Knowledge check

Study guide
CONTEMPORARY BUSINESS ISSUES

CPA Australia gratefully acknowledges the many authors who have contributed to this module.

Question 1.1
What types of activities or roles could a professional accountant provide to improve productivity
for an organisation?

Professional accountants can provide several roles in improving productivity, including:

Data capture

Both of physical and monetary flows, to enable an accurate view of

currentoperations

Analysis

Both of financial and non-financial information, to enable identification

ofactivity drivers

Performance measurement

Includes establishing benchmarks and measuring progress towards goals

and targets

Process redesign

By applying process improvement tools to identify inefficiencies and

bottlenecks, and reconfiguring activities

Resource control

Through budgeting and forecasting, as well as designing and

implementing internal controls

Question 1.2
For each of the characteristics listed in Table 1.1 (i.e. organisation, strategy, customer/community,
financial, governance, work force and information technology processes), list one example of
the type of strategic advice that professional accountants may be able to provide.

There is a wide range of business advisory services that professional accountants may be able
toprovide, including:

Organisation
Legal structure (sole trader, partnership, trust, company).
Succession planning.

Strategy

Business planning process, including linking budgets to organisational objectives.

External environment information and analysis.
Specific growth strategies (acquisition, joint venture, partnership).
Performance measurement systems design, evaluation and implementation.

Customer/Community
Customer profitability and segmentation.
Sustainability improvements and reporting.

Financial
Capital structures and sources of funding.
Wealth maximisation strategies (dividends, buy-backs, reinvestment).
Finance function (budgeting, payroll, accounts payable/receivable, inventory,
taxation,reporting).
Costing and pricing, and leasing versus purchasing of assets.

Governance
Governance structures (board composition, committees).
Independent director role.
Risk management and internal controls.

Work force
Organisational structures (in-house, outsource).
Performance measures and links to remuneration.

IT processes
Management information systems (reviews, scoping, implementation, testing).
Project management services.

Question 1.3
Do you believe professional accountants are well placed to provide strategic advisory
services (outside the traditional areas of cost accounting, financial accounting and taxation) to
organisations? Justify your position.

Professional accountants, both internal and external to organisations, are well placed to provide
strategic advisory services to organisations for a number of reasons, including the following:
The professional approach of the accountantsuch as having a service ideal, honesty,
integrity and not acting in their own self-interest.
The technical abilities of accountants are based on a systematic body of theory and
knowledge. They have gone through rigorous education and training, which provides a base
level of knowledge that leads to competence in delivery of services.
Many technical skills are transferablefor example, the technical requirements of an
audit (including setting the scope, determining the approach to sampling, and obtaining
and reviewing data) are often similar, despite the reviewed data being of a different nature
(i.e.physical measures instead of financial measures).
Accountants are often exposed to the whole of an organisationfinance, sales,
marketing, human resources, IT, legal, production, logistics and after-sales services.
Thisknowledge is invaluable when assessing the impact of potential decisions across
different parts of an organisation, as well as its industry supply chain.
Accountants are often exposed to several industries, and similar problems that arise
in different organisations. The ability to transfer their knowledge of how similar problems
have been resolved provides a valuable resource to clients who may have never experienced
suchproblems.

Question 1.4
The business advisory industry thrives during periods of business change and hardship
(IFAC2008, p. 26). Explain why this may be the case.

In periods of change and hardship, many organisations realise that they cannot continue
operating as they have done previously. Business models that worked in the good times may
not be relevant when times get tougher. Many organisations find that, in difficult times, there are
additional pressures from:
shareholdersto continue generating sufficient returns;
employeesto provide tolerable working conditions and guarantee security of work;
suppliersto increase/maintain orders and margins; and
customerswho are buying less, and on reduced margins.
In addition, regulatory changes (e.g. new licensing regimes or new taxes) and changes in
community expectations (e.g. relating to the environment) can also have a significant impact on
organisations.
Organisations may not have sufficient resources or expertise to solve the underlying issues,
or make the required changes, and so typically request assistance from external sources.
Byobtaining that expertise externally, both the adviser and the organisation should benefit.

Question 1.5
1. Soft skills, especially communication skills, networking and the ability to manage relationships,
are extremely important to progress to senior roles in accounting/finance. At the CFO level,
how important do you think it is to be technically competent in the finance role, compared
to actually managing the finance role? Explain your reasoning.
2. A contemporary business and social issue is maintaining worklife balance. What risks does
an accountant providing strategic advice face in this area?
3. In the CFO role, how important do you think it is to:
(a) know the organisation and the products/services it offers?
(b) be passionate about the products/services the organisation offers?

Explain your reasoning.

1. There are two main ways of perceiving the CFO role. One is that it is a management role,
which oversees a technical function. The key skills involved would focus on managing a
team of people and difficult deadlines, making significant financial decisions and being
able to interact with both internal and external stakeholders, including banks, regulators,
shareholders, consumers and employees. People and project management skills could be
seen as equally important as technical competence.
However, the second (and more appropriate) view is that, in most situations, it is likely that
the CFO needs to be technically qualified. While the technical specialists within the function
would provide the technical skill, there is still a need for the CFO to be knowledgeable
and competent. A technical understanding of what is being performed by subordinates is
essential to properly managing the function. If you do not know what is expected of your
team in terms of technical requirements, time, and regulations, then it will be difficult for you
to properly understand and manage the area.
2. Along with the benefits of acting in an advisory role, there are also some potential pitfalls.
Hitting tight deadlines for important issues (and possibly across multiple clients) can lead
to difficulties in finding time and balance with non-work activities. Such deadlines were
traditionally compliance-based and reflected the end-of-month/year processes. Being locked
in well in advance, and being somewhat repetitive, these activities could be planned for.
However, strategic advisory services can take place at any time through the course of the
year, and the volume or extent of the workload may not be as easily planned. Important areas
of consideration to maintain worklife balance include:
planning and booking leave in advance;
planning work schedules and work pipelines into the future;
maintaining a time log and reviewing hours worked to monitor fatigue;
not overcommitting (either with the number of clients or the number/size of
engagements); and
having access to temporary support services and backup personnel as needed.
3. The CFO has a dual role of manager with technical expertise. The purely technical role
of ensuring the correct recording, reporting and communicating of results must be
combined with the broader manager role. Where the CFO is providing strategic advice
as to products, services, prices, organisational structure, business planning and overall
strategy, it is important for the CFO to be both knowledgeable about the inner workings
of the organisation and also a proud supporter of the product offering. What may be more
important than passion for a specific product or service is that the needs of the customer are
properly satisfied and the financial position of the organisation is strong and under control.

Question 1.6
Refer back to Table 1.1. Consider the strategic advice that a professional accountant could give
an enterprise in relation to its customers. Explain how that advice might differ depending on
whether an accountant was advising a small, medium or large enterprise.

Potential opportunities for strategic advice in relation to customers include the following:
Customer profitability analysisUsing activity-based analysis to determine the full cost of
each customer (including cost of goods sold, sales time, customer service, delivery, logistics
and after-sales service). This can determine the real profit that is generated by each customer,
which can allow customers to be segmented into groups according to profitability, and also
how demanding they are on organisational resources (e.g. sales personnel and after-sales
service). The least profitable customers can then be highlighted and strategies for dealing
with them can be created. These may include educating the customer on the costs incurred
to service them and charging for the services provided (menu-based pricing).
Customer performance ratings and satisfactionDeveloping reporting systems that
capture important measurements (like delivery in full and on-time statistics), which should
help influence customer satisfaction levels. Where ratings are not satisfactory, strategies may
be implemented to make improvements.
Customer pricing analysisAdvice may be provided based on analysis from tools such as
cost-volume-profit analysis and sales mix analysis, which may be used to identify the most
suitable pricing structures and profitable mix of sales offering.
Customer needs analysisAdvice on providing products and services that customers
actually need or desire. This may involve survey generation, the use of focus groups,
orthe use of social media to canvass customer feedback. It also links into other customerrelated areas of satisfaction and pricing analysis, such that product/service features can be
reviewed and priced appropriately to satisfy customers and generate maximum value for
theorganisation.
The advice will probably vary depending on the size of the organisation for several reasons.
Table1.1 identified the following stereotypical characteristics of different sized organisations.

Customer/
community

Small enterprise

Mid-sized enterprise

Large enterprise

Few customers
account for large part
of turnover.
Close to their
customers and
customers business
plans.

Growth of customer
base.
Moving away from the
direct proximity of their
clients.

Large, international
customer base.
Success or failure of
the enterprise is felt
through the whole
supply chain, the
employee base and
the wider community.

A smaller organisation may not have the computer systems, records or personnel to conduct
a detailed customer profitability analysis, performance measurement or scenario testing using
pricing and sales mix tools. The advice may include support in setting up the systems and
putting processes in place to conduct this type of work. Medium to larger-sized organisations
are more likely to have accounting staff and systems in place, so efforts may be more focused on
finetuning systems, advising on current best practice, and providing an independent review and
verification of current methods.

Question 1.7
A business cannot achieve sustainability and profitability at the same timeone must always
be sacrificed for the other. Do you agree or disagree? Explain your answer.

The underlying suggestions in the question are:

being sustainable incurs costs that reduce profitability; or
a profit focus prevents attention being given to matters outside cost minimisation and profit
maximisation; or
at best by pursuing both goals they will cancel each other out to deliver what is called a
zerosum game resultno improved profit and no improved sustainability.
But this is not necessarily the case. For example, sustainable actions can grow profits, especially
as externalities become internal (e.g. carbon prices and Environment Protection Agency (EPA)
controls). Competitive advantage can be gained. Some customers only want to buy from ethical/
sustainable organisations and are often prepared to pay more for what they see as a superior or
ethical product. Similarly, some suppliers only want to deal with sustainable/ethical purchasers,
and some investors only want to invest with organisations they perceive as being more ethical,
with the consequent possibility for reducing costs of capital.
If you are interested in reading more about profit and sustainability, please read the story about
RayAnderson and his experience with Interface (a carpet manufacturer):
http://www.greenbiz.com/blog/2009/10/05/ray-anderson-radical-industrialist).
Or you could access his book entitled Confessions of a radical industrialist:
http://us.macmillan.com/confessionsofaradicalindustrialist/raycanderson.

Question 1.8
The IT snag (adapted from Sexton 2010).
In the face of a recent economic downturn, the board has requested that you, as the CFO,
together with the chief information officer (CIO), produce a business case for outsourcing the
organisations information technology (IT) operations offshore. The CIO sees this as an opportunity
to significantly reduce costs within his business unit, which will help him achieve his substantial
end-of-year bonus. As the CFO, you acknowledge that there is a possibility to reduce overheads
associated with the IT operations and, as a consequence, increase profitability.
What ethical issues need to be considered in this situation?

(Adapted from Sexton 2010).

There are many valid reasons to outsource business activities, including risk mitigation, improved
cost efficiency and access to technology and skilled staff not available in your own organisation.
Yet while outsourcing information technology (IT) may reduce certain risks, such as continued
reliance on legacy systems, there are also risks associated with having a third party provide
services. These risks include failure to offer services to an appropriate standard (which could harm
the reputation of your business), possible breaches in security or an inability to comply with legal
and regulatory requirements. There are also additional risks associated with the loss of control
over the information source and its security.
Apart from undertaking due diligence to ensure that any identified risks are addressed, it is
also necessary to determine that the outsource provider has the appropriate experience and
expertise to handle your IT operations, that it is a viable and financially secure organisation with
good governance, and that the outsourcing arrangements are appropriate to your business
strategy. It is also important to ensure that you are engaging with an ethical service provider
whom you are able to trust with your organisations sensitive and confidential data.
It is essential that the board fully understands the corporations ethical obligations before any
decision is made to outsource IT offshore. As well, any decision needs to be in accordance
withstated corporate social responsibility policies and obligations.
As CFO and a member of a professional accounting body, you also have personal ethical
obligations as outlined in the Code. Although the Code does not specifically address outsourcing,
it does contain some fundamental ethical principles relevant to this situation. Foremost is
the principle of confidentiality. This requires members to refrain from disclosing outside the
organisation confidential information acquired as a result of professional and business relationships
without proper and specific authority from the client or employer. This extends to refraining from
using confidential information to your personal advantage or to the advantage of third parties.
You need to ensure that the board specifically addresses the confidentiality issues that arise from
any outsourcing arrangement and formally documents its consideration of these issues together
with the authority for any disclosure of confidential information.

