answering questions p1

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ANSWERING QUESTIONS

When answering questions in ACCA paper P1 Professional Accountant it is important

to realise that very rarely, if ever, will there be one single answer or correct solution.

Markers have to give credit for answers that are relevant, technically sound and

professionally prepared.

The examiner writes in an essay style using very few bullet points, notes, headings or

sub-headings. The examiner does not underline or embolden any text. His answers

flow with logical explanation of the points being made.

Good answers are professionally written, contain relevant and correctly explained

technical content and answer the question as set.

An answer that contains the basic points of theory, regulations and examples can

achieve a pass mark. Additional marks can be earned for deeper argument, greater

relevance and most of all proper application. The highest marks will be for answersthat do this and have effective professional expression.

When expressing yourself try to be clear and understandable, even when dealing with

technical matters or conceptual ideas.

Try to show balance and breadth of understanding and the ability to join up concepts,

issues and ideas.

This paper is called the Professional Accountant and you should think like one. As

professional accountants we bring something very special to the table, we are ethical,

technically accurate, knowledgeable in accounting, finance, law, revenue law and

business and most of all we are analytical. Accountants should be able to analyse

scenarios and data giving reasonable and reasoned explanations and drawing out ideas

and conclusions. We are also objective and utterly honest and can support

management but also challenge when required. Showing these skills and capabilities

will certainly gain marks.

But remember you will never have enough time to achieve perfection!

To explain how the good answers are written we can take a question scenario and a

couple of typical requirements to illustrate how they work.

Sample question:

Mucky Mining plc is a minerals exploration, development and production company

that operates globally and is listed on the London Stock Exchange.

The company is highly successful with a strong balance sheet, consistently positive

cash flow and profitability and production sustainability from its ever increasing

minerals reserves.

Mucky Mining plc recently won the Rice Porterhouse Creepers LLP and MonetaryTimes transparency award for its financial statements for the most recent year.

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Chairman Connie Flikt described this award as a great honour and a mark of our

objectivity and integrity in financial reporting evidenced by our informative and

relevant reporting.

On the same day as winning the transparency award a newspaper report in The Daily

Moon newspaper ran with the headline Kids dig gold for pennies in which it set outuse and abuse of children in appalling working conditions in a mine owned by Mucky

Mining plc.

In an interview with an independent TV news company chairman Connie Flikt is

asked to comment on the Daily Moon report and on an article in the magazine Green

is Good that criticises the companys mining operations that are scarring the

landscape and its careless disregard for reinstatement and decommissioning. Connie

makes a brief statement Mucky Mining is committed to high standards in its

employment policies and supports environmental improvement and all stakeholders

can rest assured that our business is sustainable and successful and a major contributor

to economic, social and environmental improvement that delivers long term growthand return for our shareholders.

Required

(a)Explain and assess the concept of sustainability in the conduct of business andethical behaviour referring to the scenario as necessary (9 marks)

(b)Explain what is meant by a stakeholder contrasting the responsibilities oflisted companies towards stakeholders and shareholders (8 marks)

(c)Critically evaluate the role of accountants as a profession in society byreference to relevant issues in the scenario (8 marks)

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Where to begin:

Always start by looking at the requirements so that you know what the main topics of

the question are. In this case the topics are

sustainability in businessethics and sustainabilitystakeholdersshareholders v stakeholdersrole of accountancy profession in society

You should recognise where they are in the syllabus and remember the basics you

have learned from your studies.

What next?

Then look carefully at the wording of the questions to ascertain which questions

require reference to the scenario, which dont and which questions may require a link

to be made.

Clearly part (a) gives you a choice regarding reference to the scenario since it states

as necessary, but it will be best to assume that the examiner would prefer you to do

so.

Part (b) does not require reference to the scenario since it refers to a stakeholder,

listed companies and stakeholders and shareholders.

Part (c) states by reference to relevant issues in the scenario and requires you to refer

to it.

