lsbf notes acca f1
TRANSCRIPT
ACCA Paper F1
Accountant in
Business
Class Notes
June 2011
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© The Accountancy College Ltd, January 2011
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior written
permission of The Accountancy College Limited.
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Contents PAGE
INTRODUCTION TO THE PAPER 5
CHAPTER 1: RECRUITMENT AND SELECTION 7
CHAPTER 2: DIVERSITY 15
CHAPTER 3: TRAINING AND DEVELOPMENT 19
CHAPTER 4: PERSONAL EFFECTIVENESS 25
CHAPTER 5: PERFORMANCE APPRAISAL 37
CHAPTER 6: LEADING PEOPLE 41
CHAPTER 7: INDIVIDUALS AND GROUPS 57
CHAPTER 8: MOTIVATING PEOPLE 63
CHAPTER 9: THE ROLE OF ACCOUNTING 71
CHAPTER 10: THE MACRO-ECONOMIC ENVIRONMENT 91
CHAPTER 11: THE BUSINESS ENVIRONMENT 97
CHAPTER 12: BUSINESS ORGANISATION 105
CHAPTER 13: ORGANISATIONAL CULTURE 115
CHAPTER 14: CORPORATE GOVERNANCE 121
CHAPTER 15: ETHICAL CONSIDERATIONS 125
CHAPTER 16: IT AND SYSTEMS 131
CHAPTER 17: CONTROL AND SECURITY 137
CHAPTER 18: FRAUD 145
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Introduction to the
paper
INTRODUCTION TO THE PAPER
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AIM OF THE PAPER
The aim of the paper is to introduce knowledge and understanding of the business
and its environment and the influence this has on how organisations are structured
and on the role of the accounting and other key business functions in contributing
to the efficient, effective and ethical management and development of an
organisation and its people and systems.
OUTLINE OF THE SYLLABUS
1. Business organisation structure, governance and management
2. Key environmental influences and constraints on business and accounting
3. History and role of accounting in business
4. Specific functions of accounting and internal financial control
5. Leading and managing individuals and teams
6. Recruiting and developing effective employees.
FORMAT OF THE EXAM PAPER
The syllabus is assessed by a two hour computer-based examination.
The examination consists of a mixture of 2 mark and 1 mark questions.
FAQS
How do I get the most from my course?
● Try and be seated and pick up your handout by the start of the lecture. This
will ensure we have the maximum lecture time. Your course notes will be in
divided into chapters, please make sure you bring the relevant chapters with
you to class.
● Manage your time effectively. If you have a busy work schedule use your
study planner to catch up. Do not allow yourself to fall behind.
● If you have any difficulties or questions please do not hesitate to contact me
either before the lecture or during the break as most students are in a
desperate hurry to leave at the end of the lecture. Alternatively, you can
always email me or phone me through our helpline.
● In the event of an emergency you can come for the same lecture on a
corresponding part-time course as all the courses run parallel to each other.
It is crucially important that you attend the full course of lectures.
● Try to read the business section of a decent newspaper at least once a week
to get an idea of what is going on in the business world.
● Practice as many questions as you can. You should aim to have attempted
every question in the revision kit at least twice before the exam.
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Chapter 1
Recruitment and
selection
CHAPTER 1 – RECRUITMENT AND SELECTION
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CHAPTER CONTENTS
THE RECRUITMENT AND SELECTION PROCESS ------------------------- 9
THE DIFFERENCE BETWEEN RECRUITMENT AND SELECTION 9
STAGES IN THE RECRUITMENT AND SELECTION PROCESS 9
DETAILED RECRUITMENT STAGES 10
DETAILED SELECTION STAGES 10
POSSIBLE METHODS OF RECRUITMENT ------------------------------- 11
JOB ADVERTISEMENTS 11
RECRUITMENT AGENCIES 11
POSSIBLE METHODS OF SELECTION ----------------------------------- 12
INTERVIEWS 12
ASSESSMENT CENTRES 13
REFERENCES 13
CHAPTER 1 – RECRUITMENT AND SELECTION
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THE RECRUITMENT AND SELECTION PROCESS No organisation will be successful without the correct staff.
Choosing incorrect staff can result in:
● Poor quality work
● Poor morale
● High staff turnover
● Wasted time and money in recruiting more staff.
There are a number of ways to obtain the correct staff:
● Promote from inside the organisation
● Recruit from outside the organisation.
The difference between recruitment and selection
Recruitment is the process of establishing that vacancies exist and communicating
these vacancies to an appropriate pool of candidates. (Recruit or promote?)
Selection is the process of filtering candidates in order to select the individual best
suited to a particular vacancy.
Stages in the recruitment and selection process
The first consideration is the type of job to be offered.
● If the job already exists then it will be important to start with a job analysis
● If the job requires getting specific tasks done then again a job analysis would
be a sensible place to start
● If the role of the job is likely to change then a person specification may be
more appropriate
● A job analysis will mean looking for someone with particular skills and
experience
● A person specification will mean looking for someone with a particular
personality.
Rodgers’ 7 point person specification
Rodgers gives a list of 7 qualities that might be important:
● Physical make-up
● Attainments
● General intelligence
● Special aptitudes
● Interests
● Disposition
● Circumstances.
CHAPTER 1 – RECRUITMENT AND SELECTION
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Detailed recruitment stages
● Gap analysis (if the job does not already exist)
● Identify vacancies
● Make decision to recruit
● Job analysis (if the job is new)
● Advertise.
Detailed selection stages
● CVs reviewed
● Interviews / Assessment centres carried out
● Selection of candidate
● Offer letter to candidate
● Induction.
CHAPTER 1 – RECRUITMENT AND SELECTION
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POSSIBLE METHODS OF RECRUITMENT
The main two methods of recruitment are either:
● The organisation doing its own recruitment by placing job adverts
● The organisation using a recruitment agent to carry out the recruitment.
Job advertisements
Jobs should be advertised in an appropriate way. Possible places include:
● Internet
● Specialist journals
● Local press
● National press.
Job advertisements normally contain the following:
● Job description
● Brief overview of the organisation
● Salary
● Person specification
● Contact information.
A variation on this is where the organisation ‘advertises’ at a recruitment fair (this
is often used for graduate recruitment).
Recruitment agencies
There are two main approaches to using recruitment agencies:
● Potential candidates go to the agency.
The agency then tries to place them in a job.
● The organisation goes to the agency with a high level role.
The agency then tries to find a person to fill that role.
This is often referred to as ‘headhunting’.
The advantages of using an agency include:
● It is less distracting for managers
● It may be faster
● Gaining access to all the people on the agency’s books
● The agency has knowledge of how to recruit staff
● The agency has knowledge of salaries expected.
Disadvantages of using an agency include:
● The agency will not know what the organisation is like
● The agency may recommend people so it can meet its own targets
● It can be expensive.
CHAPTER 1 – RECRUITMENT AND SELECTION
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POSSIBLE METHODS OF SELECTION
The main methods of selecting staff are:
● Application forms / CVs
● Interviews
● Aptitude tests
● Assessment centres.
Whichever method is chosen it is normal to ask the candidate to supply references.
Interviews
Interviews are still used as part of the main selection process in most jobs. The
reasons for this include:
● They are flexible enough to allow for different approaches
● They allow the interviewer to ask questions
● They allow the interviewer to assess interpersonal skills.
There are a number of difficulties with interviews
● They are artificial
● They require the interviewer to be skilled and well-prepared
● They can lead to the halo effect and cloning
● They are time consuming.
Types of Interviews:
● Individual
● Panel
● Selection Boards.
CHAPTER 1 – RECRUITMENT AND SELECTION
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Assessment centres
An assessment centre is NOT a place. An assessment centre is where a variety of
selection methods are used to select candidates.
These methods include:
● Interviews
● Group exercises
● Role playing
● Practical tests.
The advantages of using assessment centres instead of just interviews include:
● They can be used to see how candidates deal with others
● The candidates can be observed over a longer period of time
● The candidates can be given practical tasks that reflect the job.
The disadvantages of using assessment centres include:
● Candidates will do well in some areas and not others
● It is possible to coach candidates to perform well at practical tests
● May be expensive.
References
There are a number of problems with using references as part of the section
process. These include:
● They may be unsuitable
● They may be biased
● They may be too brief.
CHAPTER 1 – RECRUITMENT AND SELECTION
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Chapter 2
Diversity
CHAPTER 2 – DIVERSITY
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CHAPTER CONTENTS
EQUAL OPPORTUNITIES ------------------------------------------------ 17
DIVERSITY --------------------------------------------------------------- 18
WHAT IS MEANT BY DIVERSITY? 18
DIVERSITY MANAGEMENT 18
CHAPTER 2 – DIVERSITY
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EQUAL OPPORTUNITIES
Equal opportunities means ensure individuals are treated fairly in the employment
process. In other words everyone has the right to be treated fairly at work.