The conceptual framework in the Code can also be applied in this situation:
(a) Identify threats to compliance with the fundamental principles: As the CIO has his annual
bonus hinging on this decision, there is an appearance that his objectivity is compromised.
This situation would therefore create a self-interest threatthat is, a threat that a financial
or other interest will inappropriately influence the members judgment or behaviour
(APESB2013b).
(b) Evaluate the significance of the threats identified: The CIO has the potential to earn a
substantial end-of-year bonus. Being in a decision-making position for the organisation,
andbeing a direct benefactor of the decision to outsource (as an individual employee),
suggests that the significance of the threat is high.
(c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an
acceptable level: As the CIO has a conflict of interest in the outsourcing decision, it would
be prudent to seek external independent advice on the outsourcing option. This advice
may require an analysis of the outsourcing arrangement (functionality of IT systems, pricing,
support, etc.), as well as any proposals received from other outsourcing providers.
It is important that the ethical dimension of any outsourcing decision is given the same weighting
as any financial considerations and is not obscured by perceived increases in profitability.

Question 1.9
Fair dealings (adapted from Sexton 2009).
As CFO you have been asked to develop a business plan to support a major restructure of your
organisation. The board is hesitant to approve such a major restructure, so you decide to conceal
the key assumptions contained in the business plan as this would only confuse the board in its
decision-making. At the next board meeting you intend to present your business plan. You are
hoping that no director questions you on the assumptions or limitations of the business plan and
that the decision to restructure is approved.
If you proceed with this course of action, which fundamental ethical principle would you most
likely breach?

(Adapted from Sexton 2009).

As CFO you have an obligation to act with integrity and therefore be straightforward and honest
in professional and business relationships. Integrity also implies fair dealing and truthfulness.
Further, paragraph 110.2 of the Code requires that a member of CPA Australia:
shall not knowingly be associated with reports, returns, communications or other information where
they believe that the information:
a

Contains a materially false or misleading statement;

Contains statements or information furnished recklessly; or

c Omits or obscures information required to be included where such omission or obscurity would
be misleading.

It is therefore important that you fully disclose to the board any key assumptions and how they
were assessed, as well as highlighting any limitations in the business plan.
As a member in the business you hold a senior position within your organisation. The more senior
the position, the greater will be the ability and opportunity to influence events, practices and
attitudes. It is therefore expected that you have a role in encouraging an ethics-based culture
in your organisation that emphasises the importance that senior management places on ethical
behaviour. Accordingly, you should not proceed with your planned actions and you will need to
fully consider your ethical obligations.
It is important for members to always act with integrity and to make sure that any report
or communication does not omit or obscure information which could render the report or
communication misleading.
Reports presented to the board by management, particularly those which accompany the
approval of significant transactions, should clearly state the scope of any expert opinions
used to support or reject a board decision, the underlying assumptions and any material risks
andlimitations.
Note also that the fundamental principles of professional competence and due care and
professional behaviour would likely be breached in this scenario. However, the specific threat
tothe principle of integrity is more prevalent.

Question 1.10
Assume you are a senior accountant in a construction organisation that undertakes large-scale
projects. In your role to date, you have learnt a lot about the project management staff. Youknow
that they are predominantly highly professional engineers, who work quite autonomously,
andshow a strong work ethic and dedication to their job role.
Your organisation has recently deployed a knowledge sharing system and telecommunications
infrastructure that can effectively support teleworking. The project managers have demonstrated
a strong commitment to the knowledge sharing system, and it has become a key part of their
collaborative working.
Your organisation is now considering the introduction of teleworking for project management
staff. You have been asked to provide advice on the likely costs, risks and benefits of this proposal.
What would be your main considerations?

Your advice should include that for the initiative to be successful, the technology used must cater
for the work that the project managers need to do. This will require an understanding of what
business systems they need to access to perform their work. As the project managers are using
the knowledge sharing system, this is a primary consideration.
You should advise that studies have demonstrated that telework promotes increased productivity
and work quality. Also, as the project managers have already demonstrated autonomy and a
strong work ethic, there is a low risk of any loss of efficiency with the introduction of teleworking
to this group.
With the introduction of teleworking, your organisation will be able to build and retain the trust
and confidence of its project managers, improving staff engagement and retention. To ensure
delivery of the benefits of this service, management support will be critical. The staff concerned
should also be informed about monitoring their worklife balance, so as to avoid any risk of
burnout.
The costs of providing the relevant technology will include the provision of internet access and
communication tools such as mobile phones and email applications. The cost of the provision of
these services in remote locations must be included in the estimations.

Question 1.11
What alternative approaches would complexity theory suggest that may lead to a more effective
result in the case of QNH Ltd?

Possible approaches in the case of QNH Ltd include the following.

Approach

Commentary

Encourage discussion

Develop an environment to encourage more discussion between sales and

product staff. Strengthening internal relationships can have a marked effect
on business performance, and harnessing these relationships will develop
corporate social capital. This could be done by setting up meetings in an
informal environment where sales staff can ask direct questions of product
management. This may also provide an environment for sales staff to bring
customer questions and feedback to the product managers.

Rewards and recognition

Modify the remuneration schemes to reward sales staff for spending time
learning about products, and communicating customer feedback to product
staff, and reward product staff for communicating more effectively to sales.
This is one element of building a more innovative business culture.

Engage the product

andsales staff

Engage both the product and sales staff in helping to develop solutions to
the situation. This will lead to staff who are more engaged. More engaged
staff will mean more engaged customers, and this can be assessed using
human sigma measuring and monitoring.

Use narrative techniques

Narrative techniques can be used to effectively uncover more details

of the underlying issues. Sense-making can be used to develop shared
understanding and methods to resolve the issues.

Use the most significant

change technique

As solutions are developed, a tool such as the most significant change

technique could be used to provide feedback on which techniques are being
most effective. This can also be used to propagate success stories back
through the organisation to augment the successful change.

Reinforce corporate
values

The disparity in goals between product and sales may lead to a situation
of dysfunctional autonomy. To mitigate this, corporate values need to be
reinforced within both teams. It is expected that there will be a corporate
goal of earning revenue in order to gain profit and maintain shareholder
value. To this end, the product team needs to develop products that sales
can sell, and sales also need to sell products that will earn value. Involving
both teams in discussions on shared goals and values could improve the
shared focus.

Approach

Commentary

Try safe to fail

experiments

Rather than embarking on a costly major IT development to replace

the legacy information system, you could try a number of safe-to-fail
experiments for alternative ways of getting new information out to sales.
These may include:
informal training sessions, facilitated by people with knowledge of both
the sales and technology fields;
developing communities across sales and product for staff with similar
interests to promote informal questions and discussions; or
using easily developed intranet sites or social media tools such
asblogging.
All these low-cost solutions are quick to develop and to add to if successful,
and can easily be closed down without major cost if unsuccessful.

Bring in sales staff

Bring in sales staff who have an interest in improving the situation to

work with the product team for a fixed time, and to help develop product
information in their own style of language. This feedback can be used to
develop templates for new product information documents. In the same way,
someproduct people may be able to spend time working with sales staff
ordirectly with customers, so they can understand the environment better
and provide more relevant information.

There may be many more solutions. You might inspire innovative solutions from sales and
product staff by using the corporate equivalent of throwing a football or lighting the barbecue
(see the video How to organise a childrens party referred to in the study guide). By working
together, they may come up with solutions that are unimaginable to more senior staff who are
removed from the situation and apply only traditional, ordered-systems thinking.

Question 2.1
What trends can be identified when comparing developed countries with the leading developing
countries (Brazil, Russia, India, Chinaoften called BRIC)?

The BRIC countries all show significant growth in consumption over the last decade, with Russia
the lowest at 23.7 per cent and China the highest at 86.4 per cent. Brazil and India have had
significant growth rates in consumption (both around 50 per cent).
Meanwhile, many developed countries have shown declines over the last decade. The US has
reduced daily consumption by 5.7 per cent, with Germany and France reducing consumption
by 10.0 and 13.8 per cent respectively. The declines may be a result of lower growth due to
slow recovery from the Global Financial Crisis (GFC) as well as the eurozone sovereign debt
crisis, butthey also reflect a move away from oil to other fossil fuels, renewable energies and
more energy-efficient activities. Australias strong growth in consumption during the period
(20.1percent) was against the trend for developed countries, and may be reflective of it
remaining out of recession during the GFC.
Another interesting observation is that the US share of global consumption has fallen from
25percent in 2003 to 20 per cent in 2013. At the same time, Chinas share has increased from
7 per cent to 12 per cent. This growth is reflective of both Chinas massive population and its
growth in GDP over the corresponding period. It is also reflective of the USs shift towards
alternative fuels (e.g. natural gas).

Question 2.2
How might peak oil affect an accountant in business?

In a peak oil environment, an accountant would be expected to analyse the financial, operational
and environmental impacts on the business, and proactively work to ensure the sustainable future
of the business.
For example, peak oil is of concern to an accountant in preparing forecasts of fuel expenditures
for staff cars, raw material input costs, production and manufacturing costs, and for distribution
of the organisations products. If the organisations products or services rely on oil, and supplies
become limited, this could severely restrict the ability of the organisation to operate. Withlimited
supply, the price of oil would be expected to rise, potentially causing the organisation to
becomeunprofitable.
In addition to forecasting, the accountants role would be to help prepare and position
the organisation to continue as a sustainable operation. This may include analysis and
recommendations on new energy-efficient investments, alternative energy sources or even
thedevelopment of new product/service lines.

Question 2.3
Do you think a nations agricultural industry should be protected from foreign competitors?

There is no correct answer to this question, but it is important to consider the merits of the
alternatives.
The pure economic argument of letting markets determine supply and demand would suggest
that if cheap produce can be obtained from more efficient and less costly markets, then this
should be permitted, and protection via tariffs, quotas and other trade barriers should not be
used. The main benefit is that consumers are provided with greater choice at lower cost. They are
then able to buy more goods and services with a certain level of disposable income.
However, this ignores several issues including dumping of products (i.e. selling below cost, or at
artificially low prices due to foreign government support). When dumping occurs, localindustry
can be permanently harmed as a result of distorted market behaviour at the sourceof production.
Another issue that must be carefully considered is food security. This is the need for a nation to
have enough infrastructure and farming capability to produce enough food for its population in
times of difficulty. Difficulties may include global drought, global price increases that the local
population cannot afford, and even disrupted supplies due to war.
Domestic producers are often powerful groups within countries and can use their political power
to lobby those in power to protect their incomes by ensuring foreign competitors face greater
barriers to entry.

Question 2.4
Do you think it is ethical for countries to outsource food production? In your answer, consider
how the property rights of minority interest groups should be dealt with.

From a purely commercial point of view there does not seem to be an ethical dilemma involved
in outsourcing food production. Some countries have very little land available for agriculture,
ortheir climate does not support efficient production. The ability to outsource food production
to low-cost nations that have greater areas of arable land appears sensible.
However, it is important to consider how negotiations are conducted, and who they are
conducted between. In many instances, governments negotiate directly with each other.
Somegovernments are very powerful and are willing to exert this power to extract deals that
are very beneficial to themselves, and can be quite detrimental to the other party. Corruption
also creates a significant risk. Governments have been known to sell or lease land that was held
by minority groups without any consultation. This may also lead to forced relocation, or forced
labour without compensation. Companies that are aware of these issues need to acknowledge
the ethical implications of their decisions with regards to the effect on local communities, as well
as the commercial side of the decision.

Question 2.5
Water stress refers to situations where there is not enough water to meet demand. What are
three things that organisations can do to alleviate water stress?