Now look at the verbs and descriptions in the questions.

Explain requires some depth, assess requires a view, contrasting requires

comparison and critically evaluate requires both sides to an argument with some

judgment if possible.

Now comes the scenario

You may have time due to the extra fifteen minutes you are given in the exam to read

the scenarios first then to read again marking important issues as you go through.

Mucky Minerals plc is a listed company that presumably has to comply with a code of

corporate governance such as the UK Combined Code. In the real exam you can use

UK guidance unless otherwise stated as long as the environment is principles-based.

We can see from the nature of business that mineral exploration is high in risk but

high in return. It is perhaps a long-term business.

Our company is clearly very successful with good returns, cash flow and financial andmineral reserve strength. These should give a premium share value.

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The company has recently won awards for transparency in its financial statements.

But dont be fooled into believing that all information will be of the same quality!

Dont assume that all is well either, be a little sceptical. The statement from the

chairman was to be expected, he would say that!

Then comes what you may be expecting, some bad news, that casts doubt on the

ethics of the company. There is an as yet unconfirmed report in a newspaper regarding

the use of child labour. Please dont believe everything that you read in the papers but

be alert to the issue.

There is further bad news on environmental issues in the Green is Good magazine.

The chairman makes a classic statement that reassures all but addresses few issues,

she says the right things but actually does not confirm, deny or respond specifically to

the two social and environmental issues.

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Answering the questions

The style of answer is in an essay form, concise and to the point and logical. You may

sometimes use tabulated points if you wish but best to do that within an essay format.

(a)Sustainability is a term with several meanings, even in this context.

A sustainable business could mean a successful business with tangible and

intangible assets and future cash flows that in the current environment or any

predicted changes or foreseeable uncertainties is able to continue to operate

successfully in business in the long term.

A sustainable business may also be seen as one that recognises ethical

obligations towards society through it social and environmental policies. It

could be regarded as a business that recognises and balances economic, social

and environmental objectives. In this context the business is sustainable in the

long-run because it meets the requirement of a very broad range ofstakeholders both now and in the future. Sustainability implies that it protects

society and environment by not compromising future generations in its

activities and use of resources.

Sustainability may also be seen as doing those things economic, social and

environmental that supports the long-run maximisation of profit or shareholder

value. This is the so called ethics paysview.

The term ethics used in the question is concerned with what is right and wrong

in terms of business decision-making, behaviour and activity. An ethical

business being an honest and transparent business that meets the moral

requirements of society and operates in a socially and environmentally

acceptable way.

There are inevitably some potential conflicts between achieving objectives in

terms of return, growth and risk and achieving social and environmental

objectives. Focus on economic objectives may be a short-term view that is not

sustainable in the long run. Shareholders, customers and other stakeholders

may not be supportive of a pure profit maximiser if they have ethical, social

and environmental concerns. This could lead to a falling or static share price

or revenues.

In the scenario it is clear that Mucky Mining plc is economically successful.

The company does however have social and environmental issues with its

potentially immoral labour practices and potential disregard for the

environment in its mining operations.

The media reports are however unconfirmed.

As a listed company shareholders may express their dissatisfaction orally, in

writing, at votes or by walking away and selling their shares.

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The scenario does not give information regarding the legality of the social and

environmental issues but putting the morals to one side both issues could give

rise to economic cost for the company beyond reputation damage in terms of

potential fines and damages.

Ultimately a sustainable business contributes to the economic and socialsuccess of a nation in a way that does not compromise future generations.

This solution does answer the question in that it gives various views on the

meaning of sustainability and distinguishes the business issues from what are

possible ethical issues. The answer is quite balanced between economic and

ethical objectives. Indeed the answer implies that there is ultimately a real

concept of an ethical business.

This is not the only answer though and an alternative, but less effective,

solution follows.