In many countries, this is enforced by legislation. For example, in the UK there is
the Equality Act 2010 which outlaws discrimination on many grounds, such as sex,
race and disability.
There are a number of reasons why a company might wish to do more than they
are legally obliged to. These include:
● Feeling they have a moral duty
● To keep customers happy.
Obviously this is important for recruitment and selection but also includes:
● Equal opportunities for training
● Equal opportunities for promotion
● Equal treatment in times of redundancies.
CHAPTER 2 – DIVERSITY
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DIVERSITY
What is meant by diversity?
The idea of diversity means the organisation recognising that people are different
and looking for ways to use the different viewpoints this brings.
The organisation may try to have a workforce with a variety of:
● Religions
● Races
● Marital status
● Genders
● Sexual orientations.
The organisation might try to achieve this through numerical targets.
Diversity management
Diversity management means actively encouraging a diverse workforce.
There are a number of benefits:
● More creative ideas
● More viewpoints considered when making decisions
● Better understanding of customers
● Increased chance of being successful in new markets.
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Chapter 3
Training and
development
CHAPTER 3 – TRAINING AND DEVELOPMENT
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CHAPTER CONTENTS
TRAINING AND DEVELOPMENT ---------------------------------------- 21
WHAT IS THE DIFFERENCE BETWEEN TRAINING AND DEVELOPMENT? 21
THE BENEFITS OF TRAINING AND DEVELOPMENT AT WORK 21
THE TRAINING AND DEVELOPMENT PROCESS------------------------ 22
METHODS OF EVALUATING TRAINING 22
TYPES OF DEVELOPMENT 22
CHAPTER 3 – TRAINING AND DEVELOPMENT
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TRAINING AND DEVELOPMENT
What is the difference between training and
development?
Training is:
● needed so a person can carry out their present job
● mainly concerned with technical skills
● usually given by a superior.
Development is:
● giving a person skills they may use in the future
● often concerned with soft skills
● the responsibility of everyone in the organisation.
The benefits of training and development at work
Training benefits the organisation since
● Staff will have more skills
● More work can be delegated to them
● They will require less supervision
● Work should be better quality
● Customer service should be improved.
Training benefits the individual since
● Work should be more interesting
● The individual should have a higher self-esteem
● The skills will be transferable to other jobs.
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THE TRAINING AND DEVELOPMENT PROCESS
Organisations and individuals will only receive the above benefits if training and
development are planned properly.
The process is:
● Assess the training needs of the organisation
● Decide what the objectives of any training should be
● Plan how the training will be carried out
● Deliver the training
● Evaluate the training.
Methods of evaluating training
Training can be evaluated by:
● Asking trainees what they thought
● Measuring what trainees have learned
● Measuring changes in job behaviour after attending training
● Impact of training on organisational results
● Impact on training on its value to the organisation.
Types of development
The types of development include:
Management development Develop management skills and experience
Career development Secondments and transfers
Professional development Following CPD courses from professional bodies
Personal development To improve competences
Kolb’s experiential learning
Kolb suggested that much of our learning comes from experience -
● Experience provides basis for
● Observation and reflection Which we convert into abstract concepts
● Hypothesis and conceptualisation Which provides ideas which can be
tested
● Experimentation Which creates new experiences.
CHAPTER 3 – TRAINING AND DEVELOPMENT
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Honey and Mumford’s learning styles
Learning is the acquisition of knowledge to effect a change in behaviour.
Honey and Mumford suggested 4 learning styles that individuals may exhibit -
● Activist – learns through doing
● Reflector – learns through watching
● Theorist - learns through understanding theories
● Pragmatist – learns through applying theories.
Learning Organisation
Is an organisation that facilitates the acquiring & sharing of knowledge.
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Chapter 4
Personal effectiveness
CHAPTER 4 – PERSONAL EFFECTIVENESS
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CHAPTER CONTENTS
WHAT IS COMMUNICATION? ------------------------------------------- 27
THE COMMUNICATION PROCESS 27
FORMAL AND INFORMAL COMMUNICATION 27
FEATURES OF EFFECTIVE COMMUNICATION 28
BARRIERS TO EFFECTIVE COMMUNICATION 29
CONSEQUENCES OF INEFFECTIVE COMMUNICATION 29
METHODS AND PATTERNS OF COMMUNICATION -------------------- 30
TECHNIQUES FOR IMPROVING PERSONAL EFFECTIVENESS -------- 32
THE PERSONAL DEVELOPMENT PLAN 32
WHAT IS TIME MANAGEMENT? ----------------------------------------- 33
TOOLS AND METHODS TO ENCOURAGE EFFECTIVE TIME MANAGEMENT 34
HOW IT CAN HELP TIME MANAGEMENT 34
MENTORING, COACHING AND COUNSELLING ------------------------ 35
WHAT IS MENTORING 35
WHAT IS COACHING 35
WHAT IS COUNSELLING? 35
CHAPTER 4 – PERSONAL EFFECTIVENESS
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WHAT IS COMMUNICATION?
A process which involves the exchange of information between people.
Communication is an essential process within an organisation. It is used to
● share ideas
● give instructions
● provide feedback
● address social needs.
The communication process
Formal and informal communication
Formal communication moves in 3 major directions:
● Vertical
● Horizontal or Lateral
● Diagonal
Formal communication can be in written or verbal form via
● Meetings
● Interviews
NOISE
Transmit Encode Sender Receive Decode
Feedback
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● Memos
● Emails
● Letters
● Faxes
● Notices
Informal communication moves in any direction. When used in the organisation it
serves mainly as a social tool rather than a means to ensure that tasks are
performed.
Informal communication includes rumour, gossip and stories, which is often
transmitted via the grapevine.
Features of effective communication
For communication to be effective, information must be:
● Understood by the receiver
● Sent via the appropriate channel
● exchanged at the appropriate time
● as detailed as is appropriate
The 5 C’s of Communication – Concise, Complete, Correct,
– Courteous & Clear
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Barriers to effective communication
These could include
● Information overload
● Inappropriate language
● Deliberate distortion
● Lack of time
● Conflict
● Fear
Consequences of ineffective communication
When communication is ineffective this results in
● De-motivated staff
● Poor decision making by management due to insufficient information
● Staff being unclear about their roles
● Ideas not being shared
● Individuals’ social needs not being met
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METHODS AND PATTERNS OF COMMUNICATION
There are several ways in which information can be communicated. These can be
categorised as:
● Verbal
● Written
● Visual
● Body Language.
Within an organisation a number of different communication patterns exist.
These patterns can be categorized as centralised and decentralised.
Centralised Communication patterns include –
Wheel
Chain
Y
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Decentralised Communication patterns include –
Circle
All-Channel
CHAPTER 4 – PERSONAL EFFECTIVENESS
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TECHNIQUES FOR IMPROVING PERSONAL
EFFECTIVENESS
There are several techniques which management may use to help employees
improve their personal effectiveness. These include personal development plans
and effective time management.
The Personal development plan (PDP)
This is a structured approach used to help individuals develop new skills and plan
their careers.
When developing a Personal Development Plan (or PDP) the following should be
taken into account:
● Current role
● Current strengths and weaknesses (SWOT)
● Career aspirations.
An effective PDP should enable both the individual and manager to set:
● Short and Long term objectives
● Training/development plan.
Any objectives set should be SMART -
● Specific
● Measurable
● Achievable
● Relevant
● Timebound.
For the personal development plan to be effective management should ensure that
regular review and discussions are included in the process.
The individual’s performance should be also monitored and measured against the
short and long term objectives set. Finally, management must ensure that the
individual receives appropriate feedback regularly.
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WHAT IS TIME MANAGEMENT?
The effective and efficient use of time.
Time is a unique resource, which cannot be stored or bought in surplus. Therefore
everyone concerned should ensure that the best use is made of this scarce
resource.
Poorly managed time can lead to:
● Stress
● Poor quality of work
● Low productivity
● Double bookings
● Missed deadlines.
Ineffective time management can be caused by:
● Ability
● Workload
● Organisational culture
● Personality
● Lack of delegation
● Structure and layout of work place
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Tools and methods to encourage effective time
management
Some methods used to manage time effectively include prioritisation and
scheduling.
Tools which can be useful are:
● Diaries and calendars
● To do lists
● Delegation
● Assertiveness.
How IT can help time management
Most organisations use information technology to enable individuals to manage
their time, for example electronic time sheets are used by management to provide
a check on how people are spending time at work.