According to the World Business Council for Sustainable Development (2009), things organisations
can do to alleviate water stress include:
measure and monitor water use to develop an understanding of consumption;
recycle and reuse water to minimise consumption;
reduce the pollutants and chemicals that enter the water supply, thereby lowering toxic and
other contaminants;
engage with suppliers and customers to adopt best practices;
develop new water treatment technologies; and
enter into partnerships with local government and the scientific community (WBCSD 2009, p. 13).

Question 2.6
Review Figure 2.6 and consider the following questions:
(a) What are the potential reasons for the small increase in domestic water use between low- and
middle-income countries and the high-income countries?
(b) What are the causes of the vast differences in agricultural use?

(a) In Figure 2.6 we find that world domestic water use is 8 per cent, which increases to
11percent for high-income countries. However, it is important to remember that this is
just the percentage comparison and does not reflect the total amount of water consumed
by each person in the high-income countries. The 11 per cent domestic use still represents
a significantly higher level of physical water consumption. However, because of the
significant levels of industrial and agricultural usage, the overall percentage has remained
low. Inhighincome countries, the domestic use volume (and percentage) is likely to be
higher due to better water infrastructure, higher disposable incomes and less frugal use
(e.g.watering gardens).
(b) The industries for low- and middle-income countries are still primarily agriculture-based.
Incomes tend to rise as countries move towards greater levels of industrialisation. It follows
that agricultural water use falls (as a percentage of total water use), while industrial water
userises.

Question 2.7
How is biodiversity relevant to the financial services sector, in particular accounting firms,
lawfirms, financial planning firms and insurance firms? Outline the possible impacts.

Historically, the financial services sector has been seen as having a low environmental impact
given that it has little direct environmental impactprimarily, energy, water and paper for office
workers. As such, understanding the relevance of biodiversity, what it is and how it can affect the
sector, is often difficult.
However indirectly, biodiversity is often of real relevance to the transactions or investments that
the sector is offering or advising on. Lenders, investment managers, insurers and advisory services
must understand biodiversity-related risks that might increase project costs and liabilities as well
as affect ability to secure a licence to operate in the future. Over the last decade or so, many
of these advisory services have included using scientific specialists as part of the service team,
or joint venture arrangements to access the appropriate experts. These experts undertake an
evaluation of the transaction/investment and highlight compliance, reputation and environmental
risks. They then quantify these impacts financially and include them in the transaction (the figures
are generally not entirely accurate, as many impacts can only be estimated).
Since 1996, not-for-profit organisations and civil advocates have also become involved in
monitoring the activities of the finance sector and in particular the funding of large projects with
adverse social and environmental effects. In 2003 the Equator Principles were established by
the International Finance Corporation. The principles are a set of voluntary standards designed
to help banks identify and manage the social and environmental risks associated with directly
financing large infrastructure projects like dams, mining and pipelines. Eighty financial institutions
around the world have adopted the principles, covering over 70 per cent of global project
finance debt in emerging markets.
Since then, BankTrack (http://www.banktrack.org), a global network of civil society organisations
and individuals, has emerged. It tracks the operations of the private financial sector (commercial
banks, investors, insurance companies, pension funds) and publishes reports and campaigns on
what they consider unsustainable investments. In 2007, BankTrack listed the Australian Gunns
Pulp mill proposal for Tasmania on the grounds that it:
resulted in the destruction of old growth forests and their ecosystem;
posed possible health impacts to those living in the region; and
resulted in a violation of human rights and because of its impacts on Aboriginal culture
andheritage.
BankTrack launched a global campaign against ANZ as the bank considered funding the
development. In May 2008 ANZ publicly announced that it would not fund the mill for
undisclosed reasons. Since then, the project has failed to secure funding. Although ANZ did
not disclose why it chose to not pursue the project, most certainly reputation and biodiversity
impacts played a significant role in the reduced financial viability of the transaction. Sincethen,
ANZ (n.d.) has publicly disclosed how they consider social and environmental business
lendingdecisions.
A more recent development is the Natural Capital Declaration (NCD), which is a finance sector
initiative to incorporate natural capital elements into decision-making. This includes applying
natural capital risks to the cost of capital of relevant projects and operations (natural capital is
discussed further in Module 4).
This analysis reveals the relevance and complexity of biodiversity issues within the financial
sectorwhether for a bank directly funding a project, a superannuation fund investing in
the company undertaking the project, or a legal firm advising on the transaction. Immediate
ecological impacts need to be considered, as well as community perceptions and possible future
political and regulatory changes.

Question 2.8
What is the current regulatory position of the government in your country regarding measures
for operating in a carbon-constrained economy?

Governments can respond with a carbon tax or emissions trading scheme (also known as
capand-trade). The following is a summary of the current position of some countries (at the
time ofwriting):
Australia. Effective 1 July 2012, the Australian Government introduced a carbon tax for
entities emitting over 25 000 tonnes of carbon dioxide equivalent greenhouse gases
(although the transport and agriculture industries were exempt). The carbon tax had an initial
fixed price of $23 per tonne, rising to $24.15 for the following financial year, and it was then
planned to transition into an emissions trading scheme for the 2015 financial year. However,
with a change of government in 2013, the carbon pricing scheme was out of favour and the
carbon tax legislation was repealed with effect from 1 July 2014.
Canada. At a federal level, a carbon tax was proposed in 2008. This proposal was to be a
revenue-neutral measure, with increased taxation on carbon being balanced by tax cuts for
individual citizens. The proposal is unlikely to be put to the vote due to a lack of support at
the national level. At the province level, British Columbia and Qubec each have a carbon
tax. In 2008, Qubec and Ontario agreed to collaborate on an inter-provincial cap-and-trade
system, although no such system has currently been launched.
European Union. A proposal in the 1990s to initiate a carbon/energy tax was discarded after
strong industrial pressure. However, several countries took the initiative to apply a carbon
tax. For example, Denmark, Finland, Norway, Italy, the Netherlands and Slovenia applied a
household carbon tax that increases the cost of heating and electricity use. Other countries
with a carbon tax include Germany, Ireland, Italy, Switzerland, and the UK, although the
various carbon tax schemes are not uniform across all sectors. In 2005, the European Union
(EU) Emissions Trading Scheme was launched, providing a binding carbon trading system on
EU member states (with Norway, Iceland and Liechtenstein since joining). The scheme sets a
cap on the amount of certain greenhouse gases that can be emitted and allows companies to
trade allowances (e.g. to offset any emissions over the cap).
New Zealand. Originally, New Zealand proposed a carbon tax, but due to a lack of support
the proposal was discarded in 2005. This proposal has since been replaced by the Climate
Change Response (Emissions Trading) Amendment Bill, and the Electricity (Renewable
Preference) Amendment Bill, which were passed into law on September 2008. The legislation
establishes the framework for the New Zealand Emissions Trading Scheme. Further
amendments to the legislation were made in 2009 and 2012.

 USA. The federal government has a long history of trying to pass laws related to climate
change. The first attempt was in 1993, when President Clinton proposed a tax on all fuel
sources, except for alternative-energy sources (e.g. wind, solar and geothermal). Some states,
such as California, are considering the imposition of carbon taxes. In 2009, the House of
Representatives voted to reduce carbon emissions by 17 per cent from 2005 levels in 2020
and 83 per cent in 2050, and to begin a national cap-and-trade scheme. Other measures
approved by the house will require power companies to produce 15 per cent of their
electricity from wind and solar energy. The White House views these energy reforms as part
of a job-creation program. In 2009, the Senate passed the Clean Energy Jobs and American
Powers Act. Some cities and counties in the United States have carbon taxes. For example,
Boulder, Colorado, passed the first municipal carbon tax in 2006 and renewed it in 2012.
Boulder residents can receive deductions on their energy bill for using renewable electricity
sources. Marylands Montgomery County and Californias Bay Area also have carbon taxes.
Rest of the world. There are very limited efforts in other regions of the world. India has a
carbon tax. There are carbon tax proposals in some Asian countries, most notably Taiwan.
There are no carbon taxes proposed or in place in the Middle East, and no likelihood of any
movement in that direction in the near future. The only Central or South American country
with a carbon tax is Costa Rica, and only for hydrocarbon fuels.

Question 2.9
What would be some of the likely effects on business enterprises transitioning to and operating
in a carbon-constrained economy?

Most firms will have an initial transition cost to operate in a carbon constrained business
environment. However, costs are often offset by bottom-line savings related to reducing GHG
emissions, with the major savings being from a drop in energy consumption. The savings will
likely be compounded by rising energy prices. Hence, carbon-constrained-economy measures
are likely to lower waste and increase operational efficiency, raising long-term economicgrowth.
Proactive businesses that implement GHG-emissions measures early will gain a competitive
advantage through product differentiation, thereby increasing market share, reducing operating
costs and increasing profit margins. It is estimated that by 2050, markets for low-carbon
technologies could be worth at least USD 500 billion. Hence, a carbon-constrained economic
environment may provide an opportunity for innovative firms.
It is important to acknowledge that measures will certainly have a disproportionate effect on
certain individuals, firms and industries. For example, a carbon tax imposes a tariff at a fixed rate
independent of income. This would mean that low-income earners (firms or individuals) are taxed
at the same rate as high-income earners. A carbon tax may also be excessive for some social
groups, particularly rural residents and the elderly. Environmental and social campaigners argue
that whatever type of method is applied, it must have regard for:
equity considerations;
individual and household welfare;
the transition of labour from high- to low-emissions industries; and
the guarantee of energy security.
Substantial government funding is needed to sustain research, growth and the economic
exploitation of carbon-reducing technology, plant and equipment.
All firms will be exposed to increased supply chain pressure for low-emissions products and
services, which initially could be more costly. There is likely to be a substantial increase in
business input costs (e.g. electricity, water, gas, diesel, transport, waste services, packaging).
There is also likely to be consumer pressure for low-emission goods and services, resulting in
disparity between supply and demand. There will be a need to incorporate carbon accounting
into business planning and operational process.

Question 2.10
(a) How can reporting environmental performance be helpful to firms?
(b) Why use environmental KPIs?
(c) What are the three key principles in defining KPIs?

(a) Reporting on environmental performance will aid firms in several key ways.
it will provide firms with management information to help them exploit cost savings
thatgood environmental performance typically generates;
it gives firms the opportunity to set out what they consider to be significant in their
firmsenvironmental performance; and
environmental reporting will help firms prepare for the future as they understand
theircosts.
(b) The KPIs are a measurement tool to help firms communicate and manage the links between
environmental and financial performance. Environmental KPIs are based on quantifiable
metrics that reflect the environmental performance of a business in the context of reaching
its wider goals and objectives. KPIs help firms implement strategies by linking various
levels of a firm (e.g. business units, departments and individuals) with clearly defined aims
andbenchmarks.

Poor management of energy, natural resources or waste can harm performance. Hence,
failure to plan for a future in which environmental factors are likely to be significant may risk
the long-term value and potential of a business.

KPIs focus on key measures. They provide the most important data for understanding the
factors that drive a business forward. Hence, KPIs lessen the need for lengthy reports on a
wide range of measures that may be less relevant.

(c) In addition to the general reporting principles, there are three key KPI principles.
1. KPIs should be measurable to facilitate action. [F]or example, targets can be set to
reduce a particular emission if it is expressed in a quantitative term.

2. A KPI must be relevant; that is, it should have a general narrative, explaining its aim and
impact. Each KPI is to explain the process undertaken, the calculation methods and
relevant assumptions. Moreover, data linking environmental to financial performance
should be discussed.

3. The final KPI-specific principle is comparability. Firms are to report data in a comparable
format, so [that] users of reports can assess the performance of a single company over
time and relative to its competitors [KPIs] should be expressed in absolute terms
that cover the entire business for each period of reporting, and related to a normalising
factor. Typical normalising factors are turnover and production output, but others
may be relevantfor instance, companies with offices may normalise to floor space
Thisallows stakeholders to know how much environmental impact firms have relative to
agiven amount of goods and/or services produced (DEFRA 2006, pp. 1617).

Question 2.11
What challenges does an age-diverse workforce present?

