ACCA

P1 Governance,Risk
and Ethics

19:00 21:00
Sdanvi Shi
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SdanviACCAF
70P3

ACCA


P1 -CG
Scope of corporate governance
Definition of CG
a set of relationship / structures / means shareholders & stakeholders
interest & companys objective

Theory Principles(11) Stakeholder models

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Scope of corporate governance
Integritystraightforward ethical std. Professional relationship
Fairness rights of any groups
Judgement best decision
Independence: free of bias or pressure
(IA,NEDs,Audit committee)
independence of mind: provide opnions without other people's
Best influence
decision independence in appearance: avoid situations where an informed
third party could reasonably conclude that your decision is under other
people's influence.
Scepticism : professional skills based on
a healthy corporate culture to make the scepticism thrive

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Scope of corporate governance

Openess/transparency:open & clear disclosure confidentiality

Probity: honest reporting
Honest
Responsibility: clear roles ( pre-event)
disclosure
Accountability answer for consequencespost-
event
Innovationchange over time

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Scope of corporate governance
Principal vs agent (appoint fiducidary duty)

Agency theory Information asymmetry (self interest threats)

Control & monitor to solve agency problem

Agency cost
reduce information asymmetry:
AGM/EGM(proxy vote)
enhance goal congruence:
performance-related pay
share option

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Scope of corporate governance
Stakeholder models
Mendelows matrix dynamic
power & interest influence
four types
help define different attitudes to different stakeholders
interest

ignore inform
power

satisfy key

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Approaches to CG
approaches to CG


Corporate
ownership Principles vs Rules

Principles based approaches Rules based approaches

UK corporate governance code 2010 US Sarbanes Oxley Act (2002)

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 Approaches to CG
Principles based approaches (UK corporate governance code)
Focus on aim
'Comply or explain basis
Flexibility & cost saving (suitable for small company &multi-national business
judgement & explanation
Lack of consistency hard to lead to best practice too board
Stock market setting stds and judge the seriousness of non-compliance &
revalue company economic efficiency

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Approaches to CG

Rules based approaches (US Sarbanes Oxley Act)

Focus on achievement
Full compliance
Easy can be evidenced & consistency
Legal enforcement
For small company no deviation)
box ticking exercise: no consideration of the reasons why the rules need
to be complied
Punished by state lack of economic efficiency

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Approaches to CG
Corporate ownership
Family / insider firms
reduced agency problem(easier to establish ties between owners and
managers) poor protection of minorities(reluctant to external recruitment)
take long-term strategic view

outsider system:
high agency problem(tend to be more robust goverance to protect
shareholders) hostile takeover
focus on short-term interest

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Approaches to CG
Private & public sector & NGO
agency relationship: principal changes
purposes:
political control:
governance: oversight body/board of governors
ensure compliance with laws
ensure the org. is well-run and meet the performance target
budget negotiation
senior management appointment

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Corporate goverance practice and reporting
Corporate goverance practice and reporting

Reporting practice structure

The role of the board

Example of best practices (UK CG Code)

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 Corporate goverance practice and reporting

CEO VS Chairman
(board business
board boardshareholders
some problems:
benefits of separation:
close relationship?
a single individual does not have unfettered power
participation?
give suitable focus
two different perspectives,Improves decision-making

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Corporate goverance practice and reporting
Independent NEDs
no executive power
4 role:
Strategy-Challenge (number/status/participation) & contribute
(capability)
Scrutinise performance & report
Risk management and control-risk & audit committee
People-remuneration,nomination

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 Corporate goverance practice and reporting
Effectiveness
Balance (diversity )
Time allowed for roles
Size
continuity of required skills
nomination committee
Induction programming(minimise the time take for a
starter to be effective in his job)
company 's values&culture
board operations (reporting line & his place in structure)
director's duties and relationship with people

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 Nomination committee - leaving office
Retiring by rotation(expiry of a predetermined fixed term)
Not offering themselves for re-election when their term of office ends or
Failing to be re-elected(termination payment)

Resignation
Death
Being disqualified
Insolvency of the company

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Corporate goverance practice and reporting
Remuneration
Sufficient to recuit ,retain and motive in long-term
EDs: a balanced remuneration package: salary/performance related
bonus/pension/benefits/share option
NEDs: industry average salary, non-performance related pay, no share option

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Corporate goverance practice and reporting

