P1 Revision notes

Key Underpinning Concepts

Fairness - Respecting the rights and views of any groups

Responsibility-Willingness to accept liability for the outcome of decisions

Accountability- Answerable for the consequences of actions (Jun 12)(dec 12) (Dec 14)

Honesty/Probity- Truthful, not misleading

Integrity- A person of high moral virtue

Importance: Code of ethics do not capture all ethical situations and importance of the
virtue of the actor is therefore important. (pilot paper) (Jun 13)(jun09)

Transparency/ Openness- clarity, disclose all relevant information.

Importance:
1) gains trust with investors
2) underpin market confidence (Dec 07) (Jun 13)(June 11) (Jun 14) (Dec 14)

Independence- The auditor must be materially independent of the client for the following
reasons:
1) to increase credibility and underpin confidence in the process
2) to ensure the reliability of the audit report (June 08)(Jun 12)

Reputation- Organisation reputation for moral virtues (Jun 14)

Innovation - occurs when a firm “transforms” knowledge and ideas into new products,
processes.

Scepticism - is an attitude which includes a questioning mind to provide a critical

assessment of evidence

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The consequences of corporate governance (CG)
failures (dec 10)
1) Effective CG protects the value of shareholders’ investment in a company
2) Lost of jobs after the collapse of cy
3) Creditors have gone unpaid and customers have remained unserviced.
4) The loss of auditors’ reputation.

There are 2 possible systems for trying to get

companies to have good corporate governance:

1) Rules based: (June 08)(June 10)(Dec 11)(dec 12)(dec 13)

- companies adhere to the rules or pay penalties
- compliance is enforceable in law
- companies can face legal action if they fail to comply

2) Principle based:(June 08)(June 10)(Dec 11)(dec 12)(dec 13)

- comply or explain
- it can TEMPORARILY explain why it has not
- the punishment for this non-adherence will be judged by investors (fall in share price)

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Stakeholders
Internal actors
NEDs (Dec 08)
- are independent and are not involved in the day to day running of the business

Executive directors (Dec 08)

- should be working in the best interests of the shareholders

Legal responsibilities
- directors are collectively responsible for the company’s performance, controls,
compliance and behaviour

Board roles
1) discuss and agree strategies to maximise the long‑term returns to the company’s
shareholders
2) comply fully with relevant regulatory requirements

Company secretary

- maintain the statutory registers

- responsible for the timely filing of accounts
- advises directors of their regulatory and legal responsibilities and duties
- must always take the side most likely to benefit the company
- must be a member of one of a list of professional accountancy
- provide members (eg shareholders) and directors with notice of relevant meetings
- organise resolutions for and minutes from major company meetings (like the AGM)

Sub-board management
= ‘middle’ management, managers below board level are a crucial part of the
governance system

Employee representatives (June 10)

Trade unions represent employees in a workplace

Unions are often good at highlighting management abuses such as fraud, waste,
incompetence and greed

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External Actors
Agency relationship (June 09) (June 10)(Jun 12)(dec 13) (Jun 14)

Agency is defined as a relationship between a principal (an owner) and an agent

(manager), who runs the business.
In the case of corporate governance, the principal is a shareholder and the agents are
the directors.

Agency costs
Shareholders incur agency costs in monitoring the agents (directors)
Costs of monitoring:
1. Attending relevant meetings (AGMs and EGMs)
2. Studying company results
3. Making direct contact with companies

Transaction costs occur when dealing with another party.

If items are made within the company itself, therefore, there are no transaction costs

Company will try to keep as many transaction as possible in-house in order to:
1) reduce uncertainties about dealing with suppliers
2) avoid high purchase prices
3) manage quality

The 3 factors to take into account as to whether the transaction costs are worthwhile are:

1) Uncertainty - Do we trust the other party enough?

2) Frequency - How often will this be needed?
3) Asset specificity - How unique is the item?

Types of Investor:
1. Small investors - Individuals who hold shares in unit trusts, funds and individual
companies.
2. Institutional investors - The biggest investors in companies, dominating the share
volumes on most of the world’s stock exchanges (Jun 14)

When should institutional investors intervene in company affairs? (dec 10)

- Concerns over strategy
- Consistent underperformance (without explanation)
- NEDs not doing their job properly
- Internal Controls persistently failing
- Failure to comply with laws and regulations
- Inappropriate remuneration policies
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Auditors and regulators

The most obvious role of audit in corporate governance is to report to shareholders that
the accounts are accurate (‘a true and fair view’ is the term used in some countries.