There are many potential problems that an age-diverse workforce may produce. They relate to
all age groupsfrom older workers feeling threatened by younger, potentially better educated
workers, to younger ones who feel resentment at older workers who take up the positions
towhich they aspire.
Age is just one aspect of diversity, and often intersects with others. For example, age and gender
are often related issues for women, for whom the childbearing years can be still be associated
with a lack of commitment to work (e.g. employers might fear that, having spent years training
female employees, they might leave to have children). This perception can restrict access to
promotion and opportunities. Hence, despite decades now of initiatives, women continue to
earn less than men and continue to be under-represented in senior positions. Flexible conditions
to assist with childcare can also create resentment from a variety of sources (e.g. from those who
missed out on such support to those who see it as favouring one group).

Question 2.12
Why might some employees have a negative perception about a corporate offshoring plan?

There are many reasons why an employee might have a negative perception about a corporate
offshore outsourcing plan. As mentioned in the study guide, CPA Australia members who judged
their offshoring to be successful noted that the support from internal employees in the finance
and accounting areas is deemed critical. This means addressing issues such as individuals being
anxious about a change in their or their fellow employees responsibilities as well as the security
of their jobs.
For reasons of security, patriotism, or other, an employee may feel uncomfortable taking an
activity that was traditionally performed at home and sending it overseas. An employee may
also have negative feelings about offshore outsourcing based on something they read in the
media or heard from someone in another organisation. For example, the most recent statistics,
from the National Secretary of the Finance Union in Australia, suggest that 6000 finance sector
jobs have been lost in Australia (Carter 2012).
There is a flip side to this in that negative perceptions may be held of Australia as a recipient of
offshore outsourcing plans. As also noted in the study guide, a number of Australian industry
bodies, including Invest Australia and the Australia Financial Centre Forum, have promoted
Australia as a location for the offshoring of analytics capabilities. Axiss Australias (2006) report
Australia as a Hub for Analytics Offshoring laid out the case for making Australia an analytics
hub for activities such as equity research, corporate finance, mergers and acquisitions, corporate
credit, structured finance, project finance, retail banking, strategic functions and actuarial
services.

Question 2.13
What potential costs are associated with the benefit of labour consolidation?

Labour consolidation is considered a primary benefit of offshore outsourcing, although there

are several associated costs of attempting to do the same thing in the same place. These costs
include:
making individuals redundant (e.g. pay, benefits);
transitioning to a new location (e.g. rent, sales, set-up);
transferring knowledge to new employees (e.g. through tacit and explicit knowledge
management processes); and
creating the change (e.g. establishing and communicating new systems and processes).

Question 2.14
What employment and economic advantages and disadvantages of offshoring might you expect
to find for host countries such as India and home countries such as Australia?

Although there is limited research on the impact of offshoring at the national level, there is
evidence that for host countries, such as India, there are positive impacts on economic growth.
Vibrant offshoring sectors can lead to jobs growth, increased spending, an emerging middle
class, a positive current accounts balance, local knowledge enhancement, concentrated urban
and regional economic growth, and positive change in institutional structures. The overexposure
to a particular industry could be problematic, however.
For home countries, such as Australia, research is again limited, and suggests mixed outcomes.
While offshoring certainly results in jobs being moved overseas, research on the US economy
suggests that offshoring frees up the home labour force to focus on more value-added
activities, especially of a complex, strategic nature. In the United States, research from McKinsey
& Company (2003) estimatesthat for every USD 1 spent on offshoring, about USD 1.121.14 is
generated. As the global labour force becomes more integrated, there will be a more efficient
clearing of supply and demand for jobs, and thus a less varied wage rate.

Question 2.15
What factors might you expect to be critical to the success of offshoring finance and accounting
activities?

While there is no single recipe for the success of implementing an offshoring program, there are
several key elements concerning the relationship between firms and the activities within each
firm. It is essential that the relationship between the firm and its provider is characterised by high
levels of communication (about current and future activities), trust, fairness and the control of
proprietary information. For the business planning to offshore its activities, it is essential to gain
the support of leadership and management throughout the organisation. Often a committed
offshoring champion is appointed to drive the initiatives. The business should seek alignment
between business objectives and outsourcing objectives, and understand technology and
stakeholder requirements. It is also critical to craft a careful risk mitigation strategy and consider
all the processes, interfaces and business impacts before offshoring.
Businesses that experience more success with offshoring commit adequate resources, establish
a change management, communication and implementation plan, and have a sound offshore
vendor selection process. Businesses must develop a complete contract to address pricing,
performance and quality, the full scope of costs, staff issues and security. Another good policy
is to establish a strong governance system of the offshore provider and to institute demand
management to avoid scope creep and to monitor the extended support.

Question 3.1
Review the ACFEs (2014) report (http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf)
and make brief notes in relation to the following questions. (Note: See the suggested figures
in the report for each question.)
(a) What is the effect on the loss ultimately suffered by the victim organisation of failing to
detect fraud early? (Figure 9)
(b) What proportion of detected frauds are detected by the external audit process? (Figure 11)
(c) What are the three most common means of fraud detection in your region? (Figure 16)
(d) What sectors suffered the highest rates of fraud? (Figure 22)
(e) What are the most common fraud types in your sector? (Figure 24)
(f) What initiatives do organisations rely on to prevent fraud? (Figure 26)
(g) How would you describe the typical fraudster? (Figures 40 to 76)
(h) What role does gender play in workplace fraud? (Figures 57 to 62 and 74)

(a) Failing to detect fraud early has a dramatic impact on the total loss for organisations.
Thelonger the fraud continues, the greater the loss, as shown in Figure 9. The implication of
this is that a perpetrator of workplace fraud will continue to offend until such time as they are
caught. For example, (looking at Figure 9) the median fraud loss from incidents picked-up
in less than seven months was only $50 000, while the median loss from incidents pickedup in 61months or more was $965 000. It is interesting to note the linear progression of the
median loss between those extremes. As the report notes, the longer frauds were able to
goundetected,the more costly they become (ACFE 2014, p. 16).
(b) External audit was involved in detecting only 3 per cent of detected fraud cases (i.e. not 3%
of cases that actually occur). This compares with 3.3 per cent in 2012 and 4.6 per cent in 2010.
This contrasts with the expectation of some people in business that an external audit will be
effective in detecting fraud.
(c)

Table SA 3.1: Most common means of fraud detection in a selection of regions

Country/region

Means of fraud detection

United States

Tip, management review, internal audit

Sub-Saharan Africa

Tip, management review, internal audit

AsiaPacific

Tip, management review, internal audit

Western Europe

Tip, management review, internal audit

Eastern Europe and Western Central Asia

Tip, management review, internal audit

Canada

Tip, management review, accident/account reconciliation

Latin America and the Caribbean

Tip, management review, internal audit

Southern Asia

Tip, management review, internal audit

Middle East and North Africa

Tip, management review, internal audit

It is interesting to note that consistently across the world, the most commonly reported
means by which workplace fraud is detected is via tips.

(d) The sectors with the highest rate of detected internal fraud are Banking and Financial
Services (17% of the total number of cases reported) followed by Government and Public
Administration (10.3%). It is unsurprising that Banking and Financial Services have a higher
rate of internally instigated fraud given the volume and accessibility of funds in that sector
relative to other sectors.
(e) You should consider the data applicable to your own industry sector; however, data for a
selection of sectors is provided in Table SA 3.2.

Table SA 3.2: Most common types of fraud in a selection of sectors

Sector

Two most common types of fraud

Banking and Financial Services

Corruption, Cash on Hand

Government and Public Administration

Corruption, Billing

Health Care

Corruption, Billing

Education

Corruption, Billing

Insurance

Corruption, Skimming

(f) The report found that organisations rely heavily on an external audit of financial statements
to identify fraud, with 81.4 per cent of organisations saying that this is one of their fraud
detection strategies. This is in contrast to the very low rate of fraud detection by the external
audit process. Other fraud detection strategies include having a code of conduct (77.4%) and
having an internal audit department. From Figure 26, it is clear that many organisations have
multiple strategies in place aimed at detecting workplace fraud.
(g) The survey does not provide the profile of a typical fraudster but we are able to build our own
profile based on the highest frequency of each of the available parameters, which shows:
male (66.8%);
aged 41 to 45 years (frequency rather than value) (18.1%);
employed in the accounting department (17.4%);
non-management employee (frequency) (42%);
12 months to detect the fraud (for non-management employee);
acting alone (54.9%);
involved in corruption of billing (false invoicing) schemes (around 22% each);
in role for between 1 and 5 years (40.7%);
no prior criminal history (86.6%); and
exhibiting signs of living beyond their means (43.3%).
(h) Males are more commonly associated with workplace fraud incidents according to the survey,
with 66.8 per cent of offenders being male (this is consistent with the other Report to the
Nations surveys published in recent years). Representation of males in fraud cases varies
across different regions. Males also are responsible for a higher median value of loss, whichis
in part due to a higher proportion of males who commit fraud being in management or
owner/executive positions. Males also exhibit different behavioural red flags than females,
with fewer males than females committing fraud because of financialdifficulties.

Question 3.2
Please access the Australian Institute of Criminology report, Australian Crime: Facts &
Figures: 2013 (AIC 2014), available online at: http://aic.gov.au/publications/current%20series/
facts/1-20/2013.html.
Go to the section Fraud and deception-related crime in Chapter 2 (located after Figure 27).
(a) Review Table 5. Has the reported rate of fraud been increasing or decreasing in the last
10years?
(b) What factors do you think might be effecting a change in reporting rates?
(c) What proportion of detected fraud cases are reported to the police?

(a) The table shows a steady decline in the rates of reported fraud over the last 10 years, butfor
the first time since 200405, there was an increase in reported rates in 201112. The survey
notes that the increase in 20112012 may be due to changes to counting rules rather than an
increase in reported offences (AIC 2014, p. 35). This decline over the last 10 years (other than
20112012) is at odds with the recent estimates and surveys that all talk about an increase in
fraud not a decrease. It is arguable that the decline in reporting rates is just thata decline
inthe rate of fraud reported rather than a decline in the number of cases.
(b) Depending on the jurisdiction, reporting fraud to the police or other law enforcement
agencies may not be mandatory. That leaves open the question of whether business is less
inclined to report such matters to law enforcement than they once were. Some of the reasons
why business crime victims may be inclined not to report business crimes to law enforcement
agencies are as follows:
a wish to avoid negative publicity;
a sense that the organisation has nothing to gain;
fears that the investigation will involve the organisation unduly in a protracted legal
proceeding; and
fears that criminal action against the perpetrator will adversely affect any civil
proceedings taken by the victim.
(c) The report notes that Fraud is believed to be one of the most under-reported offences, with
fewer than 50 percent of incidents being reported to police or other authorities (AIC 2014,
p. 34). This is similar to the data set out in Report to the Nations on Occupational Fraud and
Abuse (ACFE 2014).

Question 3.3
What do you think the role of the forensic accountant would be in investigating bribery and
corruption in cases like the AWB and Siemens?

The forensic accountant investigating a business crime, such as bribery and corruption, is focused
on capturing and analysing evidence. This will involve:
searching for and capturing relevant evidence;
identifying witnesses to interview;
interviewing witnesses;
analysing bank records (both in terms of potential payer and potential receivers of
bribepayments);
reviewing electronic communications;
reviewing social media to look for relationships between the various parties;
preparing relationship charts;
analysing all evidence (including the oral evidence of witnesses); and
reporting.

Question 3.4
What controls or other initiatives could a business implement to reduce the risk of its staff or
agents becoming involved in corruption?

There are a number of controls and initiatives that organisations can take to counter the risks
ofcorruption:
develop and implement a corruption control plan;
develop and implement a communication program;
enhance probity and contracting procedures;
install a program of alternative avenues for reporting suspicions of corruption; and
opening channels of communication with customers, vendors and other third parties.
In relation to enhanced probity and contracting procedures, organisations should ensure
that they have a policy of rotation so that their own personnel do not establish an improper
association with a supplier, customer or other business partner through an association that has
continued for too long.

Question 3.5
(a) What is the objective of money laundering?
(b) What sources of evidence would you consider in an investigation of money laundering activity?