Sustainability refers to the ability of meeting present needs without

compromising the capability of meeting the needs of future generations. It

refers to policies and practices adopted by organisations which ensure that the

rate of resource utilisation matches the rate at which they can be replenished.

Ethical behaviour is right behaviour and means that the business actions apply

the moral values of society.

Society has views on issues such as the employment of children and working

conditions. Modern societies often regard child labour as immoral. However

this view is not universal and children do work in some countries, even where

laws prohibit it. There are moral arguments supporting the employment of

children where there is no alternative such as education and where incomes are

barely at a subsistence level.

Society has also changed its views in many regions regarding environmental

damage with activities such as mining. Many states impose requirements

through laws so that the issue is not merely ethical but a matter of law as is the

case with child labour.

Some would argue that the dignity of all people requires business to be

responsible and to apply appropriate labour practices and environmental

policies.

Mucky Mining plc appears to put profits before people and the planet and is

ignoring its broader stakeholder responsibilities.

The company is likely to suffer lost sales, a pressure on its share price and

employee difficulties if it continues to ignore concerns as expressed in the

media.

Sustainable businesses must take a responsible view as regards social and

environmental issues.

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(b)A stakeholder is a person, organisation, individual or group who has alegitimate interest in, is impacted by or impacts upon an entity or its activities

or operations. Some stakeholders have legal interests, some have contractual

interests and some impose their interest upon the entity. Stakeholders may be

within the entity or even by running it, some may merely be connected such asshareholders, suppliers and customers whilst some may be external such as

government, lobby groups and society or communities. Stakeholders have

varying power to influence and interests that connect them to an entity.

Listed companies can be regarded as firms with a purely economic purpose or

entities with economic, social and environmental purposes.

Listed companies have a particular issue in that ownership and control are

largely separated. The directors who run or control the business do not usually

have significant shareholdings that give them ownership or effective legal

entity voting control. Whilst directors can be removed shareholders rarely takesuch action and directors are generally promoted from within or selected from

outside by the board.

When the question refers to responsibilities of listed companies this could be

seen as the responsibilities of the board.

Legally directors must act in good faith in what they believe are the interests

of the company. UK law requires consideration of social and environmental

matters but leaves it up to directors to determine what they wish to do to

promote the success of the company.

Shareholders are particularly important to listed company directors since the

directors will actively operate to deliver shareholder value in terms of return

and growth at an acceptable risk to the shareholders. They will to some extent

be judged on the share price performance.

Delivering these objectives may however require social and environmental

concern to create a sustainable business. Ethic does tend to pay.

Some shareholders may also be ethical members who are willing to pay a

premium for high standards of social and environmental performance.

Stakeholders other than shareholders may therefore be seen as a key to

maximising long-term shareholder value. Satisfied customers, suppliers,

employees and society may support this.

Listed companies are likely to put shareholders at the top of their stakeholder

priority list. This is due to the fundamentals of traditional and legal company

purpose.

Other stakeholders legitimacy may be judged by their power, or influence,

and interest or willingness to engage.

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This answer explains rather than merely defines the concept of a

stakeholder. The answer then goes on to describe why shareholders may be

treated differently to other stakeholders. The answer does not say that

shareholders are more important, it is written with balance and care.

Within the answer stakeholder theory includes the Mendelow model

without actually referring to it.

An alternative answer follows that is simpler, shorter and with less depth.

A stakeholder is a person who has an interest in or who affects or can be affected

by the operations of an organisation.

Stakeholders may have claims upon an organisation that may demand recognition.

The Mendelow stakeholder model suggests that organisations need to consider

both the power and interest of a party in determining the legitimacy or response to

a claim by a stakeholder.

Stakeholders include management, employees, shareholders, customers, suppliers,

government and society.

Listed companies have to take a balanced view of their stakeholders and may use

the Mendelow model to determine who has the power and interest.