A qualified audit report is an important signal to markets about the company.

Non-corporates
Public sector organisations (Dec 14)
- are state controlled
- can be parts of government departments (eg. hospitals and schools), or local
government authorities, nationalised companies and non-governmental organisations
(NGOs)

Agency relationship in the Public Sector

- management serve the interests of the taxpayer
- the taxpayer/electorate does not have one simple goal

Charities and voluntary organisations

- exist for a particular social, environmental, religious, humanitarian or similar benevolent
purpose and often enjoy tax privileges and reduced reporting requirements
- there is the agency problem between the donors and the charity.
Will the donations be used fully for the purpose?

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Board of directors

Board of directors - Roles and Responsibilities

1) Provide entrepreneurial leadership
2) Represent company view and account to the public
3) Determine the company’s mission and purpose
4) Select and appoint the CEO, chairman
5) Establish appropriate internal controls
6) Set the company's strategic aims

Cross directorships (pilot paper)

When two (or more) directors sit on the boards of the other.
In most cases, each director’s ‘second’ board appointment is likely to be non-executive.

Unitary Board (pilot paper)(Jun 12)

This is where all directors, including managing directors, departmental directors and
NEDs all have equal legal and executive status in law.

Advantages
1) NEDs are empowered, have an equal status to executive directors.
2) The presence of NEDs can bring independence, experience and expertise
3) The directors are equally accountable
4) Reduce likelihood of abuse of power by a small number of senior directors
5) Larger than a two-tier board = more viewpoints
6) All members have equal legal responsibility

Disadvantages
1) A NED or independent director can not be expected to both manage and monitor
2) The time requirement on NEDs may be onerous

Two-tier boards(Jun 12)(jun09)

The board is split into multi-tiers, separating the executive from directors

Advantages
1) Clearly management and owners separation
2) Separate meetings means freedom of expression

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NEDs - Roles and Responsibilities (pilot paper)(Jun 13)
1) Strategy role - NEDs contribute to strategy.

2) Scrutiny role - NEDs should represent the shareholders’ interests, NEDs ensure that
the EDs account for decision taken.

3) Risk role - NEDs should ensure the company adequate internal controls and risk
management systems

4) People role - NEDs should oversee issues on appointments and remuneration.

Independence
The board should ensure any NED is truly independent in character and judgement by:
- not being an employee of the company within the last 5 years
- not having a material business relationship with the company in the last 3 years
- not receiving any remuneration except a director’s fee
- not having any family ties with the firm
- not holding cross directorships with other directors

Roles of CEO (June 08) (Dec 14)

1) To lead the company and to protect shareholder interests
2) To develop and implement polices and strategies
3) To assume full responsibility for all aspects of the company’s operations
4) To manage the financial and physical resources of the company, monitor results, and
ensure that effective operational and risk controls are in place
5) To oversee the management team, and assisting in the appointment of directors to the
board
6) Communicating effectively with significant stakeholders

Roles and Responsibilities of Chairman (Dec 07)

(June 11) (jun 09)
1) Provide leadership to the board - board's effectiveness, setting the board's agenda
2) Represents the company to investors and other outside stakeholders.
3) Effective communication with shareholders
4) Ensuring the board receives accurate and timely information
5) Coordinate NEDs

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Benefits of separation of roles of Chair & CEO (Dec 07)(Dec 11)

1) Frees up the chief executive to fully concentrate on the management of the

organisation
2) Allows chair to represent shareholders’ interests
3) Removes the risks of ‘unfettered powers’ in one individual
4) Reduces the risk of a conflict of interest
5) Agrees with most best practice codes

Nominations committee - Roles (June 09) (June 10)(dec 13)

- The nominations committee is usually made up of NEDs.
- Is responsible for recommending the appointments of new directors to the board
- advises on the balance between NEDs and EDs
- establishes the skills, knowledge and experience possessed by current board (diversity
of the board)
- notes any gap that will need to be filled

Risk committee -Roles (Dec 08)(Jun 12)