(a) The objective of money laundering is to enable people with a beneficial interest in the
proceeds of criminal activity to enjoy the fruits of their criminal conduct while at the same
time satisfactorily accounting for the source of those funds to government investigation and
regulatory bodies. Without money laundering, the proceeds of large criminal activity would
not be available to the criminals who generated it as they would not be able to demonstrate
the legitimacy of the income.
(b) Investigations could include:
examining the bank records of the subject of the investigation;
examining the bank records of a business entity used as a vehicle to launder criminal
proceeds;
considering legitimate sources of income of the subject of the investigation; and
preparing an asset betterment statement (see later in this module) aimed at identifying
an increase in assets thatcannot be accounted for by income from legitimate sources.

Question 3.6
You have been engaged by a company to investigate an alleged workplace fraud. The allegation
is that a member of staff has been diverting payments from a client to their own personal bank
account rather than depositing them into the company bank account.
(a) What documents would you request?
(b) What, if any, other sources of evidence would you seek to obtain?

(a) There would be a chain of records and documents held by the company, and which are the
property of the company, that can be sourced for analysis. These would include:
accounting records disclosing the services rendered and the subsequent billing history
ofthe company to the client(s); and
accounting records of payments received from the client company, including bank
statements of the company.

These internal company records can be analysed to find out, by careful reconciliation,
thecorrect level of billing to the client and the correct level of payments received
allowingfor an accurate calculation of any difference.

Assuming the client company is willing to assist in the investigation, that entity should
be able to provide copies of their records showing receipt of bills and their payments.
Matchingthese records would disclose funds:
yet to be paid;
paid and received; and
paid and not received by your client.

These records would normally be made available to the investigator on request.

It then may be necessary to seek a court order to obtain the banking records of the
employee. This may be possible in a situation where you are able to gather sufficient
evidence to present to a court.

(b) Other sources of evidence you may seek could be:

information gained through interviews with the staff member and other employees;
computer-based data from computers operated by the employee at your client company;
computer-based data from the computer of the employee (subject to a court order); and
telephone records held by the company for telephones used by the employee.

Question 3.7
Go to: http://www-03.ibm.com/software/products/en/analysts-notebook/ for an online
demonstration of the capability of the Analysts Notebook.
How do you think Analysts Notebook would assist in preparing a forensic accountants report
in a business crime investigation?

The Analysts Notebook would assist in preparing a forensic accountants report in a business
crime investigation by showing:
relationships between individuals, corporations and other parties;
timelines of events; and
movement of funds between various relevant parties.

Question 3.8
Payroll fraud (involving the payment of salary and wages to a fictitious employee) will present
adifferent range of accounting anomalies to accounts payable fraud.
List three accounting anomalies that may be associated with payroll fraud.

Payroll fraud presents accounting anomalies such as:

casual staff who have not worked for some time, suddenly being included on the payroll;
salary and wages for more than one employee being paid into a common account;
alterations to time sheets or other payroll records to show more hours worked;
alterations to hourly rates; and
unusual claims for higher-duties allowances.

Question 3.9
Review the example data in the following table. Using both horizontal and vertical data analysis
techniques, identify indicators of possible fraudulent activity for further investigation.

Horizontal analysis
In Year 2 there has been an 80 per cent increase in salesthis would seem to be a dramatic
increase in sales volume in one year.
At the same time, the cost of goods sold (COGS) has increased by 140 per centit would be
worthwhile making enquiries about why the increase in COGS is out of step with the increase
in sales (you would expect them to be similar).
This could indicate:
understated sales volume;
overstated sales volume;
theft of inventory; or
false invoicing (payment for inventory not received).
However, it could also be due to other non-integrity related mattersfor example, a price
reduction in order to compete in the market or obsolete inventory being written-off.
Vertical analysis
Cost of goods as a ratio of sales volume is very high in this business for both Year 1 and
Year2 (50% and 67% respectively relative to an industry average of 42% of sales)this
variation would need to be investigated and accounted for.
Selling and administration expenses appear to be quite high relative to the industry average.
Vertical analysis shows unusual variations in COGS which are worthy of further investigation.
Thepotential fraud types are the same as for the horizontal analysis. Higher than expected
selling and administration expenses as a proportion of sales could indicate manipulation,
suchas false invoices for services associated with these functions. But again, there may be
otherlegitimate reasons for the apparent anomalies.

Question 3.10
Consider the procurement/accounts payable system of an organisation that you have dealt with.
List at least three fraud risks associated with that system.

Accounts payable/procurement fraud (otherwise referred to as false invoicing) is a commonly

encountered workplace fraud. It is important to consider the risks in all their variations to ensure
that an accurate assessment of the risks confronting the business can be achieved. So, for example,
when conducting a fraud risk assessment, the risk would not be limited to a generic accounts
payable fraudit would need to include as many of the variations as listed below that apply to the
business under review.
False invoicingin collusion with a genuine suppliergenerating an invoice for:
inventory not provided;
non-inventory goods or services not provided.
False invoicingsomeone masquerading as a genuine suppliergenerating an invoice for:
inventory not provided;
non-inventory goods or services not provided.
False invoicingbogus suppliergenerating an invoice for:
inventory not provided;
non-inventory goods or services not provided.
Fraudulent undersupply of ordered inventory by the supplier.
Corrupt relationship with suppliers:
inventory; and
non-inventory.

Question 4.1
Explain the issues with accounting for state-owned assets on an historical cash basis (which is
often done using a cash rather than an accrual system).

Currently, accounting for state-owned asset sees many governments recognising these assets at
historical cost. Further, many make do with cash accounting rather than accrual accounting.
Accounting for state-owned assets at historical cost has implications for the decision usefulness
of the balance sheet. This is because the historical cost of assets is merely a historical record of
the financial sacrifice made to construct it. The historical cost, particularly if incurred long ago,
isnot a relevant measure of the future economic benefits expected to be derived from using the
asset. In addition, it may not require the recognition of other assets controlled by governments;
for example, land under roads or mineral resources.
There may also be implications for the comparability of financial statements that contain
such assets because the financial statements may include costs relating to assets acquired at
different points in time. Also, ratios would be distorted by the comparison of current income
with a historical cost, in light of changes in the purchasing power. In this regard, historical cost
has been criticised on the grounds that it aggregates costs incurred at various points in time as
though they are equivalent in economic terms. However, allowing for the time value of money,
thepresumption is open to criticism.
The impact of cash accounting is that obligations are only accounted for when the bill is received
rather than when the obligation is incurred. This helps to disguise weak finances and also has
implications for the decision usefulness of the financial statements.

Question 4.2
(a) What are special purpose entities (SPEs)?
(b) How could an unconsolidated SPE be used to hide the fall in value of investments?
(c) How might the application of IFRS 10 Consolidated Financial Statements change how SPEsare
accounted for?
Note: You are not required to have or to apply a detailed knowledge of IFRS 10 in answering
this question.

(a) Special purpose entities (SPEs) are legal or accounting entities that are treated as separate
from the reporting entity. For example, if a company establishes a limited partnership
to conduct part of its business and accounts for the partnership separately from the
company, then the partnership is an SPE. The business conducted through an SPE usually
has a different nature from the business of the main company. It is usually narrow in focus,
temporary or specific. For example, a company might use a partnership to own an asset and
borrow money against that asset.
(b) If the assets and liabilities of the SPE are not included in the companys consolidated financial
statements, it is off-balance sheet. If the assets owned by the SPE fell in value, the decline
would not be disclosed in the companys financial statements. This lack of disclosure is one
advantage of SPEs for those who do not want others to know about a fall in asset values
orthe existence of a liability.
(c) IFRS 10 Consolidated Financial Statements has a revised definition of control. Applying the
new definition requires significantly more judgment to determine whether an entity should
be consolidated. An entity needs to consider whether control exists, particularly when the
ownership interest is less than 50 per cent. Further, it needs to assess whether they have the
power to direct activities that significantly affect returns. The assessment under IAS 27 was
based on the power to govern the financial and operating policies.

The new requirements create a greater need to consider both the entitys holdings and rights,
and the holding and rights of the other shareholders, to determine whether the entity has the
necessary control.

Question 4.3
What gives rise to liquidity risk in the banking system?

A mismatch between the duration of deposits and loans gives rise to liquidity risk.
A substantial proportion of customer deposits are at call, which means that depositors may
withdraw their funds at any time without penalty. Loans are provided for a much longer duration;
for example, a mortgage may be advanced for 25 years or longer.
Liquidity risk is inherent in the banking business model, and managing this risk well is central to
the business of banking.

Question 4.4
What are the two main ways that a bank can manage liquidity risk?

There are a number of possible techniques for managing the liquidity risk, but the most
important two are:
Maintaining the trust that depositors have in the banking system in general and in a
given bank, so as to minimise the probability of a bank run occurring. This requires prudent
management.
Maintaining a sufficient base of available liquid funds to meet the daily obligations of the
bank. This level will vary, and banks estimate the level of reserve funds required based on
their particular circumstances.

Question 4.5
What were the key causes of the 2008 liquidity crisis?

The causes of the liquidity crisis in 2008 were brewing over from the preceding decade, and can
be broadly grouped into the following categories:
1. Dramatic loan growth beyond available core deposit funding, making the banking
system more vulnerable to shocks, and resulting from the following process:
Significant growth in demand for lending products, including amongst the US sub-prime
borrowers.
Significant proportion of bank funding sourced via nervous wholesale funding.
Banks engaging in the trade of complex structured products, which allowed banks to
further expand their balance sheets and take on higher risks.
Perception that bank assets, such as securitised mortgages, were liquid, and high-quality
assets, reinforced by robust credit ratings (which later proved to be overly optimistic).
2. Financial institutions holding insufficient capital and inadequate liquidity buffers:
This became apparent with the benefit of hindsight.
3. Inadequate risk management practices:
Corporate governance, market transparency and quality of supervision were found to be
lacking, in hindsight.
In particular, the focus of risk management had been firm-specific, and there was a lack of
appreciation of how a system-wide shock would play out under stress.

Question 4.6
What were the causes of the eurozone sovereign debt crisis?

The eurozone sovereign debt crisis was caused by significant ongoing budget deficits and a
build-up of very high debt levels by a number of governments in the eurozone.
The average level of debt as a percentage of GDP in the eurozone reached 79 per cent in 2009.
Even before the Global Financial Crisis, debt levels were already high, with the average level of
debt as a percentage of GDP in the eurozone at 68 per cent, 8 per cent higher than the maximum
level stipulated by the EU agreement of 60 per cent.
No actions were taken against EU member states which breached agreed debt ceilings, and a
number of EU member states took advantage of this to finance their ongoing expenditure with
debt which was relatively cheap at the time.
The build-up of high debt levels was caused by consistent budget deficits (the difference
between a governments tax receipts and its spending), which meant that should a government
lose access to cheap debt, it would need to take drastic measures to cut its expenditure,
orincrease taxes, in order to be able to balance its budget.
A number of EU members became very vulnerable to financial shocks. The high debt levels
and high budget deficits meant that a sudden increase in interest costs would place significant
additional burden on those countries, and loss of access to reasonably priced debt would expose
governments to bankruptcy risk (i.e. an inability to meet their payment obligations). This is what
happened to Greece and a number of other countries in the eurozone.

Question 4.7
Why did the revision of the Greek budget deficit trigger the sovereign debt crisis?

While there is no one correct answer to this question, the following is a reasonable hypothesis:
Greece was the EU country most vulnerable to financial shocks, as it had the highest
level of debt as a percentage of GDP and consistently ran very high current account and
budgetdeficits.
When Greece revised its budget deficit estimate for 2009 from 6 per cent to 12.7 per cent,
it undermined the credibility of the Greek economic forecasting and reduced investor
confidence in the Greek economy. Investors started to question whether Greeces budget
deficit was likely to be revised up again later, whether Greeces debt-funding model was
sustainable and whether other countries would also be revising their budget deficits,
andexperience debt refinancing issues.
Risk premia on Greek and other European government bonds increased, increasing the
likelihood of Greece and a number of other EU members defaulting on their debt, and
creating a vicious cycle.

Question 4.8
What is contagion in the context of the eurozone sovereign debt crisis?