Corporate goverance practice and reporting

Reporting practice structure

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Corporate goverance practice and reporting
Unitary board(UK,USA) :
equal legal responsibility

Multi tier board(Japan,Germany)

Supervisory board(NEDs)
appoint
Operating board(EDs)

may not always be this form(EDs like CEO in the corporate

board,however NEDs are in the operating board)
quick decision-making, suitable in complex and dynamic environment
device to have excessive power

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Corporate goverance practice and reporting

Corporate goverance practice and reporting

Reporting practice structure

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Corporate goverance practice and reporting
goverance disdosure
Information about directors
Reports from committee
Details of relations with auditors
A statement that the directors have reviews the effectiveness of internal
control
A statement that the company is a going concern
A statement on relations and dialogue with shareholders
Sustainability reporting

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P1 -Risk
 Internal control system
Internal control system

Response to significant risk (manage and

Reasonable assurance that
will achieve objectives
control risk)
Effective + Efficient business operation
Reliability of reporting
Compliance with laws / regulations
Safeguard investment / assets

COSO Cube (3) ERM

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 Risk attitudes and internal environment
Control Environment(top tone)
Corporate culture
Management style
Orgnisation structure
Method of imposing control
Ethical values

Risk appetite: Sound system

risk tolerance boundanry

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 Risk attitudes and internal environment
Risk appetite:
A measure of companys ability and willness to accept different risks (seeker ,
averse , neutral)
Shareholders demand
Organisations size , structure , stage of development
Personal view
National / cultural difference

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 Risk attitudes and internal environment
Sound I/C system
What is risk awareness : nature,impact,possibility
Embedded What is culture : the way we do things
How to embedded :
introducing a taken-for-grantednessof risk awareness into the
culture of an organizationand its internal controlsystems.
Aligning individual goals with those of org.
Job description/Training/Reward system
Establish performance indicators to monitor and feedback
information on risk to management(risk committee/board)
At all levels
Responsive Communication to staffs
Report to weakness

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Risk
Risk assessment part 1

Risk events categorizing risk

Trends and root causes
External / Internal events Scope Function
(strategic ) (operational risk)
Escalcition triggers
Event interdependencies /related risks
Positively correlated
Negatively correlated

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Risk
Scope Function
Strategic vs operational Market
(most oppropriate level of management) Credit
Liquidity/financial risk cash flow
Legal
Health,safety,environmental
scope Reputation risk
duration Business probity risk
impact Derivatives risk
source of risk Technological risk
management responsiblity Outsourcing risk
Business risk (survival)

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Risk assessment
Risk assessment Part 2

Assess Likelihood
Impact

Risk response(TARA)

Risk control (make sure the risk response effectively)

Cost benefit analysis
Problems of implementation: management override,error..

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Communication and monitoring

Information (ACCURATE)
Accurate,complete,cost beneficial
User-targeted,relevant,authoritation
Timely, easy to use , reliable
Unbiased

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Communication and monitoring
Monitoring:
Board setting policies for I/C
Roles: Seeking regular assurance
Ensuring effective risk
management
Providing information and
maintain communications with
those affected by control should consider:
measures the nature and impact of risks
establish control environment to the extent of acceptable risk
support the I/C the categories of acceptable risk
the company's ability to reduce and
control the risks
cost-benefit ananlysis

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Communication and monitoring
Monitoring:
Audit Committee
Independent NEDs (one financial expertise)
Roles: external aduit(appointment & remuneration)
I/A
I/C
F/S Scope of work: risk management processes; VFM audit
Authority:reports are reviewed and action taken
Independence
reporting Review Resource

Internal audit: an important part of the I/C, having the same objectives as I/C

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Communication and monitoring
Risk Committee
Set risk policy & strategy on: Extent of acceptable risk & Categories of acceptable risk
Assess risks & effectiveness of RM
Review reports on key risks
Reviews findings of internal audit
Remain overall risk exposure under limit
The totality of loss that may occurs

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Communication and monitoring
Communication:
External reporting
the board is responsible for reporting on risk and internal control to shareholders
in the annual report and at the AGM

Effective controls for managing risks

Management responsibility for I/C
Weakness

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P1 -ETHICS
ACCA
Ethics
Models of ethical conflict resolution

AAA model
1. Facts Tackers 5 Questions
2. Ethical issues 1. Prifitable?
3. Norms/ principles / values 2. Legal
4. Alternative courses of actions 3. Fair & equitable ?(to whom)
5. Best course consistent with norm / priceples 4. Right? (Subjective judgement )
/ value Ethical theories
6. Consequences of each action 5. Sustainable / environmentally sound?
7. Decision ethical