- Helps Investor confidence
- Should be made up of NEDs
- Reviews effectiveness of internal controls regarding risk
- Is responsible for overseeing risk management

Remuneration Committee - Roles (pilot paper) (June 10)

- Determine remunerations policy
- Ensure that each director is fairly but responsibly rewarded.
- Is responsible for advising on executive director remuneration policy
- Be complient with relevant laws

Mandatory disclosures (Dec 08)(Dec 11) (June 14)

These are components of the annual report mandated by law, regulation or accounting
standard.
Examples include statement of comprehensive income, SOFP, CF statement, statement of
changes in equity

Voluntary disclosures (Dec 08)(Dec 11) (June 14)

These are components of the annual report not mandated in law or regulation but
disclosed nevertheless.
Examples include risk information, operating review, social and environmental
information, and the chief executive’s review.

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Annual General Meeting - Purpose (June 11)

1) Present the year’s results

2) Discuss the outlook for the coming year
3) Present the audited accounts and
4) To have the final dividend and directors’ emoluments approved by shareholders.

Extra-ordinary General Meeting (June 11)

Extraordinary meetings are called when issues need to be discussed and approved that
cannot wait until the next AGM.

Management may want:

- a shareholder mandate for a particular strategic move, such as for a merger or

acquisition.
- other major issues that might threaten shareholder value may also lead to an EGM such
as a ‘whistleblower’ disclosing information that might undermine shareholders’ confidence
in the board of directors

Directors rights and duties

Rights
Directors do not have unlimited power. They are limited by:

Articles of association
These prescribe how directors operate including the need to be re-elected every 3 years

Shareholder resolution
This can stop the directors acting for them

Provisions of law
Eg health and safety or the duty of care.

Board decisions
Boards make decisions in the interests of shareholders not directors

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Proxy voting (Dec 11)
A proxy is a substitute or ‘other person’ that can be nominated to attend a company
meeting to exercise the votes of shareholders unable or unwilling to attend in person.
The proxy can be the company chairman.

Advantages
- lower agency cost if fund managers do not need to attend each AGM in person.

Fiduciary Duties (Dec 07) (Jun 13) (Dec 14)

= is a duty of trust and care.
Fiduciary duty of directors is to act in the economic interest of shareholder

Directors service contract

This should Include:
1) key dates
2) duties
3) remuneration details
4) termination provisions
5) constraints
6) other ‘ordinary’ employment terms

Objectives of CPD (Jun 12) (Dec 14)

1) Maintain sufficient skills and ability
2) To communicate challenges and changes within the business environment
3) Improve board effectiveness
4) Support personal development of directors

Retirement by rotation (June 09)

is an arrangement in the director's contract that specifies his her contract to be limited
(typically 3 yrs) after which he or she must retire from the board or offer himself for re-
election.

The director must be actively re-elected back

ADV. : reduce cost, encourage director's performance

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Director can leave the service of a board (June 09)(dec 13)

1) Resignation with or without notice

2) Not offering himself for re-election
3) Death in service
4) Failure of the cy (when a cy fails , all directors' contracts are cancelled)
5) Being removed - by being dismissed for disciplinary offence
6) Being disqualified from being a cy director by a court

The reasons can be:

1) Allowing the company to trade while insolvent

2) Not keeping proper accounting records
3) Failing to prepare and file accounts 3+ defaults in filing of documents during the
preceding five years
4) Failing to send tax returns and pay tax

Conflict of interest(Jun 12)(Dec 10) (Dec 14)

1) Directors contracting with their own company (However, the articles may allow if
disclosed)
2) Substantial property transactions: These need approval
3) Loans to directors: generally prohibited

Insider dealing/trading (jun 11)

Here a director uses information (not known publicly) which if publicly available would
affect the share price
Trading in own shares with this knowledge is fraud

The purpose of directors' remuneration is:(Dec 11)(dec 13)

1) to attract and retain individuals

2) motivate them to achieve performance goals

Components of a rewards package (pilot paper) (JUN 09)(June 10)(Jun 13)

1) Basic salary , which is paid regardless of performance;
2) Short and long-term bonuses
3) Share schemes
4) Pension and termination benefits
5) Pension contributions
6) Other benefits in kind such as cars, health insurance, use of company property.