Software packages are made available in various applications which individuals use
to manage their time. Applications such as Microsoft Outlook can be used to create
‘to do’ lists and to manage diaries.
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MENTORING, COACHING AND COUNSELLING
What is mentoring?
The process whereby a more experienced member of staff helps a lesser
experienced colleague to improve their progress in the organisation.
Some organisations assign new employees with a mentor to help smooth their
progress on joining.
Mentoring provides benefits to both the mentor and the mentee -
Mentor Mentee
A new perspective Access to experience
Challenge to established thinking A safe way to ask questions
Satisfaction Access to a network
What is coaching?
A process where an individual is provided with assistance and support in setting
goals in order to achieve a specific objective/outcome.
Coaching is usually carried out on a one to one basis.
The coach provides guidance and support but it is up to the individual to set and
achieve the goals.
What is counselling?
A purposeful relationship in which an individual helps another to help himself.
Counselling is non-directive – meaning that the individual being counselled is not
told what to do. Instead he/she is given the opportunity to explore various
possibilities and find his/her own solutions.
A counsellor must have specific skills/abilities, including
● The ability to observe
● Sensitivity
● Empathy
● Impartiality
● Discretion.
During counselling the use of open questions is most effective to help draw out the
as much information as possible to facilitate the process.
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Chapter 5
Performance appraisal
CHAPTER 5 – PERFORMANCE APPRAISAL
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CHAPTER CONTENTS
PERFORMANCE APPRAISAL --------------------------------------------- 39
WHAT IS PERFORMANCE APPRAISAL? 39
THE APPRAISAL INTERVIEW 39
WHY ARE APPRAISALS IMPORTANT? 39
ASSESSING INDIVIDUAL PERFORMANCE 40
ASSESSING THE APPRAISAL PROCESS 40
BARRIERS TO EFFECTIVE APPRAISAL 40
WHAT IS MANAGEMENT? 43
CHAPTER 5 – PERFORMANCE APPRAISAL
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PERFORMANCE APPRAISAL
What is performance appraisal?
Appraisal is an ongoing process where a manager helps the individual to establish
objectives and then measures performance towards those targets.
The primary element of the performance appraisal is the appraisal interview but an
effective appraisal should also include feedback throughout the appraisal period.
The appraisal interview
The appraisal interview provides the opportunity for the individual and manager to
discuss
● The past
● The present
● The future.
The results of an effective appraisal interview are
● Objectives for the coming period
● Training/development plan
● Agreement regarding reward/bonus
● Documentation of the discussion
● Grading.
Why are appraisals important?
Benefits of appraisals include
● Better communication
● More feedback for staff
● Increased recognition
● Improved control.
Appraisals are an important control mechanism, as it provides an opportunity to
assess the performance of individuals within an organisation.
Since it is a control system, appraisal can be described as (TARA)
● Targets
● Actuals
● Review
● Action
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Assessing individual performance
An individual’s performance can be assessed through
● Achievement of objectives
● Feedback from internal customers
● Feedback from external customers
● Feedback from colleagues
● Self-appraisal
● Volume of work achieved
● Attendance at training courses.
Assessing the appraisal process
Assessing the effectiveness the appraisal system can be obtained by looking at
● Take up of training
● Improvements in employee satisfaction
● Improvement in employee effectiveness
● Feedback from employees
● Impact on internal recruitment/career planning
● Cost/Benefit analysis
● Staff turnover.
A good appraisal system should be (the 4 F’s)
● Frequent
● Factual
● Fair
● Firm.
Barriers to effective appraisal
Some of the barriers to effective appraisal include
● Lack of structure
● Lack of preparation
● Fear of being judged
● Lack of commitment
● Lack of understanding
● Lack of follow up
● Lack of opportunity to feed back to management
● Bureaucratic system.
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Chapter 6
Leading people
CHAPTER 6 – LEADING PEOPLE
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CHAPTER CONTENTS
LEADING AND MANAGING PEOPLE ------------------------------------ 43
THE CLASSICAL SCHOOL ------------------------------------------------ 44
FAYOL – RULES OF MANAGERIAL CONDUCT 44
TAYLOR – SCIENTIFIC MANAGEMENT 45
THE HUMAN RELATIONS SCHOOL -------------------------------------- 46
THE ROLE OF A MANAGER – DRUCKER 46
THE ROLE OF A MANAGER – MINTZBERG 46
SUPERVISORS 47
AUTHORITY AND RESPONSIBILITY ------------------------------------ 48
WHAT IS AUTHORITY? 48
WHAT IS RESPONSIBILITY? 48
WHAT IS DELEGATION? 48
WHAT IS POWER? 48
WHAT IS LEADERSHIP? 49
THEORIES OF LEADERSHIP – TRAIT THEORY ------------------------ 50
THEORIES OF LEADERSHIP – ACTION CENTRED LEADERSHIP ----- 51
THEORIES OF LEADERSHIP – BLAKE AND MOUTON ----------------- 52
THEORIES OF LEADERSHIP – THE ASHRIDGE MODEL --------------- 53
THEORIES OF LEADERSHIP – FIEDLER -------------------------------- 54
WHAT IS CONTINGENCY THEORY? 54
WHAT IS SITUATIONAL LEADERSHIP? 54
FUNCTIONAL LEADERS 55
LEADERSHIP AND CHANGE - BENNIS 55
LEADERSHIP AND CHANGE - KOTTER 55
LEADERSHIP AND CHANGE – HEIFETZ 56
CHAPTER 6 – LEADING PEOPLE
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LEADING AND MANAGING PEOPLE
What is management?
Fayol identified 5 management roles which help provide an explanation of what
management is. They are:
● Planning
● Organising
● Commanding
● Controlling
● Co-ordinating
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THE CLASSICAL SCHOOL
Taylor and Fayol are classical theorists.
Fayol – Rules of managerial conduct
Fayol also identified 14 rules of managerial conduct:
● Division of work
● Authority
● Discipline
● Unity of Command
● Unity of Direction
● Subordination of general interests
● Remuneration
● Centralisation
● Scalar chain
● Order
● Equity
● Tenure of personnel
● Initiative
● Esprit de corps.
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Taylor – scientific management
Taylor advocated one best way of doing every task:
● Scientific analysis
● Identification of ideal method – Specialisation
● Training
● Reward – Money as a motivator
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THE HUMAN RELATIONS SCHOOL
The Human Relations School owes much to the work of Elton Mayo, who performed
the Hawthorne Experiments.
Several important ideas came out of the Hawthorne Experiments:
● The importance of groups at work
● The value of inclusion
● Motivational Theory.
The role of a manager – Drucker
Drucker sees managers as having 5 roles:
● Setting objectives
● Organising
● Motivating and Communicating
● Establishing yardsticks
● Developing people.
The role of a manager – Mintzberg
Mintzberg identifies 3 types of role that a manager has:
Interpersonal
Figurehead Performing legal or ceremonial duties
Leader Motivating and inspiring
Liaison Developing networks outside the organisation
Informational
Monitor Collecting, filtering of information
Disseminator Sharing, communicating information inside the organisation
Spokesperson Sharing information outside the organisation
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Decisional
Entrepreneur Looking to the future
Resource Allocator Deciding between projects
Disturbance Handler Resolving disputes
Negotiator Representing the organisation at negotiations
Supervisors
Supervisors are the lowest level of management within the organisation.
They are sometimes referred to as front line managers or team leaders.
They carry out the same roles as managers, but at a lower level.
Aside from management responsibilities, supervisors sometimes have operational
responsibilities.
A supervisor’s main role is to ensure that specified tasks are performed correctly &
efficiently by individuals & groups.
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AUTHORITY AND RESPONSIBILITY
What is authority?
The right to get others to perform certain actions which comes from an individual’s
position in the hierarchy.
The 2 main types of authority are:
● Formal/Line
● Staff/Functional
What is responsibility?
The degree to which an individual can be called to account for their actions.
Responsibility is a duty owed and cannot be delegated.
Matching authority and responsibility is referred to as the principle of
correspondence.
What is delegation?
The process which involves a manager passing down authority to a subordinate, but
maintaining ultimate responsibility.
What is power?
The ability to do things or get things done, regardless of authority.
French and Raven identified 5 sources of power:
● Reward
● Referent/Charismatic
● Coercive
● Expert
● Legitimate
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What is leadership?
Encouraging others to work willingly towards goals.
Leadership is related to the concepts of power and motivation.
Managers have authority, leaders have power.
Leadership is concerned with setting goals and inspiring people to commit to
achievement of organisational goals.
A leader is someone “who exercises influence over other people”
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THEORIES OF LEADERSHIP – TRAIT THEORY
Some theorists believe leadership stems from having the right traits or
characteristics, such as:
● Self assurance
● Above average intelligence
● Helicopter factor
● Entrepreneurial skill
● Health
● Above average height (!)
