Professional Accountant

ACCA Paper P1

2

Format of the Paper

Section A: 50 marks

• A number of questions relating to a single

scenario

Section B: 50 marks

• Two out of three 25 mark questions

3

Core Areas of Syllabus

• Governance and responsibility 35%

• Internal control and review 20%

• Identifying, assessing & controlling risk 25%

• Professional values and ethics 20%

4

Syllabus Summary

Governance & responsibility

Professional values & ethics

Risk managementInternal control &

review

5

1Chapter Theory of governance

6

Session Content

7

Company ownership and

control

8

“ the system by which companies are

directed and controlled “

Definition of corporate

governance

“ the system by which companies are

directed and controlled in the interests

of shareholders and other stakeholders”

9

Key concepts

• Fairness

• Openness / transparency

• Independence

• Probity / honesty

• Responsibility

• Accountability

• Reputation

• Judgement

• Integrity

10

Operational areas affected by

corporate governance

11

Agency theory

12

Agency theory and corporate

governance

13

Key concepts of agency theory

• Agent employed by principal

• Agency = relationship

• Agency costs

• Accountability

• Fiduciary responsibility

• Stakeholders

• Objectives

14

Cost of agency relationships

Examples include:

• Incentive schemes for directors

• Providing and reviewing data

• Meetings

• Accepting higher risks

• Monitoring behaviour

• Residual loss

15

Agency problem resolution

measures

• Meeting – Principal/key investors

• Voting at AGM

• Resolutions at AGM

• Accepting takeovers

• Divestment of shares

16

Agency accountability

• Act in shareholders‟ interests

• Provide good information

• Operate within legal structure

17

Transaction cost theory –

external transactions

18

Transaction costs can be

further impacted

19

Stakeholder theory

20

2ChapterDevelopment of corporate governance

21

Session Content

22

Development of corporate

governance codes

23

UK Combined Code

• Directors

• Director‟s remuneration

• Relations with shareholders

• Accountability and audit

• Institutional investors

24

UK Combined Code cont.

25

Reasons for developing a

governance code

• Reduce fraud / corruption

• Poor governance = poor performance

• Investors will pay a premium

• Decision factor for institutional investors

• Reduces risk

26

Practical problems with a

governance code

• Reactionary process

• Impact varies

• Restricts individual decision-making

power

• Bureaucracy

• Harms competitiveness

• Cannot stop fraud

27

3ChapterThe board of directors

28

Session Content

Essential text: p52

29

Development of governance

regarding board of directors

• Cadbury Report (1992)

• Higgs Report (2003)

• Tyson Report (2003)

30

Board structures

31

Advantages of two-tier board

• Clear separation

• Implicit shareholder involvement

• Wider stakeholder involvement

• Independence of thought, discussion &

decision

• Direct power over management

32

Problems with two-tier board

• Dilution of power

• Isolation of supervisory board

• Agency problems between boards

• Bureaucracy

• Reliant upon relationship between

chairman & CEO

33

Roles of NEDS

34

Threats to independence

35

NEDs on the board

Advantages:

• Monitoring

• Expertise

• Perception

• Communication

• Discipline

Disadvantages:

• Unity

• Quality

• Liability

36

Chairman & CEO

37

Splitting role of Chairman &

CEO

Reasons for:

• Representation

• Accountability

• Temptation

Reasons against:

• Unity

• Ability

• Human nature

38

Induction and CPD

39

Legal and regulatory framework

40

Conflict of interest

41

Performance evaluation

42

Board committees

43

4Chapter

Directors‟ remuneration

44

Session Content

45

Components of directors‟

remuneration package

46

Directors‟ remuneration – other

issues

47

5ChapterRelations with

shareholders and

disclosure

48

Session Content

49

Institutional investors

• Types

• Importance

• Potential problems

50

Potential problems

51

Institutional investors

• Types

• Importance

• Potential problems

• Solution: shareholder activism

• Institutional shareholder intervention

52

Institutional shareholder

intervention conditions

• Strategy

• Operational performance

• Acquisitions and disposals

• Remuneration policy

• Internal controls

• Succession planning

• Social responsibility

• Failure to comply with relevant codes

53

Disclosure – general principles

54

Disclosure: best practice

55

Mandatory vs voluntary

disclosure

56

Voluntary disclosure

57

6ChapterCorporate governance

approaches

58

Session Content

59

Approaches to corporate

governance

60

In favour of rules-based

approach

Organisation‟s perspective:

• Clarity of requirements

• Standardisation for all companies

• Binding requirements

Wider stakeholder perspective:

• Standardisation across all companies

• Sanction

• Greater confidence in compliance

61

Against a rules-based approach

Organisation‟s perspective:

• Exploitation of loopholes

• Underlying belief

• Flexibility is lost

• Checklist approach

Wider stakeholder perspective:

• „Regulation overload‟

• Legal costs

• Limits

• „Box-ticking‟

62

SOX / Sarbox

63

Family structure(vs joint stock)

Benefits:

• Fewer agency costs

• Ethics

• Fewer short-term decisions

Problems:

• Gene pool

• Feuds

• Separation

64

Insider-dominated structure(vs

outsider-dominated)Benefits:

• Fewer agency problems & costs

• Lower cost of capital

• Greater access to capital

• Less short-termism

• Greater input to decisions

Problems:

• Lack of minority shareholder protection

• Opaque operations

• Misuse of power

• Market does not decide or govern

65

International convergence

66

7ChapterCorporate social

responsibility and

corporate governance

67

Session Content

68

Corporate social responsibility

(CSR)

69

Nature of CSR

Carroll defined CSR as including 4 points:

• Economic responsibility

• Legal responsibility

• Ethical responsibility

• Philanthropic responsibility

70

Social responsiveness

• Reaction

• Defence

• Accommodation

• Proaction

71

Stakeholder classifications

• Internal & external

• Narrow & wide

• Primary & secondary

• Active & passive

• Voluntary & involuntary

• Legitimate & illegitimate

72

Stakeholder mapping:

Mendelow

Minimal effort Keep informed

Keep satisfied Key players

Level of interest

Power

High

High

Low

Low

73

Organisational motivations

regarding stakeholders

Instrumental view:

• To not do so would have an impact on

primary objectives of organisation

• Devoid of any moral obligation

Normative view:

• Moral duty towards others

• Act in general sense of what is right

74

8Chapter

Internal control systems

75

Session Content

76

Objectives of an internal control

system

To ensure as far as practicable:

- Orderly and efficient conduct, including

adherence to internal policies

- Safeguarding assets

- Prevention / detection of fraud & error

- Accuracy and completeness of records

- Timely preparation of financial information

77

Sound control systems

78

Roles

79

Elements of an effective internal

control system

• Control environment

• Risk assessment

• Control activities

• Information and communication

• Monitoring

80

Management levels

81

9Chapter

Audit and compliance

82

Session Content

83

Internal audit

84

Factors affecting need for

internal audit

• Scale, diversity and complexity of

company‟s activities

• Number of employees

• Cost / benefit

• Changes in organisational structures

• Changes in key risks

• Problems with existing internal control

systems

• Recent „events‟

85

Risks if auditors are not

independent

86

Threats to independence

87

Audit committee roles

88

Audit committee: internal

control

• Review the company‟s internal financial

controls

• Review all the company‟s internal control

and risk management systems

• Give approval to internal control and risk

management statements in annual report

• Receive reports from management about

effectiveness of control systems

• Receive reports on tests carried out on

controls by internal auditors

89

Audit committee: internal audit

90

Audit committee duties: external

audit

• Recommendation on appointment, re-

appointment and removal of auditors

• Oversee selection process

• Approve terms of engagement and

remuneration

• Ensure independence and objectivity

• Review scope of audit

• Ensure appropriate plans at start of audit

• Carry out post-completion audit review

91

10Chapter

Risk and the risk

management process

92

Session content

93

Why incur risk ?