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Stakeholders (Dec 07)
= organisation or person that can affect or be affected by the policies or activities of an
entity.

STAKEHOLDER ‘CLAIMS’ (June 08) (June 10)(dec 12)(dec 14)

= what stakeholders want
A stakeholder makes demands of an organisation.

Some shareholders want to influence what the organisation does (those stakeholders who
want to affect) and the others are concerned with the way they are affected by the
organisation.

Direct stakeholder claims

Direct stakeholder claims are made by those with their own ‘voice’.
These claims are usually unambiguous, and are made directly between the stakeholder
and the organisation.

Examples: trade unions, shareholders, employees, customers, suppliers

Indirect stakeholder claims

Indirect claims are made by those stakeholders unable to make the claim directly
because they are, for some reason, inarticulate or ‘voiceless’.

1) Internal and external stakeholders

Internal stakeholders
Will typically include employees and management

External stakeholders
Will include customers, competitors, suppliers, and so on.

2) Narrow and wide stakeholders (June 09)

Narrow stakeholders
Most affected by the organisation’s policies and will usually include shareholders,
management, employees, suppliers, and customers who are dependent upon the
organisation’s output.

Wider stakeholders
Less affected and may typically include government, less-dependent customers and the
wider (non local) community

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3) Primary and secondary stakeholders

Primary stakeholder
Without whom the corporation cannot survive
Do influence the organisation

Secondary stakeholders
Those that the organisation does not directly depend upon for its immediate survival

4) Active and passive stakeholders

Active stakeholders
Those who seek to participate in the organisation’s activities.

Passive stakeholders
Are those who do not normally seek to participate in an organisation’s policy making.

5) Voluntary and involuntary stakeholders (june 10)

Voluntary stakeholders
- are those that engage with an organisation of their own choice ad free will.
- they have option to leave (employees)

Involuntary stakeholders
- have their stakeholding imposed and are unable to detach or withdraw.
- have no option to leave (neighbour, competitors)

The instrumental view of stakeholders

That organisations take stakeholder opinions into account only insofar as they are
consistent with profit maximisation

So, a business acknowledges stakeholders only because to do so is the best way of

achieving other business objectives.

The normative view of stakeholders

The normative view argues that organisations should accommodate stakeholder
concerns because by doing so the organisation observes its moral duty to each
stakeholder.

The normative view sees stakeholders as ends in themselves and not just instrumental to
the achievement of other ends.

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The Mendelow Framework

Corporate Social Responsibility (CSR) is a concept whereby organisations consider

the interests of society by taking responsibility for the impact of their activities on wider
stakeholders.(Dec 11)(dec 13)

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Objectives (purpose) of IC (Dec 08)(Jun 12)
1) To ensure the efficient conduct of business

2) To safeguard the assets of the business.

3) To prevent and detect fraud

4) To ensure the completeness and accuracy of accounting records.

5) To ensure the timely preparation of financial information

How IC can be strategic in nature? (Jun 13)

Internal controls can be at the strategic or operational level.

At the strategic level, controls are aimed at ensuring that the organisation ‘does the right
things’;

at the operational level, controls are aimed at ensuring that the organisation ‘does things
right’.

Those controls that operate at the strategic level are capable of influencing activities over
a longer period.

IC importance
1) Underpins investor confidence

2) Risks would not be known about and managed without adequate internal control

3) Helps to manage quality

4) Provides management with information on internal operations and compliance

5) Helps improve under-performing internal operations

6) Provides information for internal and external reporting

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Effective system of IC (pilot paper) (Jun 13)
These are:

1) Principles of internal control embedded within the organisation’s structures.

2) Capable of responding quickly to risks.

3) Include procedures for reporting failures to management

Typical causes of internal control failure are: (June 08)

(Dec 11)(jun09)(dec 12)(dec 13) (Dec 14)
1) Poor judgement in decision-making

2) Human error

3) Control processes being deliberately circumvented

4) Management overriding controls

5) The occurrence of unforeseeable circumstances

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The United States Securities and Exchange Commission (SEC) guidelines are to
disclose in the annual report as follows:

The mandatory external reporting of internal controls

and risks (june 10) (june 14)
1) The disclosure allows for accountability
2) Increase scrutiny from shareholders. (more transparent)
3) Enhance shareholder confidence and satisfaction.
4) Encourage good practice inside the company.