● Co-operation
● Tact
● Courtesy
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THEORIES OF LEADERSHIP – ACTION CENTRED
LEADERSHIP
Adair maintains that good leadership is about balancing 3 sets of needs
● The task
● The team
● The Individual
Team Individual
Task
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THEORIES OF LEADERSHIP – BLAKE AND MOUTON
Blake and Mouton identified 2 variables impacting leadership style:
Blake and Mouton identified 5 extreme styles:
● Task Manager
● Country Club Manager
● Impoverished Manager
● Middle Road Manager
● Team manager.
0 9
9
0
Team
/People
Task/Production
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THEORIES OF LEADERSHIP – THE ASHRIDGE MODEL
The Ashridge model identifies 4 management styles along a continuum.
Tells Sells Consults Joins
● Tells
● Sells
● Consults
● Joins
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THEORIES OF LEADERSHIP – FIEDLER
The most appropriate leadership style depends on the situation in which the leader
finds himself.
Fiedler noted 3 variables
● Leader/member relations
● Task structure
● Power
These variables combine in a number of ways creating situations which are
extremely favourable / unfavourable or moderately favourable / unfavourable -
Favourable Unfavourable
Leader / member relations Leader is liked / respected Leader is not liked /
respected
Task structure Well structured Vague and unstructured
Power Leader has power Leader lacks power
In extreme situations a psychologically distant style is most effective.
In moderate situations a psychologically close style would be most effective.
Fiedler’s theory is an example of contingency theory.
What is contingency theory?
There is no one perfect management style to suit all situations.
The right style depends on the situation in which the leader finds himself.
What is situational leadership?
Situational leadership refers to the ability to adapt leadership style to suit a
changing situation.
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Functional leaders
Functional leaders have expert power.
They are able to influence other through their knowledge and expertise.
Leadership and change - Bennis
Bennis distinguishes between 2 types of leader:
● Transactional
● Transformational
He focuses on the need to inspire change rather than impose it.
Leadership and change - Kotter
Kotter identifies 6 approaches to managing change:
● Participation and involvement
● Education and Communication
● Facilitation and Support
● Manipulation and co-optation
● Negotiation and Agreement
● Explicit and Implicit Coercion
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Leadership and change – Heifetz
Heifetz suggests that the traditional model was for leaders to have all the answers,
make all the decisions and impose change on the workers.
Instead he advocates that leaders provide support and guidance to help workers
find solutions and implement change themselves.
Heifetz identifies 2 types of change:
● Technical change
● Adaptive change
When dealing with adaptive change, Heifetz suggests the following approach:
● Recognition
● Application of appropriate pressure
● Focus
● Ownership
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Chapter 7
Individuals and groups
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CHAPTER CONTENTS
GROUPS AND TEAMS ---------------------------------------------------- 59
WHAT IS A GROUP? 59
WHAT IS A TEAM? 59
WHY ARE TEAMS USEFUL? 59
TEAM FORMATION ------------------------------------------------------- 60
TEAM ROLES - BELBIN 60
TEAM FORMATION – TUCKMAN 60
TEAM EFFECTIVENESS 61
WHAT IS A COMMITTEE? 61
INDIVIDUALS ------------------------------------------------------------ 62
INDIVIDUAL BEHAVIOUR 62
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GROUPS AND TEAMS
What is a group?
“Any collection of people who perceive themselves to be a group.”
Attributes of groups:
● Shared identity
● Leadership
● Loyalty
● A common purpose.
Groups can be either formal or informal.
What is a team?
A number of people, who possess complementary skills, and are committed to
common goals and purpose, for which they hold themselves accountable.
Why are teams useful?
There are a number of benefits to team working:
● Efficiency
● Effectiveness
● Motivation
● Blending skills
● Generating ideas
● Better decision making.
There are also limitations of team working:
● Conflict
● Groupthink.
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TEAM FORMATION
Team roles - Belbin
When forming a fully functional team, Belbin advocates that members should be
able to perform a well balanced mix of roles.
These roles are not fixed to one individual member.
Members can carry out more than one role.
These roles are:
● Plant
● Resource investigator
● Co-ordinator (Leader)
● Shaper
● Monitor-Evaluator
● Team worker
● Implementer (Company Worker)
● Completer-Finisher
● Specialist (Expert).
Team formation – Tuckman
Tuckman suggests that groups develop into teams by going through 4 stages:
● Forming
● Storming
● Norming
● Performing.
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Other writers have included two additional stages:
● Dorming
● Mourning/Adjourning.
Team effectiveness
Effectiveness and cohesion usually go together.
Cohesion can be increased through:
● Team size
● Homogeneity of members
● External threat
● Team reward
● Strong leadership
● Goal congruence.
Woodcock identifies blockages to effective teamwork.
Remove the blockage, and the team will be effective.
● Inappropriate leadership
● Unqualified membership
● Unconstructive climate
● Unclear objectives
● Poor achievement
● Ineffective work methods
● Insufficient openness
● Undeveloped individuals
● Low creative capacity
● Unconstructive relationships.
What is a committee?
A committee is a group of people responsible for a particular issue.
A committee could be:
● Temporary
● Permanent.
Examples of committees
● Health and Safety Committee
● Audit Committee
● Ethics Committee.
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INDIVIDUALS
Individual behaviour
There are a number of factors which influence an individual’s behaviour and
performance at work.
These include:
● Attitude – persistent feelings & behaviour tendencies directed towards specific
people, ideas, objects etc
● Intelligence
● Personality – influences an individual’s behaviour & performance
● Motivation Level – why people choose to do one thing rather than another
● Perception – individuals select, organise & interpret the stimuli they receive.
Three types of behaviour that can be demonstrated by an individual:
● Assertive
● Aggressive
● Passive.
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Chapter 8
Motivating people
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CHAPTER CONTENTS
MOTIVATION ------------------------------------------------------------- 65
WHAT IS MOTIVATION? 65
THEORIES OF MOTIVATION -------------------------------------------- 66
CONTENT THEORY – MASLOW: THE HIERARCHY OF NEEDS 66
CONTENT THEORY – HERZBERG: HYGIENE-MOTIVATION THEORY 67
PROCESS THEORY – VROOM: EXPECTANCY THEORY 67
MCGREGOR: THEORY X AND THEORY Y 68
REWARDS AND INCENTIVES ------------------------------------------- 69
INTRINSIC VS EXTRINSIC REWARD 69
REWARD SYSTEMS 69
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MOTIVATION
What is motivation?
The urge to take action to achieve a specific goal.
Why is motivation important?
Some of the benefits of motivation to the organisation and individual and team
include:
The Organisation
● Increased output
● Lower staff turnover
● Better quality of work
● Greater commitment
● Less absenteeism
● Innovation
The Individual
● Improved morale
● Greater sense of purpose
● Improved self esteem
● More challenging work
The Team
Motivation can also improve teamwork, by:
● Increasing goal congruence
● Reducing conflict.
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THEORIES OF MOTIVATION
Theories of motivation can be classified into 2 main types:
● Content Theory – what are the things that motivate people.
● Process Theory – how can people be motivated.
Content Theory – Maslow: The hierarchy of needs
Maslow believed all human beings are driven by a set of needs which can be set in
a hierarchy.
Individuals become motivated once they have the opportunity to fulfil these needs.
● Basic/Physiological
● Safety/Security
● Social
● Ego/Esteem
● Self-fulfilment/Self-actualisation
Basic/Physiological
Safety/Security
Social
Ego/Esteem
Self-fulfilment
Self-actualisation
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Content theory – Herzberg: hygiene-motivation theory
Herzberg theory is based on two factors involved in motivation:
● The need to avoid unpleasantness - hygiene factors
● The need for personal growth – motivator factors.
The hygiene factors are concerned with the environment and conditions of work.
These factors can stop people from being dissatisfied at work, but are not enough
to motivate them.
The motivator factors are connected to the work itself and help to create job
satisfaction which leads to motivation.
This theory is also referred to as the Two Factor Theory: hygiene factors and
motivator factors.
Process theory – Vroom: expectancy theory
Vroom was more interested in the process individuals go through in order to
become motivated.
He believes that how motivated an individual is to achieve a task depends on the
extent to which the results of his efforts will contribute to his personal needs and/or
goals.
He developed a formula which he believed measured motivation:
V x E = F
V = Valence
E = Expectancy
F = Force of motivation
Vroom believed that the force of an individual’s motivation depends on two factors:
● Valence: the strength of his preference for a certain outcome/reward
● Expectancy: the individual’s perception the behaviour will result in the
outcome/reward.