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Professional ethics
Professions / accountants and public interest
Profession = duty to the public interest collective well-being of the community
Who: rely on their work

Accountants affect the wealth distribution

Corporate codes of ethics Professional codes of ethics IFAC ethical codes

Fundemental principles

Safeguards Threats of professional independence

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Professional
Corporate codes of ethics
is a commitment of the board
Purposes
Establish core value which support mission
Stakeholder identification (how to response)
Control behavior & guide decision-making when ethical situation arise
Part of strategic positioning (ethical reputation)
Communicate values and ethical stds to stakeholders

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Professional
Fundemental principles
Professional competence
Integrity
Professional behavior
Confidentiality
Objectivity

Threats of professional independence

Self interest
Self review
Advocacy
Familiarity
Intimidation

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Professional
Safeguards
CPD
to prevent the occurrence of any ethical threats
to underpin the public trust / confidence
to enhance Independence

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Corporate Social responsibility

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Corporate Social responsibility

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Corporate Social responsibility
Social audit: evaluate

establish a reasonale for engaging in socially responsible activities.

Environmental audit:
Three stages:
Metrics (scope & cost)
Measurement & compare
Report (how & wide)

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Corporate Social responsibility
Integrated reporting <IR>

(process)
Capital / process : Financial (funds )
Manufactured ()
Human
Intellectual () patent software
Natural
Social relationship

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 The meaning of CG and the purpose/benefits of CG: 12.DEC.Q2(a)
11 principles: Transparency:13.JUNE.Q1(d)
Integrity: 13.JUNE.Q1(d)
Indenpence: 12.JUNE.Q2(a)
Accountability:12 DEC.Q2(c)
Mendolow's matrix: 12.JUNE.Q1(d)(i)
Agency theory: 13.DEC.Q2(b)
Institutional investors: 14.JUNE.Q1(c)
Stakeholder theory : 12.DEC.Q4(b)(c)
AGM EGM 11.JUNE.Q1(c)

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 Rule-based & principle-based: 13.DEC.Q2(a)
Insider system: 12.JUNE Q4(a)
Charity vs listed company: 11 June Q3(a)
CEO& Chairman: 11.DEC.Q2(b)
board diversity: 13.DEC.Q3(b)
NEDs:13.JUNE.Q4(c)
Induction programme: 12.JUNE.Q4(b)
Leaving the board: 13.DEC.Q4(a)
Nomination committee: 13.DEC.Q3(a)
Remuneration package:13.JUNE.Q4(b)
Unitary and two-tier boad: 12.JUNE.Q4(c)
Reporting: 14.JUNE.Q2(c)
CPD: 14.DEC.Q4(c)

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 the objectives of internal control: 12.JUNE.Q2(c) 13.JUNE.Q1(c)
a sound internal control:13.DEC.Q1(d)(i)
a failure in internal control:12.DEC.Q3(a)(b)
risk appetites: 14.JUNE.Q2(a)
risk management responsibility:12.DEC.Q1(d)(i)
embedding risk:13.JUNE.Q3(c) 10.DEC.Q4(b)

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 categorizing risk- by scope: 12. DEC.Q1(d)(i)
categorizing risk- by function:
business vs financial risk 14.JUNE.Q2(b)
technological risk: 13.DEC.Q4(b)
financial risk: 13.JUNE.Q3(c)
health and safety risk: 11.DEC.Q1(c)(iii)
market risk: 11.DEC.Q3(b)
environmental risk: 10.DEC.Q2(c)
legal & reputation risk:13.JUNE.Q1(a)
liquidity risk: 10.DEC.Q4(a)(c)
Summary: 11.JUNE.Q2
ALARP: 11.DEC.Q1(c)(iv)

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 Internal audit: 13.JUNE.Q2(a) 13.DEC.Q1(d)(ii)
Risk committee:12.JUNE.Q2(b)(c)
Information: 12.DEC.Q3(c)
External report: 10.DEC.Q1(c)(ii)
Risk audit: 14.JUNE.Q1 (d)(i)(ii)