Listed company shareholders are of two types, institutional shareholders withmaybe five or ten percent holdings and private shareholders with relatively few

shares.

Institutional shareholders are likely to be high in interest since they require return

and growth and may be willing to enter dialogue. They are collectively high in

power and need to be listened to.

Private shareholders are lower I interest since they rarely engage in dialogue and

lower in power.

Ultimately all shareholders matter if the directors wish to support a rising sharevalue.

Other stakeholders are important since the success of the business depends on

satisfied customers, reliable suppliers and effective employees. Society and the

community can also be important.

In the scenario Mucky Mining plc will wish to please its shareholders by being an

ethical and successful business.

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(c)Professionally qualified accountants take on many roles in industry,commerce, the public sector and the accounting profession itself. Traditionally

accountants are the preparers of financial information and the professionals

who give assurance through opinions on financial information prepared by

others. Accountants are also businessmen when they take up senior managerial

roles or run their own practices or businesses. Many accountants havespecialist expertise in areas such as tax and insolvency. Accountants undergo a

broad business based examination and practical training underpinned by

excellence in accounting, auditing, tax and law.

The general public see accountants as professionals and expect expertise,

knowledge and strong ethics.

The chartered accountancy bodies in the UK received their Royal Charters

because they demonstrated excellence in examinations, training, continuing

professional development and had well enforced standards and ethical codes.

At the heart of our ethical approach, as illustrated by the IFAC Ethical Code is

the concept of the public interest. Accountants work for their employers or

clients but put the public interest first.

The public interest arises because of the reserved nature of much of our

work. In areas such as insolvency and auditing legal restrictions exist on

carrying out such work. As professionals we have earned the right to

undertake such work largely because of our ethical codes.

The IFAC code contains five fundamental principles that are essential to

giving confidence in our work. Following these as non-negotiable universal

moral principles means that we can be relied upon and so can the information

we are concerned with whether it is a tax return, annual return, annual report

and financial statements or an audit opinion.

The principle of integrity implies absolute honesty, indeed it goes beyond this

to include being straightforward in business dealings. The principle of

objectivity implies being totally unbiased in applying accounting principles,

laws and regulations whatever the circumstances, whatever the pressures and

whatever the temptations and interests involved, true objectivity means

transparency and reliability. These are supported by ethical obligations ofconfidentiality in keeping client and employer affairs private unless a public

interest demands disclosure, due care in adhering to standards and professional

behaviour in not bringing the profession into disrepute.

Accountants are a key part of corporate governance whether they are inside

business ensuring honesty and transparency or outside the business reporting

robustly on the honesty and transparency of corporate reporting.

In the scenario the professional accountants appear to be upholding these

principles in that Mucky Mining plc has won awards for the quality of its

financial statements. This implies adherence to generally accepted accountingprinciples and that the financial statements are not just true and fair as assured

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by the audit opinion but clear and understandable in presenting the business

results. However we should be careful in drawing such conclusions since audit

reports only give reasonable assurance that financial statements are free from

material error and fraud.

There are however other ethical issues of a social and environmental nature inthe scenario.

It can be argued that there is a difference between business ethics and the

professional ethics of an accountant. Professional ethics almost exclusively is

concerned with our roles in compiling and reporting on financial information.

Professional ethics does extend to our business role as explained in the

concept of integrity where we are required to be honest and straightforward in

all business dealings. Integrity here is concerned with deals, contracts,

proposals, tenders and the like rather than the more fundamental morality of

business and business activities, or at least that is the current generally held

view. Professional ethics however always implies acting lawfully. Businessethics arguably has boundaries beyond being lawful, honest and fair and

includes social and environmental responsibilities. These are the grey areas

where laws and regulations do not exist but where society has expectations

regarding issues of employment conditions, working conditions, responsible

use of resources and responsible activities.