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McGregor: theory X and theory Y
Theory X and theory Y relates to the assumptions a manager has about his staff.
Theory X assumes people dislike work and responsibility, and will avoid it is
possible. As a result:
● Workers only do what they are told to
● Workers must be forced to work.
Theory Y assumes people do not dislike work, and can be motivated to seek
challenge and responsibility in work. As a result:
● Workers make their own decisions
● Workers are self-motivated.
Theories X and Y are assumptions and not actual types of people.
However, if a manager treats his employees as if they are Theory X, they will
behave like Theory X workers which could result in de-motivation.
If a manager treats employees as if Theory Y were true, then their behaviour will
change accordingly.
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REWARDS AND INCENTIVES
A reward is
A token given to an individual/team in recognition of their success or contribution.
A reward can be monetary or non monetary.
An incentive is
The offer of a reward given to an individual/team in order to motivate them to
behave in a way to earn it.
Intrinsic vs extrinsic reward
Rewards can be intrinsic or extrinsic:
Extrinsic rewards are external to the control of individual and is dependent on the
decision of others
● For example: pay, praise and benefits.
Intrinsic rewards are internal to the individual and arises from performance of the
work
● For example: job status, satisfaction and achievement.
Intrinsic rewards could also be a result of job design
● Job enrichment
● Job enlargement
● Job rotation.
Reward systems
A good reward system should
● Motivate employees
● Decrease turnover
● Attract prospective employees
● Create goal congruence
● Be fair and objective
● Encourage innovation.
Examples of reward systems include:
● Commission
● Bonus schemes
● Profit sharing
● Management by Objective.
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Chapter 9
The role of accounting
CHAPTER 9 – THE ROLE OF ACCOUNTING
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CHAPTER CONTENTS
THE ROLE OF ACCOUNTING--------------------------------------------- 73
WHAT IS THE ROLE OF THE ACCOUNTING FUNCTION? 73
THE LAW GOVERNING THE ACCOUNTING FUNCTION ---------------- 74
REQUIREMENTS FOR FINANCIAL STATEMENTS 74
HOW ACCOUNTING STANDARDS ARE CREATED 75
THE HISTORY OF ACCOUNTING ---------------------------------------- 76
FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING ------- 77
TREASURY ---------------------------------------------------------------- 78
TAXATION ---------------------------------------------------------------- 79
FINANCIAL SYSTEMS ---------------------------------------------------- 80
FINANCIAL SYSTEMS - PAYROLL 80
FINANCIAL SYSTEMS – INVOICING (SALES) 81
FINANCIAL SYSTEMS – INVOICING (PURCHASES) 82
FINANCIAL SYSTEMS – CREDIT CONTROL 83
FINANCIAL SYSTEMS – CASH 84
FINANCIAL SYSTEMS – WORKING CAPITAL 84
COMPUTERISED SYSTEMS 84
ACCOUNTING AND OTHER BUSINESS FUNCTIONS ------------------- 85
ACCOUNTING AND PRODUCTION 85
ACCOUNTING AND PURCHASING 85
ACCOUNTING AND MARKETING 85
THE MARKETING DEPARTMENT ---------------------------------------- 86
WHAT IS MARKETING? 86
WHAT IS THE MARKETING MIX? 86
HOW DEPARTMENTS FIT TOGETHER – PORTER’S VALUE CHAIN --- 88
OTHER DEPARTMENTS 89
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THE ROLE OF ACCOUNTING
What is the role of the accounting function?
The accounting function plays an important role within the organisation.
This includes:
● Establishing financial procedures
● Implementing financial procedures
● Monitoring performance.
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THE LAW GOVERNING THE ACCOUNTING FUNCTION
● Companies are usually required to submit their accounts to a government
regulated department, eg Companies House in the UK.
● Companies are accountable to the tax authorities in the country in which they
are based.
● Companies are required to retain their accounting records for a minimum
period (eg 7 years).
● Companies may be accountable to industry regulators.
● Companies may also have to maintain a register of shareholders, or a register
of directors.
Requirements for financial statements
In the UK, the Companies Act requires financial statements to be true and fair.
General requirements regarding the preparation of accounts include:
● Following accounting standards
● Following generally accepted best practice
● Having information of sufficient quality
● Having information of sufficient quantity
● Being free from material misstatement.
Directors are responsible for the creation of financial statements.
This responsibility is likely to be delegated to the Finance Director and the Finance
department.
Their production requires co-operation between different areas of the finance team,
and may sometimes involve help from an external accounting firm.
In order to produce financial statements of sufficient quality it will be necessary to
keep a record of transactions throughout the year.
Failure to comply with regulations can have serious consequences:
● Failure to keep accounting records is a criminal offence
● Failure to present a true and fair view is a criminal offence
● Inaccurate tax records could lead to tax evasion
● Poor accounting could lead to a qualified audit report
● Poor accounting could lead to business failure.
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How accounting standards are created
The International Accounting Standards board (IASB) aims to develop a single set
of international financial reporting standards (IFRS).
The benefits of IFRSs include
● No requirement to develop national standards
● Reassurance for investors
● Ease of preparation for multi-national companies.
Nearly 100 countries adopt international standards, or amend national standards to
bring them in line with their international equivalents.
The creation of a standard:
DP
Working Group
Discussion
Public Comment
ED
IFRS
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THE HISTORY OF ACCOUNTING
Accounting records have been kept for centuries
In the15th Century Luca Pacioli created the double entry system
As companies became more prevalent, accounting became more important
The growth in the separation of ownership and control further
strengthened the need for good accounting practices
Accounting standards were developed to assist comparison
The increase in financial computer systems saw a reduction in manual bookkeeping
Large multinational companies now look to accountants to provide assistance on many areas of business
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FINANCIAL ACCOUNTING AND MANAGEMENT
ACCOUNTING
Management Accounting Financial Accounting
Users Internal Internal and External
Type of information
Planning
Control
Decision making
Financial Statements
Regulation Generally accepted methods of
best practice
Accounting standards
Companies Act
Time period Future orientation Historical
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TREASURY
The treasury function deals with the following:
● Cash management
● Financing
● Foreign currency
● Tax
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TAXATION
One of the responsibilities within the finance department is calculation of the
business tax liability.
Businesses will seek to minimise their tax liability, whilst complying with legislation.
● Tax mitigation
● Tax avoidance
● Tax evasion
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FINANCIAL SYSTEMS
A system is a collection of procedures and processes.
A system can be manual as well as computerised.
Many organisations have a procedures manual which documents all existing
systems.
Financial systems - payroll
The creation of a standard:
Record hours worked
Record overtime worked
Obtain pay rates
Calculate pay
Calculate deductions
Net pay paid to employees
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Financial systems – invoicing (sales)
Order received
Order processed
Goods despatched
Invoice raised
Record in accounts
Payment received
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Financial systems – invoicing (purchases)
Authority to order
Order
Goods received
Invoice received
Invoice recorded
Payment made
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Financial systems – credit control
Receive Order
Credit check
Create customer account
Despatch goods
Invoice goods
Reminder letter(s)/Call(s)
Write off debt
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Financial systems – cash
This relates to payments to and from the bank
● Receipts from customers
● Payments to customers
● Petty cash.
Financial systems – working capital
Working capital is the amount of capital available for the day to day running of the
organisation.
It is made up of
● Inventory
● Receivables
● Cash
● Payables
Computerised systems
Most companies now rely on automated financial systems.
There are a variety of “off the shelf” packages available.
Some organisations choose to purchase bespoke systems.
There are advantages and disadvantages to having automated systems:
Advantages Disadvantages
● Faster ● Investment
● Complex processing ● Training
● Human error ● Corruption
● Security ● Not as portable as ledgers
● Analysis
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ACCOUNTING AND OTHER BUSINESS FUNCTIONS
The accounting function can be of assistance to a number of other functions within
the business.
Accounting and production
Accounting can provide assistance with:
● Budgeting
● Performance measurement
● Calculation of Overhead Absorption Rates
Accounting and purchasing
Accounting can provide assistance with:
● Budgeting
● Variance analysis
● Pricing
● Payment
Accounting and marketing
Accounting can provide assistance with:
● Budgeting
● Pricing
● Market size and share
● Assessment of campaigns
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THE MARKETING DEPARTMENT
The Marketing department fulfils an important role within the organization.
What is marketing?
“The management process which identifies, anticipates and satisfies customer
requirements (needs) efficiently and profitably” (Chartered Institute of Marketing).
A key marketing tool is the marketing mix.
What is the marketing mix?
A set of controllable variables which can be blended to elicit a response from
customers.
The Marketing mix takes the form of the 4 Ps.
The 4 Ps are:
● Product
● Price
● Place
● Promotion.