Contagion in the context of the eurozone sovereign debt crisis refers to the financial shocks
which initially affected Greece and then proceeded to affect other economies in one or more of
the following ways:
Increase in the perceived likelihood of a financial crisis.
Correlated increase in asset-price volatility.
Correlations in asset-price movements which were not driven by fundamentals, but rather by
perception of risk and changes in risk.

Question 4.9
How could stronger regulations in banking and accounting lead to increased international
protectionism?

Regulations relating to banking and accounting could disadvantage less-developed countries

because their financial institutions and companies are less able to meet the international
standards. For example, less-developed countries could have smaller economies, and a smaller
proportion of their economies run by large businesses. Smaller businesses are less likely to
issue shares to the public, and thus share markets are smaller and less developed. In addition,
lessdeveloped countries are unlikely to have laws that offer as much protection for investors if a
company they invested in does not abide by the disclosure rules in accounting standards.
In addition, economies in less-developed countries could be more adversely affected when
companies in other countries take action to meet the new regulations (e.g. by selling assets in
thepoorer countries, or withdrawing their investments from companies in those countries).

Question 4.10
Islamic finance is claimed to be an ethical alternative to traditional finance practices. Reflect
on the nature of this alternative and discuss how it is different from other ethical alternatives.

Ethical finance refers to any financing structure that is based upon non-financial criteria
incorporating a social or a religious dimension. Conventional ethical finance mainly focuses
on excluding investments in harmful industries (such as tobacco, weapon and environment
polluting industries). It also promotes the proactive search for welfare-enhancing investments.
See, for example: http://www.australianethical.com.au/what-ethical-investment. As a matter
of principle, Islam also bans investment in industries that might harm a society, as discussed in
Aban on investing in harmful business activities in the What is Islamic banking? section.
Thisis where Islamic finance shares space with other ethical finance. Islamic finance, however,
differs from other ethical alternatives in that:
(i) Islams universe of banned industries is relatively bigger (it includes industries that might
not be considered harmful by other ethical alternatives, such as the entertainment industry);
andthat
(ii) Islams ethical concerns extend to contractual relationships underlying business exchanges,
as evident from the prohibition of riba and gharar (as discussed in What is Islamic banking?).

Question 4.11
(a) What are some of the disadvantages of operating leases and how could they be overcome
in a sharia-compliant manner?
(b) Conventional accounting practices mostly rely on interest-based financing. Islamic finance
shifts the focus to asset-based financing. Do you think Islamic finance products require a
different accounting treatment to interest-based products?

(a) The ownership of the asset in an operating lease remains with the lessor (bank) and at the
end of the lease period the bank may then lease the asset out to another customer or sell it
in a secondary market. It might be difficult to do so when the asset is not in a good shape or
when there is not an active secondary market for certain specialised equipment. One way to
deal with the problem is to set the lease period equal to economic life of the asset. Theasset
in this case is given to the lessee as a gift or sold at a minimal price at maturity, as in the
contract of ijara muntahia bitamleek or AITAB. Another sharia-compliant alternative could
be to use the diminishing musharaka structure where the lessee gradually purchases units of
theassets until she or he completely owns the asset.
(b) Asset-based financing is by nature different from debt-based financing as it underlies a
different risk structure. This obviously implies that, from an accounting point of view, assets
and liabilities need to be treated differently. Islamic banks, for example, do not guarantee
safe return of the principal amount, as holders of these accounts share in the profit or loss.
Conventional banks on the other hand guarantee the principal amount along with interest
payment. Similarly, conventional home financing is simply an interest-based loan, whereas
Islamic home financing on diminishing partnership basis, for example, represents diminishing
ownership in the asset, which is subject to price risk. These differences in risk structures
therefore require different accounting treatments.

There is agreement among advocates and practitioners of Islamic financial services that it is
not appropriate to use accounting standards and guidelines issued by conventional bodies,
such as the IASB, for Islamic finance products without appropriate adjustments. Thisis
seen as an important step towards adequate comparability and transparency of financial
statements, and proper presentation and disclosure to reflect the true nature of how IFIs
(Islamic financial institutions) operate. These adjustments are done by AAOIFI (Accounting
and Auditing Organisation for Islamic Financial Institutions), which was established in
1991 with a mandate to issue sharia accounting and auditing standards that are voluntarily
adopted by IFIs.

Question 4.12
Describe how the disclosures in an integrated report show the flow and transformation of capitals
through the organisation.

Disclosures in the integrated report show the flow and transformation of capitals through the
organisation. Every organisation requires one or more of the capitals as inputs to its business
model. These capitals are then consumed or transformed by activities that produce a range
of outputs. Whether these outputs create or destroy value depends upon the outcomes they
generate. For instance, manufacturing a product that appeals to customers will create demand
and generate revenue; whether that demand is profitable depends on the market price that
the product can command and the cost structure in the entire supply chain. In the longer term,
factors such as customer satisfaction, innovation, organisational reputation, ethical business
activities and environmental impact are all likely to affect aspects such as brand loyalty and the
value creating proposition of the organisation.

Question 4.13
What is the difference between a sustainability report and an integrated report?

The difference between sustainability reports and integrated reports is their scope. An integrated
report attempts to link an organisations sustainability report with its financial report, and
therefore has a greater scope than a sustainability report.
Some organisations publish only financial reports (as required by the relevant regulations in their
jurisdiction), while others publish a financial report plus a sustainability report. Sustainability
reports show an organisations economic, environmental and social impacts.
Sustainability reports can be prepared by organisations according to any set of principles
because there are no mandated standards such as those that govern financial reporting.
However, sustainability reports based on the GRI reporting framework (the most commonly
used reporting framework for sustainability reports) disclose outcomes and results according to
aset of principles governing the content of the report.
A third way of reporting adopted by some organisations is to integrate both the financial and
sustainability reports through the organisations business strategy and model, to more fully
explain the risks and opportunities faced by the organisation, and how the organisation is
planning to deal with them. The IIRCs IR framework (discussed in the module) provides details
onsome of the pathways as to how organisations can prepare integrated reports.

Question 4.14
How could higher credibility on sustainability issues affect a businesss relations with staff
andcustomers?

It is argued that a businesss credibility on sustainability issues increases its ability to win and
retain customers. In addition to any direct effect of marketing a businesss green performance,
itis possible that a focus on sustainability could help a business increase its competitive
advantage through better risk identification, and recognising opportunities associated with
innovation and new environmentally friendly products. Although such product development
could be costly, increasing sales is also likely to increase profits. In turn, increasing profits could
help the business borrow at cheaper rates.
It is also possible that the businesss efforts to improve its sustainability performance will help it
to attract, motivate and retain staff.
Assessing risks and opportunities associated with sustainability issue could further lead to better
cost control through operational efficiencies and avoiding waste, travel and regulatory costs.

Question 4.15
Why does the GRI believe that the GFC could have been averted, or less severe, with better
reporting?

The GRI believes that the causes of the GFC included those related to poor reporting by
corporations. The existing reporting system at the time was not transparent, which means that
external stakeholders were unable to get a full and fair picture of the corporations performance
beyond that reported according to financial accounting rules. For example, the financial
profit did not give a full account of the organisations impact on the environment or society.
Inaddition, the financial reports did not have a long-term perspective because they are based on
historical performance. Although financial reports are usually supplemented with a management
discussion of the results, including some guide as to the organisations future plans, this review
is limited in scope and does not explain the expected long-term impact on key indicators. As a
result, financial reports were not seen to discharge the organisations accountability to a broad
group of stakeholders (beyond shareholders).
In addition, the GRI believes that the current system of voluntary sustainability reporting is not
sufficient because some of the organisations that have the greatest impacts choose not to
issue sustainability reports. The GRI has called for integration of sustainability reporting with
the global financial regulatory framework, as evidenced by their support for the integrated
reportinginitiative.

Question 4.16
(a) What is a supply chain?
(b) Why would a company be interested in environmental information for other parties in their
supply chain?

(a) A supply chain extends from the natural resource, through its extraction and activities of
all suppliers, various phases of production and combination (including assembly), through
storage in various geographical locations, and ends when the product or service is in the
hands of the consumer.
(b) Supply chains naturally connect different organisations that are involved at different phases
of the journey from raw material to consumer. The different organisations are connected
through the supply chain, but all are seeking to maximise their own performance and not
expose themselves to unnecessary risks. Organisations at the various phases of the supply
chain place demands upon one another, and therefore seek information from one another
about each others performance, as it affects the relevant supply chain. If one organisation
has the potential to expose another organisation to environmental risks, it is now common
that information about environmental performance will be sought. For example, if a miner is
involved in the extraction of the raw material used by a processor, the processor is concerned
about any disruption to supply through changing legislation, environmental protests or
variable weather conditions. The processor could seek information about the miners
compliance with relevant legislation covering waste, for example. Further along the supply
chain, a retailer could be concerned about environmental information about food production.

Question 4.17
(a) Who will issue water reports under the water accounting standards?
(b) Who will use water reports, and for what types of decisions?
(c) Is auditing of water reports necessary? If so, who will audit water reports?

(a) Water reports will be issued by water reporting entities. In particular Statement of Water
Accounting Concept (SWAC) 1, para 20, states that water reporting entities may be
individuals, physical entities, organisations, or an organisation that has management
responsibility for a physical entity (e.g. a catchment water authority whose responsibility is
forthe physical catchment). See also the discussion in paragraph 11 of SWAC 1.
(b) AWAS 1 states that water accounting should assist informed decision-making about the
allocation of resources. According to the Bureau of Meteorology (2011a, p. 2):
The reports [GPWAR] will usually be prepared by water managers and will address the general
information needs of water users, water market investors, traders and brokers, environmental
organisations, auditors, financiers, local governments, researchers, planners and policy
formulatorswho cannot normally gain this information directly from the organisations that hold it.
GPWAR are designed to:

provide information that is relevant, reliable, comparable and understandable

inform users about how water resources have been sourced, managed, shared and used
during the reporting period

enhance users confidence in their water-related investment decisions (Bureau of

Meteorology 2011a, p. 3).

Benefits to GPWAR preparers include:

the opportunity to demonstrate stewardship of a public good

meeting several reporting obligations in a single report

potential to share reliable, assured information on water resources with stakeholders

(Bureau of Meteorology 2011a, p. 3).

Benefits to users of GPWAR include:

access to information important to core business such as water rights, other claims to
water, and obligations against that water

enhanced relevance and comparability of information, through use of a standard

reliability of information underpinned by an assurance process (Bureau of Meteorology

2011a,p. 3).

Therefore, users will use the information about water assets and liabilities, inflows and
outflows to assess water availability and the reliability of future supply, in various ways:
as input to water trading models;
to judge the stewardship of water managers;
to monitor water resources and formulate public policy or to plan action to lobby for
change, and to study the effects of climate change; and
government actions.

(c) Assurance of the water accounting reports is designed to add credibility to the reports,
andgive confidence to users. The Australian Auditing and Assurance Standards Board
(AUASB) and the WASB jointly issued the standards for assurance of water reports in 2014
(ISAE 3610/AWAS 2).
It is possible for assurance engagements on GPWAR to be undertaken by practitioners from
the following backgrounds:
(a) There are professional accountants with specialist knowledge, training and experience
in assurance practices, particularly those who undertake financial report audits, who
are capable of performing engagements dealing with subject matters other than
historical financial information (such as engagements to provide assurance on GPWAR).
Wherenecessary, professional accountants specialising in assurance can engage subject
matter experts to assist in parts of an engagement, for example, to assist in verifying
the appropriate application and results of models. Standards exist to govern the use of
expertsby assurance practitioners.
(b) Alternatively, there are subject matter experts, including scientists, engineers, hydrologists
and professionals from backgrounds other than financial reporting, auditing and assurance,
who have expertise in the quantification of water volumes and water accounting.
Theseprofessionals could then, if necessary, acquire knowledge, skills and experience
inassurance processes, and engage appropriately skilled experts, to enable them to
perform assurance engagements on GPWAR.
Whatever their background, the lead assurance practitioners for engagements on GPWAR
will require skills in both assurance and water quantification and accounting, or have access to
expert assistance, where necessary (AWAS 2, para 17).