Some argue that accountants may act against the public interest since we do

not professionally embrace social and environmental responsibilities. Most

professional accountants would argue that these issues are outside our

professional domain and covered by our more general citizens domain. As

citizens we may have social and environmental responsibilities beyond

upholding the law, moral standards and expectations. Our professional ethical

understanding does however give us a mature understanding of the meaning of

morality and applying the Kohlberg view we are maybe more likely than non-

professionals to adopt a stage 4 law and order view that requires respect for

human dignity, social responsibility and environmental responsibility in order

to support the sustainable and successful workings of economies and societies.

Our ethical approach does not however really encourage us to be post-

conventional since we rarely challenge laws and regulations as being

wrong since most of the laws we deal with are morally right in a

democracy.

Some also argue that the accounting profession is a value laden profession

that through its accounting principles focuses attention on profit and

measurement of profit rather than on social and environmental good

performance.

Ultimately our role is best seen as being the upholders of lawful behaviour,

honesty and transparency in reporting. Society relies on us to challenge those

who breach laws and regulations and those who fail to report their business

affairs reliably.

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This answer is undoubtedly deeper and broader than many students would

write but gives you some arguments that are relevant and hopefully well

argued.

The answer is also written very much in support of professional accountants

and that should come as no surprise because although we should recognise our

professional weaknesses and shortcomings we should support our profession.

We did not include discussion of professional failings in upholding standards

in reporting and auditing only because the answer would have become even

longer.

That brings us to an interesting question how much should you write?

Many P1 questions are open-ended and there are always more points to raise

or more depth of explanation that can be included. You therefore need a light

touch style raising relevant points confident that each point with a little

explanation will earn a mark. You cannot include everything that could be

relevant and are not expected to do so.

Throughout this question bank our answers are a good attempt without being

perfect. They represent what could be written by a well prepared candidate and

additionally help you to understand the content that makes a good answer.

There are some questions where you can have different views, a different

balance of argument and questions where more or less points could be raised.

The answer that follows makes different points to the original answer to part

(c) and is more economical and has less depth. It would get a pass mark in our

view despite being quite different.

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Professions are characterised by expertise, controlled entry standards and

continuing standards and rigorously upheld ethical codes. Professional

accountants are expected to uphold high standards of competence and ethics so

that the public can rely on our work in reporting and assurance on reporting of

financial matters.

Professional accountants are expected to act primarily in the public interest.

This implies upholding standards of honesty and transparency in business andreporting.

The IFAC ethical code sets out five fundamental principles to follow:

IntegrityObjectivityConfidentialityDue care, andProfessional behaviour

Integrity means that accountants are therefore expected to be honest andstraightforward in business dealings. Objectivity means accountants are

unbiased and impartial at all times, free from and being seen to be free from

interests that compromise independence. Due care means that accountants

uphold standards and behaviour means they do not bring their profession into

disrepute.

Accountants are likely to have played a key role in supporting the transparency

of the financial statements of Mucky Mining plc whether as preparers or

auditors.

Accountants may however have done little to deal with the social andenvironmental problems at the company apart from worrying about the costs of

putting things right. Low costs can be achieved in the short run by ignoring such

issues.

Accountants do also have a part to play in running and advising businesses and

therefore have ethical or moral responsibilities for more general business

integrity, social and environmental responsibility.

The accountancy profession can be regarded as value laden and a supporter of

big business and capitalism. Pristine capitalists pursue maximisation of profit at

all costs and as such ignore externalities such as social and environmental costs.

Since accountants focus on profit measurement they support the capitalist ethos.

The accountancy profession has done little to support corporate social

responsibility (CSR) and CSR reporting. This failure means that accountants

have not always acted in the public interest.

The accountancy profession has also failed the public with weak accounting

standards, creative accounting and a lack of robust auditing as seen in many

corporate governance scandals such as Maxwell and Enron.

The accountancy profession has often needed to rebuild trust after such events

but generally has done so for its own protection and therefore for its own

commercial gain.

answering questions p1

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