Content of external report on internal controls(dec 10)

(Jun 09)
1) a statement of acknowledgement by the board that it is responsible for the company’s
system of internal control and for reviewing its effectiveness.
2) should summarise the processes the board has applied in reviewing the effectiveness
of the system of internal control.
3) should provide high level information that does not give a misleading impression.
4) should contain information about any weaknesses in internal control that have resulted
in error or material losses.

Internal audit testing (Jun 10)

This is the internal assessment of internal controls using an internal auditor or internal
audit function applying audit techniques

What is Internal audit?

1) Internal audit is a management control, where all other controls are reviewed
2) Sometimes it is a statutory requirement
3) Codes of corporate governance strongly suggest it
4) The department is normally under the control of a chief internal auditor who reports to
the audit committee.

Importance of Internal Audit (Jun 13) is to ensure compliance with regulations and laws

When is internal audit needed? (Dec 14)

1) Large, diverse and complex organisation
2) Large number of employees
3) Cost benefit analysis required
4) Changes in organisational structure
5) Changes in key risks
6) Problems with existing internal control
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Factors affecting the need for internal audit and control (Dec 08)
1) Nature of operations
2) Size of the cy
3) Cost benefit consideration
4) Internal or external changes affecting activities
5) The need to comply with laws and regulations

Internal audit underpins the effectiveness of internal controls by performing several

key tasks:
1) Reviews and reports on controls
2) Follow up Visits
3) Examine Information
4) Compliance to standards checks (Internal variance analysis)
5) Compliance with regulations

What is the Most important areas for attention regarding IC?(dec 13)

1) Monitoring the adequacy of internal controls involves analysing the controls already in
place to establish whether they are capable of mitigating risks

2) To check for compliance with relevant regulation and codes

3) Playing a more supervisory role if necessary, for example reviewing major expenses
and transactions for reasonableness

4) Checking for fraud

Audit committee and external Audit

Key roles

So the role is to OVERSEE the external audit relationship.

This will help you understand their key role in this respect:

W ork plan of auditors is reviewed

I independence is maintained
P rep are for the audit
E engagement terms approved
R ecommend and review audits and their work
S election process involvement

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Audit committee and Internal Audit
Key roles

W ork plan reviewed

E ffectiveness assessed

A ccountable for the Internal Controls

R ecommendations are actioned
E fficiency of IA ensured

H ead of IA appointed
I ndependence preserved
M onitor IA

How an Audit committee might assist in addressing IC deficiency? (June 11)

1) Monitoring the adequacy of internal controls
2) Check for compliance with relevant regulation
3) Checking for fraud
4) Reviewing major expenses and transactions for reasonableness

Why is Audit committee responsible for overseeing the IA? (Jun 13)

1) to ensure that internal audit’s matches the compliance needs of the company.
2) to ensure that the work of the internal audit function supports the achievement of the
strategic objectives of the company.
3) oversight by the audit committee provides the necessary authority for the internal audit
function to operate effectively.
4) by reporting to the audit committee, internal auditors are independent from those being
audited.

Risk management process

1) Identify Risk - Make list of potential risks continually
2) Analyse Risk - Prioritise according to threat/likelihood
3) Plan for Risk - Avoid or make contingency plans (TARA)
4) Monitor Risk - Assess risks continually

Related risks (Jun 13)(June 11)

These are risks that vary because of the presence of another risk.
Risk correlation is a particular example of related risk.

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Positively Correlated
Risks are positively correlated if one will fall with the reduction of the other and increase
with the rise of the other.

Negatively correlated
They would be negatively correlated if one rose as the other fell.

Board Evaluation of risk

Depends on:
1) Risk appetite of company
2) Maximum risk a business can take (capacity)
3) Risk that can’t be managed (residual risk)

Risk Exposure Assessment (pilot paper) (Jun 13)(June 11)

1) Identify risks facing the company

2) Decide on acceptable risk
3) Assess the likelihood of the risk occurring
4) Look at how impact of these risks can be minimised
5) Understand the costs involved in the internal controls set up to manage these risks

Subjective and Objective risk Assessment (Dec 11)

A risk can be objectively assessed if we can measure the probability of a given outcome
or predict the impact.
For example, based on past data, the number of working days likely to be lost in a given
year through absenteeism of employees.