Question 4.18
Access the GRI G4 Sustainability Reporting Guidelines at: https://www.globalreporting.org/
resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf.
List at least four natural capital elements that are provided for in the guidelines.

Under the environmental sustainability category of GRI G4, there are guidelines for the reporting
ofthe following items which relate to natural capital:
materials;
energy;
water;
biodiversity;
emissions; and
effluents and waste.
(It is also arguable that other items under the environmental sustainability category of the
GRIG4guidelines can beincluded, but the ones listed here are the most direct.)

Question 4.19
Based on the green accounting video interviews, consider the following questions.
(a) Compare current green accounting opportunities for the accounting profession with those
in the financial services area 10 years ago.
(b) How can understanding a product or business carbon footprint help management?
(c) In what way is green accounting a multidisciplinary service?
(d) Is green accounting a business or environmental issue?
(e) What skills and attributes are required for success in green accounting?

(a) The practitioners in the green accounting video interviews compare the current green
accounting opportunities to those facing the accounting profession 10 years ago, in the area
of financial services. They suggest that 10 years ago, accountants failed to act in a timely
manner to ensure that financial services remained an exclusive service area for members
of the profession. In the current environment, there appears to be other professionals
(andnon-professionals) who wish to enter the area of providing advice and assurance in
green accounting. Both reporting and assurance are traditional accounting functions in
which accountants have expertise and credibility. However, if the profession again reacts
slowly, accountants will see opportunities being taken by others. Not only will this mean less
business for accountants, but it could lead to a lower level of service (witness the difficulties in
the financial services area as unscrupulous billing practices and a failure to provide impartial
advice have dragged down the reputation of financial advisors). Accountants need to skill
up to meet the demand for their services at the necessary level of quality. Client retention is
improved if accountants can provide these new services.
(b) Accountants should help clients understand their carbon footprint so they can see
opportunities to reduce waste and costs and to improve revenue. It could be argued that in
the future most businesses will have to account for their carbon in some way, even if they are
not legally obliged to report at the moment. Individually, we can help business people reduce
their carbon footprint and help reduce their fear and apathy about acting now. If you do not
fully understand your business and its costs, you cannot maximise profits.
(c) It is important to have the right people in a carbon assurance team, as well as auditors.
Theaudit team should include people who understand the greenhouse gas (GHG) emission
reporting regime and the industrial processes that generate emissions and consume
energyit needs engineers and scientists, as well as legal expertise. Difficult questions
mightinclude whether reporting needs to be done on an entity or site basis. There is a
needto include more outside experts than for a usual financial engagement.
(d) Green accounting is not just an environmental issueit has a business impact. Accountants
can help their clients understand how environmental issues will affect their business and
help them deal with the accompanying threats and grow their business. There are major
strategicchallenges.
(e) Required skills and attributes include: knowledge of the clients business and their industry,
knowledge of legislation and its impact on clients. Clients are looking for services in carbon
accounting, costing, carbon footprint calculation, systems to capture and record emissions
data, and verification. Engagement is usually run most successfully as a collaborative
approach between client management and auditors. Success is more likely if a senior
person in the practice is very interested in green accounting and audit, and willing to drive
the systems. The skill set in the practice must include audit experience, including sampling
and materiality, understanding of the nature of procedures required to gain assurance,
andexpertise in greenhouse gas emissions. Someone wanting to work in this area could
consider a course in carbon or green accounting.

Question 5.1
A non-executive director of Rio, an Australian company, was unhappy with a proposed deal
being considered by the board. After a majority of the board decided to adopt the proposal,
the director decided to resign from the board. Shareholders had previously been expecting him
to be elected chairman in the near future. As a result of his resignation, the company announced
to the Australian Securities Exchange merely that the director had resigned from the board
with immediate effect and will therefore not take up the post of chairman of the board
aspreviously planned (Main 2009).
Is this announcement appropriate in this case? How would you advise the board to announce
this resignation?

This was the text of the announcement made by Rio, an Australian company, on the resignation
of the director from the board on 9 February 2009. Main reported that the brevity of this
announcement left shareholders in a state of doubt and uncertainty:
In corporate terms, investors were standing outside the library and heard a loud bang and a thud.
They didnt see the revolver. They knew who was in there and they knew the outcome but they
didnt get any formal explanation (Main 2009).

This type of uncertainty can harm a companys share price and reputation because it conceals
what was going on in the boardroom at the time of the resignation.
In this case, the director made his own brief announcement shortly after the board announcement,
and two days laterafter media speculation on the situationthe board further announced that
the departure was the result of a proposed takeover by Chinalco, the Aluminium Corporation
ofChina.
The Australian company could have saved these days of shareholder uncertainty by making
a more complete announcement in the first place, and thus prevented potential loss to
shareholders and damage to the companys reputation. It is incumbent on company directors
torepresent the interests of shareholders. By not fully revealing the situation initially, the board
may also have lost the trust of shareholders, which could cause continuing damage to their
reputation and thus have a longer-term impact on the value of the company.

Question 5.2
Consider the scenarios in Examples 5.2, 5.3 and 5.4. Which reputation drivers were triggered?
Which do you believe were the main drivers and why?

Example 5.2
The combination of reduced product quality, public statements critical of customers, andthen
apologies perceived as insincere had a direct impact on reputation, damaging sales and
company value.

Financial performance and profitability

Financial performance is not given as a driver for the loss of reputationhowever, the resulting
11 per cent drop in company value would have further damaged company reputation after the
initial damage.

Corporate governance and quality of management

The CEO stepping down, followed by the resignation of the founder, leaves stakeholders with an
impression of poor management quality. The recurrence of product quality problems also implies
that the original issues had not been adequately addressed by management.

Marketing, innovation and customer relations

One of the key drivers of the reputational damage was the poor customer relations. The public
announcement by the founder criticising customers was a major trigger point for the loss of
reputation. The delay in apologising further exacerbated this damage.

Transparency and trust

The product quality issues were an initial driver, as this reduced trust in the company. The company
was insufficiently transparent about these issues. The delay in the apology to customers could also
be interpreted by stakeholders as a lack of transparency, and as violating customer trust.

Communications and crisis management, including social media

The overall poor communication was another key driver. The criticism of customers was a grave
error in communication, and the delay in the apology was also damaging. The criticism created
a crisis, and the response to this crisis was inadequate. A prompt apology, followed by clear and
consistent communication, could have reduced the impact of the original event.

Top drivers
The top drivers triggered initially were transparency and trust, customer relations, communication
and crisis management.

Example 5.3
The initial luggage loss affected only one customer (from the information given), but the overall
impact on reputation was from the resulting social media activity.

Marketing, innovation and customer relations

A major driver here is in the customer relations. If the customer problem was handled correctly
and promptly, the resultant issues may not have arisen.

Transparency and trust

The delay in response tends to imply a lack of transparency, and can also violate the trust in
thecompany by any of the observers on Twitter.

Communications and crisis management, including social media

The key driver was the poor management of the activity on Twitter. As stated in the text,
aprompt and helpful response may have avoided the reputational damage before it became a
major problem.

Top drivers
The top drivers triggered were customer relations, transparency and trust and crisis management.

Example 5.4
In this case, major reputational damage was averted by a prompt response.

Marketing, innovation and customer relations

The customer relations were well handled in this case. Potential major reputational damage
wasaverted.

Transparency and trust

The initial network failure could have initially caused some loss of trust. However, the prompt
response contained this.

Communications and crisis management, including social media

The critical posts on Twitter could have created a negative public image (as in Example 5.3),
but,as discussed, the prompt response reflected good crisis management.

Employees and culture

The humorous tweets posted by staff in response to the critical and abusive tweets showed a
verypositive culture in the company. This reflected an appropriate management style of trusting
and supporting the individual staff in responding in a personal way.

Top drivers
The potential top drivers here were trust, communications and crisis management, but good
crisis management prevented major reputational damage.

Question 5.3
Review the brand and tangible asset values in Table 5.1 and identify any findings of interest.

Technology companies (Apple, Google, IBM, Microsoft, Samsung and Intel) dominate the list.
The organisations which control the top 10 brands in the world also control a significant level of
tangible assets. Some organisations, such as McDonalds and Coca-Cola, have brand values that
exceed tangible assets, although most organisations have brand values that are less than their
tangible assets. Of note is the brand values of General Electric and Toyota, which are less than
10per cent of their tangible asset values.
It is worth remembering that the brand values are based on a net present value calculation of the
future revenues based on the strength of the brand. This means that they will not be recorded as
assets because they cannot be measured in a sufficiently reliable manner. So, these corporations
have a very large amount of assets that are not formally reported, but must still be carefully
managed and protected.

Question 5.4
Identify three products that are protected by geographical indications of source.

Examples of products protected by geographical indications of source are:

Name

Geographical location

Type of product

Tequila

Mexico

Alcoholic spirits

Jaffa

Israel

Oranges

Bordeaux

France

Wines

Roquefort

France

Cheese

Parma

Italy

Ham

Noix de Grenoble

France

Nuts

Question 5.5
Is patent protection actually possible? Is it worth the time and effort?

Whether patent protection is possible or worth the time and effort will depend on the
circumstances. The ability to successfully defend and enforce your rights will be the key
determinant in making your decision. Other factors include the financial cost of protecting
and enforcing rights, and whether any moral obligations may compel an owner to seek justice.
Themore planning that goes into identifying, recognising and protecting your organisations IP,
the more likely you will be of successfully protecting it and leveraging it in the future.

Question 5.6
How should David Belaga develop his idea of exporting The Right Stuff to Australia?

Candidates may present varying opinions of whether David Belaga should consider the
Australian market for The Right Stuff, all of which could be considered correct, depending on
how true the assumptions behind them are. However, there are some general pros and cons
tothe Australian market.
Supporting the yes perspective, the case highlights that the Australian market is in a different
hemisphere than the US. The sports drink market is fairly cyclical, with the highest sales in the
summer months (in the US, JuneAugust) and the lowest sales in the winter months (in the US,
DecemberFebruary). Belaga could counter this low sales period in the US by seeking sales
in Australia (and potentially other southern hemisphere markets such as New Zealand and
SouthAfrica). Furthermore, the case highlights that Australians have a generally high level of
interest in sports, and those who have lived or travelled to Australia will recognise that this is
both in spectatorship and in participation. Another reason to strongly consider a new market in
Australia is the shared language (English, although with some minor differences) and openness
inbusiness culture.
Regarding the no perspective, certainly one caveat that should be considered is that Australias
most popular sports are a little different from those which Belaga is familiar with in the US market.
Although not presented in the short vignette, in the US, Belagas highest sales are in (American)
football, baseball, basketball, hockey and soccer. These sports are not as popular in Australia,
where cricket, Australian Rules football, rugby union and rugby dominate. Thus, Belaga cannot
depend on the same contacts and networks as in the US (e.g. with the major professional athletic
teams) to translate to Australia. Furthermore, there may be very few linkages across Australian
and US teams at universities, sports clubs and high schools. There are also few specialty sporting
goods stores that operate in both the US and Australia; in both countries, this retail sector is
dominated by small, independent shops. And with respect to the third market of first responders
(e.g. military, fire, emergency medical services and police), again, these markets are fairly
countryspecific.
Considering the potential for overall demand, certainly Australias generally warm (and sometimes
very hot) weather, there is definitely a need for Australia-based athletes to stay hydrated.
Furthermore, Australians seem to have a willingness to try new products, including those which
are technology based.
On the downside, there are potential hurdles with respect to identifying a good manufacturer
and distributor, but these are not insurmountable. They would certainly require some
investigation of referrals, and development of processes to overcome the vast geographic
distance between the two countries.

Question 5.7
Think of a business you would like to start. What are the pros and cons of debt and equity
financing?