Product
The product itself consists of 3 elements:
● Core product
● Actual product
● Augmented product
Price
There are 4 issues to consider when pricing a product:
● Cost
● Customers
● Competitors
● Corporate objectives
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Promotion
There are 5 elements to the promotion mix:
● Advertising
● Sales promotion
● Personal selling
● Public Relations
● Direct marketing
Place
There are 2 main choices to consider under the heading of place:
● Selling direct
● Selling via intermediaries.
Place also relates to all issues concerning the physical location where a product can
be purchased and the logistics of distribution.
Marketing supports overall organisational strategy
and can be viewed under the same headings as strategic planning:
● Analysis
● Choice
● Implementation
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HOW DEPARTMENTS FIT TOGETHER – PORTER’S VALUE
CHAIN
When considering the links between departments within the organisation, it can be
useful to use Porter’s Value chain –
The Value Chain – Primary Activities
● Inbound Logistics
● Operations
● Outbound Logistics
● Marketing and Sales
● Service
The Value Chain – Support Activities
● Technology
● HRM
● Procurement
● Infrastructure
Inbound
LogisticsOperations
Outbound
Logistics
Sales and
MarketingService
Infrastructure
Procurement
HRM
Technology
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Other departments
R&D
The R&D department is responsible for the development of new products and the
improvement and amendment of existing products.
Admin
The administrative function is responsible for the processing of transactions and
any other administrative support required.
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Chapter 10
The macro-economic
environment
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CHAPTER CONTENTS
THE MACROECONOMIC ENVIRONMENT ------------------------------- 93
WHAT IS ECONOMICS? 93
WHAT IS MACROECONOMICS? 93
MACROECONOMIC POLICY 93
FISCAL AND MONETARY POLICY 93
MONETARY POLICY 93
FISCAL POLICY 94
DETERMINANTS OF ACTIVITY IN THE ECONOMY -------------------- 95
THE ECONOMIC CYCLE -------------------------------------------------- 96
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THE MACROECONOMIC ENVIRONMENT
What is economics?
The study of the production, distribution and consumption of goods and services.
What is macroeconomics?
The branch of economics that deals with the performance, structure and behaviour
of the economy as a whole.
Macroeconomic factors
Macroeconomics is concerned with:
● The overall demand for goods in the economy
● The total output of goods in the economy
● The supply of factors of production
● National Income
● National Expenditure
● Government Policy.
Macroeconomic policy
Most governments will have similar macroeconomic aims -
● Economic growth
● Low inflation
● Low unemployment
● Balance of payments.
Fiscal and monetary policy
In order to maintain stability and encourage growth, governments make
adjustments to the economy.
Monetary policy
With monetary policy, governments aim to impact the supply of money in the
economy and hence spending.
Governments have two main tools to affect the money supply:
● Interest rates
● Foreign exchange.
Monetary policy is usually described as either expansionary or contractionary
● Expansionary (to boost the economy).
● Contractionary (to cool the economy).
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Fiscal policy
Fiscal policy relates to the level of government spending, borrowing and taxation
used to manage the economy
● Government spending
● Taxation (Direct or indirect)
Fiscal policy is usually described as either expansionary, contractionary or neutral.
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DETERMINANTS OF ACTIVITY IN THE ECONOMY
There are a number of factors which influence the level of activity within the
economy:
● Confidence
● Aggregate demand
● Supply of finance
● Developments in the factors of production
● Government policy
● Exchange rate movements
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THE ECONOMIC CYCLE
The economic cycle refers to fluctuations in economic activity over the longer term.
The cycle alternates between periods of relatively rapid growth and periods of
relative stagnation and decline.
The impact of economic issues:
● Unemployment
● Inflation
● Stagnation
● Growth
● Balance of payments disequilibrium.
Time
Output
Time
Output
Output
Recession Depression Recovery Boom Recession Depression
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Chapter 11
The business
environment
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CHAPTER CONTENTS
THE BUSINESS ENVIRONMENT ----------------------------------------- 99
WHAT IS THE ENVIRONMENT? 99
PEST ANALYSIS --------------------------------------------------------- 100
POLITICAL/LEGAL FACTORS 100
SOCIO-CULTURAL FACTORS 101
TECHNOLOGICAL FACTORS 102
COMPETITION ----------------------------------------------------------- 103
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THE BUSINESS ENVIRONMENT
What is the environment?
The world beyond the boundary of our organisation.
Before making any decisions about the future, an organisation needs to understand
the environment in which it operates.
This can be done via PEST analysis.
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PEST ANALYSIS
Political/Legal
Economic
Socio-Cultural
Technological
Political/legal factors
Organisations will need to consider:
● Legislation
● Regulation
● Broader political issues.
This may impact the organisation at a number of levels:
● Globally (supra-national organisations)
● Nationally
● Locally.
Protecting employees – health and safety at work
Many countries (including the UK) have legislation in place to protect individuals at
work.
Employers must provide:
● Safe entrance and exit to and from workplaces
● A safe working environment
● Safe processes
● Safe equipment
● Appropriate training
● Appropriate investigation of accidents/injuries at work.
Employees must:
● Consider their own safety at work
● Consider the safety of those around them
● Comply with safety guidelines at work.
Health and Safety is a legal issue which employers must take seriously.
There are other reasons to take Health and Safety seriously:
● Ethics
● Motivation
● Reputation
● Financial issues eg damages
● Loss of business.
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Protecting confidentiality – data protection and data security
What is data protection?
Organisations may hold information regarding their customers and employees.
Data protection relates to the protection of these individuals against the misuse of
personal information by the organisation.
The principles of data protection
Legislation varies from country to country, but would be likely to cover the
following points:
● Personal data should be acquired and processed lawfully
● Data should not be used for purposes incompatible with the original collection
purpose
● Data collected should be relevant for the purpose of processing, and should
not be excessive
● Data collected should be accurate, and be kept up to date
● Data should not be kept for longer than required
● The organisation should make every effort to protect personal data from
unlawful processing, loss, destruction or damage.
What is data security?
Data security relates to keeping data safe from corruption, unauthorised access or
alteration.
There are a number of risks to data security:
● Physical damage
● Human damage
● Operational problems
● Data corruption.
DAVID & TRACEY – shouldn’t there be a heading ECONOMIC FACTORS?
Debbie
Socio-cultural factors
Social and cultural influences vary from country to country.
Some factors to consider might include:
● Religion
● Attitude to globalisation
● Language
● Work/life balance
● Distribution of wealth
● Population distribution
● Health
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● Life expectancy and age distribution
● Local ethical issues/values
● Local tastes/trends.
Sometimes a government may take specific action to address social issues:
● Health
● Population structure
● Housing
● Employment.
Technological factors
Technology can influence many aspects of the organisation:
● Production methods
● Marketing and distribution
● Structure
● Communication
● Product development
● Purchasing.
Technology and the organisational structure
Technology has led to an increase in the following:
● Downsizing
● Delayering
● Outsourcing.
Technology and the consumer
Technology has changed the way we live:
● Homeworking
● On-line shopping
● On-line banking
● Distance learning
● Home entertainment.
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COMPETITION
Competitors are also part of the environment and require analysis.
This could be done via Porter’s 5 Forces.
The five forces are used to assess the attractiveness, or profit potential within an
industry.
Once the organisation has identified the risks inherent in the environment, they can
take action to mitigate those risks.
● The threat of new entrants (reduced by the existence of barriers to entry)
● The bargaining power of buyers
● The bargaining power of suppliers
● The threat of substitutes
● Rivalry and competition within the industry (influenced by barriers to exit).
Porter stated that a firm wishing to obtain competitive advantage over its rivals is
faced with three options:
1. Cost Leadership Strategy.
2. Differentiation Strategy.
3. Focus Strategy (Cost or Differentiation).
The bargaining power
of buyers
The bargaining power
of suppliers Rivalry and competition
The threat of new entrants
The threat of substitutes
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Chapter 12
Business organisation
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BUSINESS ORGANISATIONS AND STRUCTURE ---------------------- 107
WHAT IS AN ORGANISATION? 107
ORGANISATIONAL STRUCTURE 107
INFLUENCES ON ORGANISATIONAL STRUCTURE 108
CENTRALISATION OR DECENTRALISATION? 109
STAKEHOLDERS --------------------------------------------------------- 111
INTERNAL STAKEHOLDERS 111
CONNECTED STAKEHOLDERS 111
EXTERNAL STAKEHOLDERS 112
STAKEHOLDER CONFLICT 112
THE INFORMAL ORGANISATION -------------------------------------- 113
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BUSINESS ORGANISATIONS AND STRUCTURE
What is an organisation?