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 Relativism & absolutism: 10.DEC.Q1(a)
Deontological & teleological:13.JUNE.Q1(d)(ii)
Kohlberg's stages of human moral development: 11.JUNE.Q1(b)
14.JUNE.Q4(a)
Tucker's 5 question: 12.DEC.Q4(a)
AAA model: 12.JUNE.Q1(b)
The nature of professionalism and public interst: 14.JUNE.Q3(c)
13.DEC.Q4(c) 12.DEC.Q1(c)
The codes of ethics:14.JUNE.Q1(b) 11.DEC.Q1(a)
The nature of impacts of ethical threats and safeguards: 14.JUNE.Q3(a)
12.JUNE.Q3(b)
Resolve the ethical dilemmas: 14.JUNE.Q4(b)
Issues associated with conflicts of interest: 10.DEC.Q3(a) 12.JUNE.Q3(a)

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 The nature of professionalism and public interst: 14.JUNE.Q3(c)
13.DEC.Q4(c) 12.DEC.Q1(c)
The codes of ethics:14.JUNE.Q1(b) 11.DEC.Q1(a)
The nature of impacts of ethical threats and safeguards: 14.JUNE.Q3(a)
12.JUNE.Q3(b)
Resolve the ethical dilemmas: 14.JUNE.Q4(b)
Issues associated with conflicts of interest: 10.DEC.Q3(a) 12.JUNE.Q3(a)

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 Gray, Owen & Adams: 13.DEC.Q3(c) 11.DEC.Q4(a)(b) 11.JUNE.Q1(d)(ii)
Sustainablity: 13 DEC.Q1(a)(i) 10. DEC.Q2(a)
Environmental/social footprint/reporting:13.JUNE.Q1(b) 12.DEC.Q1(a)
Environmental audit: 14.JUNE.Q3(b) 11.DEC.Q1(b) 10.DEC.Q2(b)

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P1
Exam Technique
HOW TO PLANNING
1.optional question first: read the first paragraph of the scenario and the
requirement.
2.transfer knowledge for each requirement onto the question paper. Note any
keywords.
3.Read the scenario for your first question: highlight or underline facts or
evidence that will help you answer the requirements (dont highlight too much
though).

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Exam Technique
BE AWARE OF THE VERBS USED IN THE EXAM QUEATION
1. Define :a straightforward recall of knowledge
2. Explain
3. Evaluate (both sides of the argument) may be easier to answer than
Construct the case (one side of the argument only).
4. critically evaluate could indicate that there were more negative than
positive points to discuss.
5. refer to the case

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Exam Technique
Example question:
Explain the benefits of performance related pay in rewarding directors(5
marks)
GOOD ANSWER
Performance related pay (PRP) is often a bonus paid to a director when a target
has been met.
The main benefit of PRP is that it harnesses the directors self interest to meet
the objectives of the company and its shareholders, achieving alignment of
interests.

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Exam Technique
Example question:
It is also an effective motivational tool in ensuring maximum effort and attention
from the director.
It is flexible enough to be designed to meet short or long term objectives of the
company.
Linking pay and performance helps to justify directors high remuneration and is
perceived as fair. This helps answer criticisms of excessive pay for directors.
Finally it avoids rewarding failure and saves the company money when the
company results are poor

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Exam Technique
BAD ANSWER(2 marks)
Directors remuneration should be designed to attract, retain and motivate them.
It includes, basic pay, benefits, pension, performance related pay, shares and
share options.Basic pay should not be too much of the remuneration. A
reasonable portion should be made up of PRP because that will make sure that
the director is paying enough attention to the company and that his interests are
aligned with shareholders.

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Exam Technique
BAD ANSWER(2 marks)
Shares and share options are used to ensure that the director is interested in the
long term and doesnt just leave the company when the short term objectives
have been met.
The benefits of PRP are
Motivates the director
Aligns them with company objectives
Fair for the director
Doesnt reward failure.
The problems with PRP are that it can lead to short-termism and manipulation of
the figures so that the director will get paid it.

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Exam Technique
USE THE CORRECT FORMAT
1. LETTER
2. MEMO/EMAILS
3. REPORT

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Exam Technique

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Exam Technique

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Exam Technique

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LETTER(13/12, 15/9)
MEMO(09/12)
NOTES (12/6,14/6): REPORT
SPEECH10/12: ladies and gentlemen, I....YOU, Thank you for listening.
STATEMENTS(10/6,11/6,11/12):
MAGAZINE ARTICLE(12/12, 15/6): XXX company
PRESS(13/6,14/12): statement WE OUR COMPANY/XXX company
STATEMENT

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Q&A