While each entrepreneur may have unique circumstances affecting their decisions regarding
debtand equity financing decision, there are some general pros and cons.
Entrepreneurs who seek debt financing will have to pay back this loan and with interest.
Advantages of debt financing include the ability to borrow the amount needed and, as long
as this money is repaid, the ownership of the company will not be affected. The disadvantages
include the debt obligation itself, interest charges, the need to put up collateral in advance,
andany lack of profitability due to high interest payments.
By contrast, equity financing involves relinquishing part of the ownership and control of the
business. Equity is advantageous as it can provide large amounts of capital, and there is
nointerest payment or obligation to repay the capital. Equity is disadvantageous if the capital
provided is too much and the providers (usually business angels or venture capitalists) may
expect very high returns.

Question 5.8
Thinking back to the rat trap case previously discussed, in what ways can we measure the
valuecreated?

The new trap provides a better quality of life to Irula rat catcher people on multiple fronts.
First,in terms of health, this hand-operated trap eliminates burns and there are no issues with
smoke inhalation. As the new trap is twice as efficient as the old trap, the catchers are successful
about 95 per cent of the time, and thus also double their income. This increased income provides
money for childrens schooling and family healthcare. Non-Irula people may then gain greater
respect for the Irula. Furthermore, as the new trap is easy to use, older men and widowed or
destitute women can also catch rats. The steel trap is impossible to break, thus saving on the
50cent cost of a new pot purchase. The Irula take pride in their trap and work with greater ease,
comfort and happiness. The new trap is just $25 and thus very affordable.
As the rat trap case illustrates, there are multiple means of measuring value creation by social
venturesand this can be financial and socialhence a double bottom line. At the financial
level, social ventures can be measured by the extent to which they are self-sustaining with
respectto profitability. The ventures value should also be considered with respect to the degree
to which the target clients are served.
In the case of CDDP, the clients are the Irula people. And at an individual level for the Irula
people, there are improvements to health, economic position, education, happiness, socialstatus,
technology access and other aspects of quality of life. In all cases, performance can be measured
on a continuum (e.g. with a precise scale, such as number of people served), viaa rating scale
(e.g. ask people to rate the effectiveness of outcomes on a five-point scale) or a binary scale
(e.g.answers on a yes/no scale).
One example of social value calculation is the Social Return on Investment (SROI) developed by
the Roberts Enterprise Development Fund (REDF). SROI calculates the blended value based on
the enterprise value and the social purpose value:
Enterprise value (Value of sales Cost of goods and services sold Operating expenses) +
Socialpurpose value (Grants and gifts Fundraising and grant writing costs + Social cost savings
Social operating costs Increases in taxes) Debt carried by social enterprise.

Question 5.9
In the last few years, the Grameen Bank has been established in the US. Do you think that the
Grameen model will work well in a developed economy? What do you think are the possible
limitations?

Since 2008, Grameen America has assisted 1700 borrowers in New York City. Grameen America
has tried to replicate the model developed in Bangladesh, based on the following principles:
A focus on supporting microenterprise only, not personal finance.
Partnerships between local businesses which raise seed capital (minimum of $2 million) and a
bank that will host low-cost savings accounts for borrowers.
All borrowers need to concurrently save as well as borrow funds from Grameen America.
Grameen Americas Basic Loan has a term of six months or one year. The interest rate is
15per cent on a declining basis. There are no other fees. No collateral is required.
Grameen America requires prospective borrowers to form or join a group of five members
who meet weekly. These groups are organised into centres, with three to six groups to a
centre. Centres meet weekly in borrowers homes or at a local community centre
Source: http://grameenamerica.org/faq.

Limitations
Within US culture, not everyone will be comfortable sharing their financial circumstances
withothers.
Only business loans are considerednot all low-income people have the capacity to
considera business.
Significant start-up funds are required.

Question 6.1
Describe the importance of non-verbal cues in the Cosminco communication initiative in
Example6.1.

This communication program includes emails, a printed poster, a video and a phone service
forquestions.
Because the management and the communications team are in Australia and the staff are located
around the world, the national cultures will vary across the company. Therefore, different cultural
styles and languages need to be taken into account.
In this case, the non-verbal communication effects will be as follows:

Kinesics
This may affect the video. The facial expressions and body movements of people in the video
will be visible. It may be necessary to restrict kinesics to those that can be universally interpreted
(e.g. asmile). Alternatively, different speakers could be used (preferably from a similar cultural
background) for countries where there may be a risk of misinterpretation. As another option,
theuse of vision of people talking could be minimised.
This cultural cue will usually have less impact on any of the other media used, although it might be
relevant for images of people used in the poster.

Vocal qualities
Similar allowances could be made for vocal qualities on the video as those made for kinesics.
Again, this will not be as relevant to other media. The people answering any questions phoned in
may need to make some allowances in their conversations.

Proxemics
This will not apply, as no face-to-face communication is included in the plan.

Object language
This is also less relevant, although it might affect the display of cultural or ritual symbolism or
artefacts in the images in the video or the poster.

Time
This will not apply in this case.

Context
The script for the video may need to be more direct for some cultures, and more implicit for
others. Accordingly, it may be best to film different versions of the video for some cultural groups.
Moredirect messages can be used in predominantly Western cultures (such as Germany and
Switzerland), whereas less direct messages would be preferable in Eastern cultures (including Asia
and the Middle East).

Question 6.2
A company associated with Cosminco, the Inter-Oil Company of Germany, has discovered oil
just off the coast of China within Chinese maritime boundaries. In order to exploit this discovery,
Inter-Oil has formed a joint venture with the Chang Oil Cooperative of China. Both companies
have employees conversant in Chinese and German.
A knowledge sharing community will be established comprising staff from both companies to
ensure that maximum benefits are gained from the knowledge and experience of each partner.
Briefly describe the cultural issues involved in this venture, and explain whether they will positively
or negatively affect the knowledge sharing initiative.

This involves a joint venture between a German (individualist) culture and a Chinese (collectivist)
culture. Consequently, where individual staff conform to their national cultural type, there is the
potential for significant difficulties to occur:
The individualist Germans may have difficulty transferring knowledge to the Chinese staff
astheir cultural type tends to hoard knowledge rather than share it.
Another cultural trait that may limit the Germans sharing knowledge is that their cultural
group more naturally tends to be competitive, whereas the Chinese are more likely to
sacrifice individual advantage for the benefit of the group. However, whether this collectivist
cultural trait leads the Chinese group to share knowledge will depend on who they consider
being part of the groupthey may consider their own local office to be the group, or they
may consider the company as a whole to be the group.
The Germans also prefer to work with explicit knowledge, which may be easier to share,
but this is not the format that the Chinese culture prefers. On the other hand, the Chinese
culture is better at sharing tacit knowledge, but the German culture is less likely to accept the
preferred story-telling techniques that suit this style.
The Germans also prefer theoretical analysis and an academic approach, which may cause a
barrier to the Chinese, who may take a more practical approach.

Question 6.3
You have commenced a new job working as a senior accountant in Cosminco, the global mining
services company introduced in Example 6.1.
There is a planned change to financial procedures, which will require project managers to revise
their approach to calculating project budgets. You have been put in charge of explaining the new
process to the project managers globally. The project managers are highly qualified engineers,
but have little training in accounting. They mostly work in remote areas around the world, butare
all fluent in English.
The communications team has been asked to assist you, but the team is currently short-staffed,
and the only internal communications team member in your office has been temporarily seconded
to another department to help with preparing the annual report.
You will need to plan the communication and develop some written material that will explain
the new procedures. To ensure that the message is fully understood, you realise that you need
to develop an understanding of your target audiences and ensure that the message is worded
and delivered in a way that each audience will understand and act on.
What are some actions you could take to achieve this?

Some actions you could take are as follows:

Talk to one or more of the project managers by phone and ask them questions about their
job rolesfind out how they normally go about their own personal development in their area
of expertise, and ascertain how they normally prefer to receive information.
Ask one or more of the project managers to explain their current budget procedures to you.
This will provide clues about the language they are familiar with in their work.
Look for copies of material written by project managers, preferably dealing with their current
project budgeting or any other financial aspects of their work. This will also give clues about
the language they are familiar with.
One ideal way to familiarise yourself with the project managers work environment would
be to spend some time with a project manager in his or her normal day-to-day work.
Analternative approach would be to arrange for a project manager to spend some time
withyou at the head office, should any of them be planning trips there.
Another means of understanding their work environment may be to conduct regular video
conferences with some of the project managers over a few days. An alternative may be to
arrange for a project manager to carry around a video camera or voice recorder and keep a
log of their activity over a number of days.
Find out from the relevant local management or human resources department what form of
key performance indicators or rewards and recognition programs may apply to the project
managers. This will assist in how you pitch the message and determine any potential linkages
to these programs to encourage take up of the message.
Other considerations when composing the message include:
Arrange for a pilot group of project managers to read and edit the message before
transmission to ensure that it is worded in a way that will communicate clearly to the
wholeaudience.
Check on the forms of media normally used to communicate with this audience and their
effectiveness, and choose the most appropriate.
It will be appropriate for the communication to be written in English as you have already
been advised that this is the predominant language of this group.
As you have no existing relationship with the group, you could locate an appropriate
authority figure in the organisation that the group already knows and respects to sign off
yourmessage or present it to the group.

Question 6.4
Continuing with your senior accounting role at Cosminco, it is decided that a brief regular
monthly communication program is required to keep the global project managers up to date on
further changes to project financing over the next six to nine months. It has been decided that
this would be an appropriate opportunity to pilot the use of social media within the company.
Which of the forms of social media discussed so far may be suitable for this purpose, and why?

A suitable tool to use would be podcasting or vodcasting (videocasting). These are ideal for a
global audience as the participants can access the sessions at times that suit their local time zones
and work shifts. Videocasting would provide the benefit of allowing the use of visuals, which would
be an advantage over audio podcasts where details about how to fill out on-screen forms or other
activities associated with the tasks being explained may need to be provided.
As company-specific financial details may be discussed, an open public forum such as YouTube
would not be suitablean internal or secure external platform would be more appropriate.
The project managers could be alerted by email when new episodes are made available; however,
as the sessions may be critical to business operation, a more direct form of notification might be
preferred, such as mobile phone SMS messages (for sites located within mobile coverage areas).
It would also be desirable to provide project management staff with the means to contact the
finance team to ask questions or clarify issues. Due to time zone differences, this might not always
be done in real time. A blog could be used for this purpose in conjunction with podcasting or
videocasting to allow for both questions and answers to be posted directly online.
An additional tool such as microblogging or an online community could be used for this function,
but this may add unnecessary complication and the cost may not be justified if the tool is only
going to be used for a limited time period.

Question 6.5
The offices of Cosminco around the world operate somewhat independently of one another,
withrather ad hoc arrangements for transferring information. A proposal has been put forward
to establish an intranet for the company, with provision for a knowledge sharing system.
ACosminco project manager with some IT experience in a previous job role has started work
on researching the technology that could be used. You have been asked to put together some
costings for theproposal.
What would be some of your main considerations for this project, and what suggestions might
you make to the project manager for optimising the investment required for the intranet?

A wide area network (WAN) will need to be established between the sites, with local area networks
(LANs) within each site (if not already existing). Some of the considerations for the project would be
as follows:
Establish appropriate internet connectivity for staff to access public internet services.
Thiswould also include allowances for any relevant security technology.
A determination would need to be made of the bandwidth needed for each network
connection, based on the expected traffic requirements. These requirements would vary,
depending on the use of email, file transfer, voice, video or other network services.
Allowances would need to be made for any extranet connections to external parties such as
suppliers, business partners or customers, with relevant security systems.
Remote access through VPNs should also be considered, in particular where staff may be
working in the field or while travelling. This will need appropriate security and may require
particular provisions where these staff need to access the knowledge sharing system.
Thisshould also support access from mobile devices.
Consider the main functions for the intranet. Will it be used for content only or will it include
communication, collaboration and activity?
Determine how much of the required functionality can be provided by cloud computing.
Balance cost savings and flexibility against any criticality of the function and additional service
management and governance requirements. Compare the total cost of ownership (TCO) of
an equivalent in-house infrastructure.
Determine relevant solutions for the knowledge sharing system, taking into account the
culture and needs of the staff that will be using it. Include all potential stakeholders in the
process of developing and implementing the solution.