An organisation is a social arrangement for the controlled performance of collective
goals. (Buchanan and Huczynski).
There are many different types of organisation:
● Commercial – Profit seeking organisations
● NFP – Not for Profit organisations like charities or schools
● Public sector – Government owned organisations or departments
● Co-operatives – Owned and controlled by the members for the benefit of the
members.
Organisational structure
Organisations can be arranged in several ways -
● Entrepreneurial/Simple
● Functional
● Divisional
● Matrix.
Entrepreneurial/Simple
Functional
Divisional
Boss
Team
Boss
Finance Sales Mktg
Fin Sales Mktg Fin Sales Mktg Fin Sales Mktg
Div 1 Div 1 Div 1
Boss
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Matrix
Influences on organisational structure
There are many factors influencing the organisational structure -
● Environment
● Culture
● Staff
● Tasks
● Span of control
● Scalar chain
● Centralisation
Span of control
The number of people reporting to one manager.
Influences on the span of control:
● Geographical distribution
● Ability
● Personality
● Support
● Organisational culture
● Scalar chain.
Sales Mktg HR Finance
Div 1
Div 2
Div 3
Functions
Div
isio
ns
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Scalar chain
The number of levels in the hierarchy.
Long scalar chain + narrow span of control = tall, narrow structure -
Short scalar chain + wide span of control = flat structure -
Centralisation or decentralisation?
Who makes the decisions?
Advantages and disadvantages of decentralisation:
Advantages:
● Faster decisions
● Expert decisions
● Motivation
● Development
● Frees up strategic apex.
Disadvantages:
● Duplication
● Comparison
● Training
● Inconsistency
● Dysfunctional decisions.
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Levels of planning within the organisation
Anthony’s hierarchy – 3 levels of planning:
The Strategic Planning Process
The Rational approach to strategic planning breaks the process down into three
distinct steps:
1. Strategic Analysis
2. Strategic Choice
3. Strategic Implementation.
● Long term
● Whole organisation
● Fundamental decisions
● Divisions
● Regions
● Day to day
● Functional
● Short term
Operational / Functional
Tactical
Strategic
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STAKEHOLDERS
A stakeholder is anyone with an interest in the organisation.
Stakeholders can be divided into 3 main groups:
● Internal
● Connected
● External.
Internal stakeholders
Stakeholder Interest
● Staff
Regular pay
Interesting work
Career progression
● Management Influence
Bonuses
Prestige
Connected stakeholders
Stakeholder Interest
● Buyers
Quality product
Reliable supply
Credit terms
● Suppliers Timely payment
Ongoing relationship
● Bank Security of investment
Credit rating
Regular payment
● Shareholders Dividends
Capital growth
Reputation
Future plans
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External stakeholders
Stakeholder Interest
● Government
Legislation
Taxation
Job creation
● Local community Pollution
Employment
Prosperity
● Pressure groups Ethics
● Industry regulator Regulation
Stakeholder conflict
Sometimes stakeholder interests are in direct conflict, eg:
● Staff vs Shareholders in relation to possible pay-rises
● Customers vs Shareholders in relation to product enhancement.
There are a number of methods for dealing with Stakeholder conflict identified by
Cyert & March:
● Sequential attention
● Satisficing
● Prioritisation
● Side payments/compensation.
Stakeholders can be mapped on Mendelow’s Matrix, in terms of their level of
interest and power.
o this can be used to track the changing influences between different
stakeholder groups over time
o & can be used to assess the likely impact that a strategy will have on
different stakeholder groups.
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THE INFORMAL ORGANISATION
In addition to a formal organisational structure, informal relationships, power
structures and communication networks exist.
It can be particularly important to identify the informal organisation when
attempting to implement change.
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Chapter 13
Organisational culture
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CHAPTER CONTENTS
ORGANISATIONAL CULTURE ------------------------------------------ 117
WHAT IS ORGANISATIONAL CULTURE? 117
FACTORS INFLUENCING ORGANISATIONAL CULTURE 117
THE LINK BETWEEN LEADERSHIP AND ORGANISATIONAL CULTURE (SCHEIN) 118
THE LINK BETWEEN STRUCTURE AND ORGANISATIONAL CULTURE (HANDY) 118
THE LINK BETWEEN NATIONAL CULTURE AND ORGANISATIONAL CULTURE (HOFSTEDE) 119
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ORGANISATIONAL CULTURE
What is organisational culture?
The way we do things around here. (Handy).
The personality of an organisation -
● Values
● Attitudes
● Norms
● Expectations
● Rituals, routines and symbols.
Factors influencing organisational culture
● Size
● Technology
● History
● Ownership
● Diversity
● Age
● Structure
● Leadership
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The link between leadership and organisational culture
(Schein)
The original leaders of an organisation create the culture.
Subsequent leaders must understand and embody the culture.
There are 3 levels of culture that leaders must appreciate:
● Artefacts
● Espoused values
● Basic assumptions (the most difficult to identify and understand)
The link between structure and organisational culture
(Handy)
Structure is a major influence on culture.
Handy popularised 4 cultural types or forms (originally identified by Harrison):
● The Power culture (usually associated with the entrepreneurial structure)
● The Role culture (usually associated with the functional structure)
● The Task culture (usually associated with the matrix structure)
● The Person culture (for example a doctors’ surgery)
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The link between national culture and organisational
culture (Hofstede)
Hofstede believed that national culture can have a huge impact on organisational
culture.
He identified 5 dimensions along which national cultures tends to vary:
● Power Distance (High or Low)
● Uncertainty Avoidance (High or Low)
● Individualism vs collectivism
● Masculinity vs Femininity
● Time Orientation – does the firm think long-term or short-term?
Hofstede is not attempting to stereotype nationalities, but to provide an insight into
why behaviour and assumptions might differ across geographical regions.
This can be particularly useful when expanding internationally.
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Chapter 14
Corporate governance
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CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY -------- 123
WHAT IS CORPORATE GOVERNANCE? 123
THE PRINCIPLES OF CORPORATE GOVERNANCE 123
GUIDANCE ON CORPORATE GOVERNANCE 123
THE ROLE OF NEDS 124
WHAT IS SOCIAL RESPONSIBILITY? 124
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CORPORATE GOVERNANCE AND SOCIAL
RESPONSIBILITY
What is corporate governance?
The system by which organisations are directed and controlled.
(The Cadbury Report)
Why is corporate governance required?
Companies are owned by the shareholders, but run by the board of directors.
Corporate governance ensures the company is run in the interests of the
shareholders.
The principles of corporate governance
The OECD lays out 5 principles of good governance:
● The rights of shareholders
● Equitable treatment of shareholders
● Stakeholder relations
● Disclosure and transparency
● The responsibilities of the board.
Guidance on corporate governance
All companies incorporated in the UK and listed on the London Stock Exchange
(LSE) are required to report on how they have applied the UK Corporate
Governance Code.
Overseas companies listed on the LSE are required to disclose any significant
differences between their application of corporate governance and the guidelines
set out in the UK Corporate Governance Code.
The UK Corporate Governance Code contains both general principles and specific
provisions. Listed companies are required to report on how they have applied the
Code, and where they have not complied with the Code, to provide explanations.
A key issue in corporate governance is that of balance, eg:
● The role of Non-executive directors (NEDs)
● Chairman and chief executive should not be the same person.
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The role of NEDs
Executive directors are involved full-time with the running of the organisation.
Non-executive directors devote some of their time to the organisation, but are not
part of the executive management team.
NEDs will usually be paid fees (eg a daily rate) to reflect the time/responsibility
devoted to the organisation.
They would not usually be remunerated via share options, as this could impact on
their independence.
At least half the board (excluding the chairman) should consist of NEDs.
NEDs should be independent of the organisation and have an important role to
play:
● Industry expertise
● Corporate conscience
● Balance in decision making
● Insight on corporate governance
● Remuneration committee (at least 3 NEDs)
● Audit committee (at least 3 NEDs).
What is social responsibility?
Behaviour which recognises the organisation’s impact on society and its
stakeholders.
More and more organisations are adopting a Stakeholder rather than a
Shareholder view.
This is further underlined by the OECD recommendation to promote good
stakeholder relations.
Many organisations attempt to include stakeholders in the decision making process
via:
● Questionnaires
● Focus groups
● Analysis of customer feedback
● Consultation with the local community
● Formal stakeholder analysis.
Although behaving in a socially responsible way may have an adverse impact on
short term profits, it is generally considered to be the right decision for the longer
term growth and success of the organisation.