I can predict with much less certainty, the probability that the stockmarket will rise or fall
on a given day. In such a situation, I must use more subjective judgement.

Risk Attitudes / Appetite (Jun 12) (June 14)

The overall risk strategy determines the overall approach to risk.

Risk Appetite
This determines how risks will be managed.
Some will be risk averse and some will be risk seekers, younger companies often need to
be risk seekers and more established companies risk averse

Risk Capacity
Risk capacity indicates how much risk the organisation can accept.

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The overall strategy of an organisation will therefore be affected by risk strategy, risk
appetite and risk capacity.

TARA (Dec 07)(June 11)(dec 13) - There are four strategies for managing risk.

Transfer - passing the risk on to another party (an insurer or a supplier or a customer)
Avoid - asking whether the organisation needs to engage in the activity where the risk is.
Reduce - diversifying the risk or re-engineering a process to bring about the reduction.
Retain - believing there to be no other feasible option.

Embedded risk (Dec 07) (dec 10)(jun09) = embedding means introducing a risk
awareness into the culture of an organisation

How?
1) Introduce risk controls into the process of work
2) Risk management can be built into the corporate mission and culture and may be used
as part of the reward system.

Risk management committee Role (Dec 08)

1) To agree the risk management
2) Review risk reports from affected department
3) Provide board guidance on emerging risks
4) Work with the audit committee on designing and monitoring internal controls
5) Monitor overall exposure and specific risks.
6) Assess the effectiveness of risk management systems

Roles of a risk manager (June 09)

1) Providing overall leadership, vision and direction
2) involve in establishment of risk management (RM) policies
3) Seeking opportunities for improvement of systems.
4) Developing and promoting RM competences

Audit risk - Process (June 14)

1) Identify risk - Mng must be aware of potential risks. They change as the business
changes

2) Assess risks - The probability and the impact of the risk needs assessing

3) Review controls over risk - the controls used are reviewed

4) Report on inadequate controls - a report is produced and submitted to the Board

Management will want to know about the key risks

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Strategic risks - (Dec 08) (dec 10)(dec 12) these arise from the overall strategic
positioning of the cy in its environment
Are managed at board level

Operational risks (Dec 08) (dec 10)(dec 12)- refer to potential losses arising from
normal business operations.
They affect the day-to-day running of operations.
Are managed at risk management level.

Reputation risks (Dec 07)

= deterioration of organisation from the point of view of stakeholders

Market risks (Dec 08) (Dec 11)

= are those arising from any of the market that the cy operates in.

Entrepreneurial risks (JUN 09)

=the risk associated with any new business.

Financial risks (JUN 13) (June 14)

= are those arising from a range of financial measures.
The most common financial risks are those arising from financial structure (gearing),
interest rate risk, liquidity

Business risks (June 14)

The risk that the business won't meet its objectives.
If the company operates in a rapidly changing industry, it probably faces significant
business risk.

Environmental risks (dec 10)

= arise from changes to the environment over which an organisation has no direct control
(global warming) or occurance for which an organisation might be responsible (oil
spillages)

Liquidity risks (dec 10)

refers to the difficulties that can arise from an inability of the company to meet its short-
term financing needs
The essential elements of managing liquidity risk are, therefore, the controls over
receivables, payables, cash and inventories.

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Ethics

Deontological ethics (pilot paper)(Jun 13)

- An action is considered morally good because of some characteristic of the action itself,
not because the product of the action (consequence) is good.
- This is where the ‘means’ are judged more important than the ‘ends’.
- Morality is seen as absolute and not situational.
- An action is right if it would, by its general adoption, be of net benefit to society.

Teleological ethics ("Consequentialist") (pilot paper)(Jun 13)

- As long as the consequences of the action taken are more favourable than
unfavourable, then the action can be considered as morally right.
- This is where the ‘ends’ are judged more important than the ‘means’.
- In the teleological perspective, ethics is situational and not absolute.

1) Egoism - what is best for me?

2) Utilitarianism - what is best for the majority?

Absolutism (June 08)(dec 10)

Right and wrong are determined and do not change regardless of the person, culture or
environment.
Believes that there are ‘eternal’ rules that guide all decision making in all situations.
A Dogmatic approach means accepting without discussion or debate and is an example
of absolutism.

