 Profession 385, 410 Professional behaviour….407 Professional codes of ethics 403 Professional competence 406 Professionalism 385 Proponents of social contract 367, 369 Proxy voting 130 Public interest 387-390 Public sector governance… 16-21 Q Quango’s… 19 Quotients approach… 459 R Radical feminist 368, 370 Reaction 164, 387 Regulators… 25 Regulatory risk 277 Relativism 356-357 Removal of directors 87 Remuneration committee 106-107 Remuneration package 109-118 Remuneration, policy and strategy… 108-109 Reporting on internal controls 251-255 Reputation 12 Residual loss 32 Residual risk 312 Responsibility… 11 Retirement benefits… 115 Retirement by rotation 84 Risk acceptance 325 Risk appetite 312-316 Risk assessment 271, 293-298 Risk attitude 312 Risk auditing 336-338 Risk avoidance 325, 329 Risk awareness 320 Risk capacity 312 Risk categories (and use of) 275, 285 Risk committee 316-318 Risk correlation… 288-289 Risk diversification… 330-335 Risk – external reporting… 339 Risk identification 271, 275, 287 Risk impact on stakeholders… 291 Risk management committee 317 I.3 Index Risk management 188, 270, 325 Risk management process… 270 Risk management roles… 195-197 Risk manager….319 Risk map 294, 327 Risk minimisation 326 Risk monitoring 271 Risk necessity… 266 Risk perception 298 Risk planning 271 Risk pooling… 326 Risk profile 317 Risk reduction 325 Risk reporting… 339 Risk retention 329 Risk strategy 312 Risk transference 325 Roles in risk management… 196 Rules based approach… 140, 415 S Safeguards 410 Scenario planning… 299 Secondary stakeholders… 170 Securities and Exchange Commission (SEC) 144 Self-interest threat… 232 Self-review threat… 233 Sensitivity analysis… 299 Service contract… 86 Severity of risk 293 Scepticism… 10 Share options 112 Shareholder activism 126,178 Shareholder democracy… 178 Shareholder intervention 126 Shareholder ownership… 177-179 Small investors… 26 Smith Report… 50, 186, 242 Social capital… 478 Social accounting 175 Social audit 470 Social ecologist 367, 369 Social footprint 462 Social reporting… 475 Social responsibility 162 Social responsiveness 164 Socialist 368, 370 Sound control systems 193 SOX.and s.404 143-146, 199, 254, 340 Specific risks… 287-288 Stakeholder claims 21, 168 Stakeholder classifications 169 Stakeholder mapping… 171 I.4 Stakeholder relations 169 Stakeholder theory 37 Stakeholders 18, 21, 25, 37, 169 Stock exchange 26 Strategic CSR… 165 Strategic risks 275 Sub-board management… 22 Subjective approach… 459 Sub-national government… 18 Succession 98 Supervisory board 69 Supranational government… 18 Sustainability accounting 463 Sustainability 454, 457 Sustainable development 454 T TARA 294, 325-327 Technology risk 277 Teleological approach 360-362 Termination of contract… 115 The Three E’s… 19 Threats to independence 72, 235, 409 Tone at the top… 62 Total shareholder return… 110 Trade unions 24 Transaction cost theory 34-36 Transparency Triple bottom line (TBL) accounting 464 Tucker… 439 Turnbull 50, 186, 189, 194, 195 Tyson… 50, 59 Two tier boards… 68 U UK Corporate governance code… 50-52, 116, 124 UK External reporting… 341 Unitary board 70 Universality 359 Upside of risk 270 Utilitarianism 361 V Value creation process… 480 Voluntary stakeholders 170 Voluntary disclosure 134 W Whistleblowing… 414 Wide stakeholder… 170 Work environment… 411 Wrongful trading 89 KAPLAN PUBLISHING ... • • viii Governance and responsibility Internal control and review Identifying and assessing risk Controlling and managing risk Professional values, ethics and social responsibility KAPLAN PUBLISHING... testing results. Review your performance by key topics and chart your achievement through the course relative to your peer group Syllabus Paper background The aim of ACCA paper P1, Governance, Risk and Ethics, is to apply ... Evaluate the qualities and characteristics of information required in internal control and risk management and monitoring.[3] Ch C IDENTIFYING AND ASSESSING RISK Risk and the risk management process