94

Risk management process

95

Enterprise risk management

96

Strategic and operational risk

97

Risks facing a business (ACCA‟s)

• Risks

Market Credit LiquidityHealth &

Safety /

Environmental

Technological

Legal DerivativesReputationBusiness

probity

98

Sector-specific risks

99

Impact on stakeholders

100

Analysing risks

101

Risk mapping

104

Role of the board

105

Risk attitudes

106

Risk committee

107

The risk manager

108

Risk awareness

109

Embedding risk in systems

110

Embedding risk in culture

111

Risk management strategies -

TARA

112

Risk avoidance and retention

113

Diversifying / spreading risk

114

Types of diversification

115

Risk auditing

116

Stages of a risk audit

117

External reporting

118

12Chapter

Ethical theories

119

Session content

120

Approaches to ethics

• Absolutism vs relativism

• Dogmatic vs pragmatic

121

Approaches to ethics

122

Kohlberg‟s CMD

3. Post-conventional

3.2 Universal ethical principles

3.1 Social contract and individual rights

2. Conventional

2.2 Social accord and system maintenance

2.1 Interpersonal accord and conformity

1. Pre-conventional

1.2 Instrumental purpose and exchange

1.1 Obedience and punishment

123

Gray, Owen and Adam‟s: Seven

positions on social responsibility

124

Variables determining cultural

context

125

Ethical stances

126

13Chapter

Professional and

corporate ethics

127

Session content

128

Profession vs professionalism

129

Profession

130

Accountants‟ role and influence

131

Limits on influence of

accounting

• Extent of organisational reporting

• Conflicts of interest in selling services

• Long-term relationship with clients

• Overall size of accountancy firms

• Focus on growth and profit

132

Influence

133

Corporate ethics

134

Professional practice and codes

of ethics

135

ACCA professional code of

ethics

• Integrity

• Objectivity

• Professional competence

• Confidentiality

• Professional behaviour

136

Conflicts of interest and ethical

threats

137

Approaches to conflict

resolution

138

Ethical conflict resolution

1. Gather facts

2. Establish ethical issues

3. Refer to fundamental principles

4. Flow internal procedures

5. Investigate alternative courses of action

6. Consult within firm

7. Obtain advice from institute

8. Withdraw from role

139

14Chapter

Ethical decision making

140

Session content

141

Applying ethical decision

making

142

American Accounting

Association Model7 questions in the model:

1. What are the facts of the case ?

2. What are the ethical issues of the case ?

3. What are the norms, principles and values related to

the case?

4. What are the alternative courses of action ?

5. What is the best course of action that is consistent

with the norms, principles and values identified in

step 3 ?

6. What are the consequences of each possible course

of action ?

7. What is the decision ?

143

Tuckers 5 question model

The decision should be:

• Profitable

• Legal

• Fair

• Right

• Sustainable or environmentally sound

144

Ethical decision making

145

Ethical behaviour

146

Factors affecting moral intensity

• Concentration of effort

• Proximity

• Temporal immediacy

• Magnitude of consequence

• Social consensus

• Probability of effect

147

15Chapter

Social and environmental

issues

148

Session content

149

Sustainability

150

Definitions

• Sustainable development is

development that meets the needs of

the present without compromising the

ability of future generations to meet their

own needs

• Sustainability is an attempt to provide

the best outcomes for the human and

natural environments both now and into

the indefinite future

151

Accounting for sustainability

152

Footprints

• Environmental footprint:

– Resource consumption

– Pollution emissions

– Measurement

• Social footprint:

– Social capital

– Human capital

– Constructed capital

153

Management systems

154

Social and environmental audit

155

Elements of a social audit