Relativism (June 08)(dec 10)

A relativist will adopt a pragmatic approach and decide, in the particular situation, what is
the best outcome.
This involves a decision on what outcome is the most favourable and that is a matter of
personal judgment.

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Kohlberg model (Dec 07)(JUN 09)(jun 11) (June 14)
1) Pre-Conventional level
View morality in terms of rewards, punishment, whether or not the act will be penalised or
found out.

Stage/Plane 1 : Punishment-obedience orientation

- It often is seen in terms of reward and punishment.
- "Will I be punished, if I am caught?" "Will I be rewarded, if I obey?"

Stage/Plane 2 : Instrumental relativist orientation

This stage recognises different sides to any issue.
Because everything is relative, each person is free to pursue his individual interests.
e.g. "you scratch my back and I will scratch yours"

2) Conventional level
View morality in terms of compliance with laws and regulations.

Stage/Plane 3 : Good boy-nice girl orientation

"Good" behaviour is that which pleases, impresses or helps others and is approved by
them (i.e. "What will people think of me?").

Stage/Plane 4 : Law and order orientation

"Right" behaviour is about doing one's duty, showing respect for authority and maintaining
the given social order, regardless of peer pressure.

3) Post-Conventional level
View morality in terms of the effect of the actions on oneself and others.

Stage/Plane 5 : Social contract orientation

"Right" is defined in terms of protecting individual rights according to standards which
have been agreed on "in the public interest".

Stage/Plane 6 : Universal ethical principle orientation

Right" is defined by conscience according to self-chosen ethical principles appealing to
logical comprehensiveness, universality and consistency.

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AAA - Seven-step process for decision making, which
takes ethical issues into account(Jun 12)(jun 09)
1) Establish the facts of the case - what is under consideration.

2) Identify the ethical issues in the case by asking what ethical issues are at stake.

3) Identify the norms by placing the decision in its social, ethical, and professional
behaviour context.

4) Identify alternative courses of action by stating each one, without consideration of the
norms.

5) What is the best course of action that is consistent with the norms.

6) Consider consequences of the outcomes - make the implications of each outcome.

7) The decision is taken - The AAA model invites the decision maker to explicitly outline
their norms, principles, and values.

Tucker's model (dec 08)(dec12)

Is the decision:

1) profitable?
2) legal?
3) fair?
4) right?
5) sustainable or environmentally sound?

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SEVEN POSITIONS ALONG THE CONTINUUM:
GRAY, OWEN AND ADAMS (Dec 11)
1) Pristine Capitalists (Dec 07)(June 11)
The value underpinning this position is shareholder wealth maximisation

2) Expedients
Also believe in maximising shareholder wealth, but recognise that some social
responsibility may be necessary

3) Proponents of social contract (Dec 07)

Businesses need to be aware of the norms in society so that they can adapt to them.

4) Social ecologists
Recognise that business has a social and environmental footprint and therefore bears
some responsibility in minimising the footprint it creates.

5) Socialists
Those that see the actions of business as manipulating, and even oppressing other
classes of people.

6) Radical feminists
It would be better if society and business were based on equality, compassion, fairness
(feminine characteristics) rather than power, aggression (masculine characteristics).

7) Deep ecologists
The most extreme position, strongly believing that humans have no more intrinsic right to
exist than any other species

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Fundamental principles (responsibilities) as a
professional (pilot paper) (Jun 10)
1) Integrity - Professionals should be straightforward and honest in all relationships.

2) Objectivity - Professionals should not allow bias, conflicts of interest to cloud their
judgements or professional decisions.

3) Professional competence and due care

Professionals have a duty to ensure that their skills and competences are continually
being updated and developed to enable them to serve clients and the public interest.

4) Confidentiality
Professionals should respect the confidentiality of any information gained as a result of
professional activity or entrusted to them by a client.

5) Professional behaviour
Professionals should comply fully with all relevant laws and regulations whilst at the same
time avoiding anything that might discredit the profession or bring it into disrepute.

Ethical threats (ASS IF memory technique) (June 09)

(June 11) (June 14)
A dvocacy - occure when a professional accountant promotes a position or opinion to the
point that objectivity may be compromised.

S elf-interest - financial or other interest of a professional accountant or of an family

member.

S elf-review - occure when a previous judgement needs to be re-evaluate by the

professional accountant responsible for that judgement

I ntimidation - occure when a professional accountant may be dettered from acting

objectively by threat

F amiliarity - occure because of a close relationship. Professional accountant become

too sympathetic to the interest of other.

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Safeguards against these threats:(Jun 12) (June 14)

1) Be professional
CPD; Corporate governance regulations; professional monitoring and discipline

2) Create the right environment

Internal controls, reviews, ethics codes, discipline and reward systems

3) Individual ethics - comply with profession standards; mentoring, contact ACCA if in

doubt, whistle-blowing

Purposes of codes of ethics (pilot paper) (Dec 08) (Jun 13)(Dec 11)

1) To convey the ethical values of the company to employees, customers, communities

and shareholders.

2) To control unethical practice by limiting and prescribing behaviour in given situations

3) To stimulate improved ethical behaviour by insisting on full compliance with the code.

Contents of a corporate code of ethics (Dec 08)

Remember this by the useful acronym ETHICS..

E mployees policies eg equal opportunities policies, training etc

T ransparent & Truthful Treatment of shareholders
H ow customers are treated (complaint procedures etc)
I nclude everyone affected (e.g. Community and wider society)
C ompany Values
S ourcing of products/ materials done ethically

Content of Best practice CG report (dec 10)

1) Disclosure of the details of all directors including brief biographies and the career
information
2) Information on how the board operates, such as frequency of meetings
3) A clear explanation of any significant changes in personnel at the top of the company
4) Includes reports from the non-executive-led remuneration, audit, risk and nominations
committees.
5) The report on the effectiveness of internal controls is provided
6) A section on accounting and audit issues with specific content on who is responsible
for the accounts and any issues that arose in their preparation.

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Social Environment

Environmental report (Jun 13)

- it is voluntary
- the purpose of an environmental report is to report on some of the details of the
company’s environmental impact or ‘footprint’.
- the contents of an environmental report typically include information on the company’s
direct environmental impact and also its indirect impacts
- It involves recording, measuring, analysing and reporting on the environmental impact,
usually in respect of two aspects: consumption (of energy and other resources) and
production (emissions, any pollutants).

Environmental Footprint (pilot paper) (June 10)

1) Measures a company’s resource consumption of inputs such as energy, water, land

use.
2) Measures any harm to the environment brought about by pollution emissions.
3) Measures resource consumption and pollution emissions in either qualitative,
quantitative or replacement terms.

Social footprint (June 10) (dec12)

deals with impacts on people and communities

Explain ‘sustainability’ (june 10)

= is the ability of the business to continue to exist and conduct operations with no effects
on the environment that cannot be offset or made good in some other way.
= activity that, ‘meets the needs of the present without compromising the ability of future
generations to meet their own needs.
’Importantly, it refers to both the inputs and outputs of any organisational process.

Inputs (resources) must only be consumed at a rate at which they can be reproduced,
offset

Outputs (such as waste and products) must not pollute the environment at a rate greater
than can be cleared or offset.

Recycling is one way to reduce the net impact of product impact on the environment.

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Sustainable development (June 08)(dec 13)
The development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.

Full cost accounting

This means calculating the total cost of company activities, including environmental,
economic and social costs

Social Audit
A process that enables an organisation to assess and demonstrate its social, economic,
and environmental benefits and limitations.

Also measures the extent to which an organisation achieves the shared values and
objectives set out in its mission statement.

Environmental audit (jun 10) (June 14)

This allows an organisation to produce an environmental report dealing with the concerns
above

This is generally voluntary

It means organisations must start collecting appropriate data:

1) agreed metrics (what should be measured and how)

2) performance measured against those metrics
3) reporting on the levels of variance.

The problem is though what to measure and how to measure it.

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Bribery and corruption

Bribery = "the offering, giving, receiving or soliciting of any item of value to influence the
actions of an official or other person in charge of a public or legal duty."

Bribing another person

You are guilty of this if you:

Offer
Promise or
Give an advantage

... to someone who you want to act improperly.

Being bribed
The recipient is also guilty.

If  a person in your business bribes another personal to give your business an advantage
- the business is guilty then too.

Corruption (Dec 14)

= "the abuse of entrusted power for private gain".

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