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Chapter 15
Ethical considerations
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CHAPTER CONTENTS
ETHICAL CONSIDERATIONS ------------------------------------------- 127
WHAT IS ETHICS? 127
WHY IS ETHICS IMPORTANT? 127
ETHICS AND THE ORGANISATION 127
ETHICS AND THE INDIVIDUAL 127
APPROACHES TO ETHICS 128
THE ACCA CODE OF ETHICS 129
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ETHICAL CONSIDERATIONS
What is ethics?
That branch of philosophy dealing with values relating to human conduct, with
respect to the rightness and wrongness of certain actions and to the goodness and
badness of the motives and ends of such actions.
The science of right and wrong.
Why is ethics important?
As ethical issues become more important to society in general, and an
organisation’s customers in particular; organisations need to recognise the value of
ethics.
An organisation failing to appreciate the importance of ethical issues will be out
synch with its customers.
Ethics and the organisation
From the organisations point of view, ethical behaviour:
● Is part of a framework of good corporate governance
● Could be a way of differentiating an organisation from the competition
● Can often reassure shareholders
● Can aid staff motivation.
Ethics and the individual
From the customer’s point of view, ethical companies:
● Conform to customers changing expectations
● Will often be chosen in preference to unethical companies, despite higher
prices.
From the employee’s point of view, ethical companies:
● Will have an ethical framework in place leading to fewer difficult decisions and
personal dilemmas
● Will often be chosen in preference to unethical companies, with regard to
employment.
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Ethical considerations
The moral issues facing and organisation differ from industry to industry – eg:
Industry Ethical Issues
● Manufacturing Pollution
Sourcing
● Pharmaceuticals Testing
Pricing
● All Industries Health and Safety
Employee welfare
Approaches to ethics
As members of the accounting profession we have:
● A responsibility to influence ethical behaviour at work.
● A duty to act in the public interest.
What is a profession?
Professions as opposed to other occupations have the following characteristics:
● Theoretical knowledge gained through higher education (ie exams)
● A governing body (ie the ACCA)
● An ethical code (OPTIC).
Ethics
Shareholder view
Ethics is bad for business
- Comply with the law
- Provide employment Ethics is good for business Ethics is the right thing to do
- Generate wealth - Competitive advantage - Above and beyond the law
- Pre-empt legislation - Moral duty
- Wider investor base - Leave the world a better place
The moral viewEnlightened self-interest
Stakeholder View
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The ACCA code of ethics
The ACCA code is based on the International Federation of Accountants (IFAC) code
of ethics for professional accountants.
Objectivity
Professional behaviour
Technical/Professional competence
Integrity
Confidentiality
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Chapter 16
IT and systems
CHAPTER 16 – IT AND SYSTEMS
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INFORMATION TECHNOLOGY AND SYSTEMS ------------------------ 133
DATA AND INFORMATION 133
WHAT IS DATA? 133
WHAT IS INFORMATION? 133
SOURCES OF INFORMATION 134
LEVELS OF INFORMATION – ANTHONY’S HIERARCHY 134
WHAT IS A SYSTEM? --------------------------------------------------- 135
IT SYSTEM 135
SECURITY OF IT SYSTEMS 136
SPREADSHEETS AND DATABASES 136
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INFORMATION TECHNOLOGY AND SYSTEMS
Data and information
It is important to be able to distinguish between information and data.
What is data?
Data is raw facts and figures.
Data can be categorised as follows:
● Continuous
● Discrete
● Qualitative
● Quantitative
● Primary
● Secondary
What is information?
Information is data which has been processed so that it is meaningful to the
individual who receives it.
Data processing turns data into information.
The qualities of good information: (ACCURATE)
● Accurate
● Complete
● Cost effective
● Understandable/User friendly
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● Relevant
● Adaptable
● Timely
● Easy to use
Sources of information
Information can come from a variety of sources, both inside and outside the
organisation -
Internal External
Financial Record Government Statistics
Staff record Trade publications
Invoices Newspapers/journals
Intranet Internet
Company brochures Industry intelligence
Customer records Competitor Accounts
Management Accounts Customers
Levels of information – Anthony’s hierarchy
Different information is required at different levels within the organization.
● Longer term
● Summarised
● Uncertainty
● Infrequent
● Immediate/Shorter term
● More detailed
● Greater certainty
● More frequent
Operational / Functional
Tactical
Strategic
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WHAT IS A SYSTEM?
A system is a collection of procedure and processes.
Systems can be manual as well as automated.
There are some advantages to automating a system.
Advantages of automation include:
● Speed
● Accuracy
● Volume
● Elimination of Human error
● Complexity
● Presentation.
IT system
There are a variety of IT systems that can be used to provide information within the
organization.
These include:
System Description
ESS Executive Support System
Aids strategic decision making
MIS Management Information System
Converts data from internal sources into
information to aid managers make
decisions
DSS Decision Support System
Supports semi and unstructured decision
making
ES Expert System
Captures human expertise in a limited
area
KWS Knowledge Work System
Helps to create and facilitate new
knowledge into the organisation
OAS Office Automation System
Helps to increase productivity of data
and information workers
TPS Transaction Processing Software
Performs and records routine
transactions
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Security of IT systems
IT systems need to be protected from corruption, unauthorised access or alteration.
There are a number of risks to consider:
● Physical damage
● Human damage
● Operational problems
● Data corruption.
Spreadsheets and databases
Spreadsheets are widely used by finance professionals as well as many other
people within the organisation, as they
● are simple to use
● require little training
● are widely recognised.
Spreadsheets are more appropriate for the short-term analysis of data, rather than
long term storage.
For the storage of large volumes of data, a database may be more appropriate.
What is a database?
A database is a collection of structured data which can be manipulated.
Benefits of database Drawbacks of Databases
Avoidance of duplication of data Data security
One single source of data Data privacy
Better security More complex
Greater flexibility in use of data Costly
Consistency
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Chapter 17
Control and security
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CONTROL, SECURITY AND AUDIT ------------------------------------- 139
WHAT IS CONTROL? 139
WHAT IS INTERNAL CONTROL? 139
TYPES OF CONTROL 140
AUDITING --------------------------------------------------------------- 142
WHAT IS INTERNAL AUDITING? 142
LIMITATIONS OF INTERNAL AUDIT 142
WHAT IS EXTERNAL AUDITING? 142
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CONTROL, SECURITY AND AUDIT
What is control?
Control is a guiding mechanism which encourages people to behave in a particular
(goal congruent) way.
What is internal control?
Any action undertaken by management to ensure that the goals and objectives set
will be achieved.
According to Turnbull guidelines the purpose of internal control is to ensure:
● reliability of financial reporting
● effectiveness and efficiency of operations
● compliance with applicable laws and regulations.
● safeguard Company Assets
● the prevention and detection of fraud
The internal control framework includes:
● The control environment
● The risk assessment and response processes
● The information systems relevant to financial reporting
● Control activities
● Monitoring of controls.
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Types of control
There are several categories of internal control –
● Administrative and accounting controls
● Prevent, detect and correct controls
● Discretionary and non-discretionary controls
● Voluntary and mandated control
● Manual and automated controls
● General and application controls
● Financial and non-financial controls
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Internal control is within an organisation is important because it:
● Improves efficiency and effectiveness
● Is good corporate governance
● Is a legal requirement in some countries
● Could prevent fraud
● Alters the auditors approach to their work.
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AUDITING
It is important to distinguish between Internal and External auditing.
What is internal auditing?
An independent appraisal of the effectiveness of an organisation’s operation and
management by its own employees.
Internal auditors guide, monitor and attempt to improve processes within an
organization.
Internal Audit is an important element of the risk management of the organisation
and may be required to assess and advise on risk.
Limitations of internal audit
● Independence
● Resourcing
These limitations can be mitigated by the introduction of an Audit Committee.
What is external auditing?
A periodic examination of the accounting records conducted by an independent
third party, to assess whether they have been properly maintained are accurate
and comply with established principles, legislation and accounting standards.
External auditors will attempt to establish whether the accounts give a true and fair
view of the financial state of the organisation.
External auditing can act as an additional preventative control measure.
Internal vs external audit
Internal Auditor External Auditor
Employment Employee Third party
Requirement No legal requirement
Good Corporate Governance
Legal requirement for:
● Public companies
● Large companies
● Some public bodies
Scope Assist management
Financial and operational matters
Role determined by management
Report to shareholders
Financial matters
Role determined by statutory duty
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There are five different types of Audits:
● Operational
● Social
● Management Investigations
● Systems
● Transactions.
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Chapter 18
Fraud
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IDENTIFYING AND PREVENTING FRAUD ----------------------------- 147
WHAT IS FRAUD? 147
THE PREREQUISITES OF FRAUD 147
FACTORS INCREASING THE RISK OF FRAUD 147
PREVENTING FRAUD 147
INTERNAL CONTROLS 148
PERSONNEL POLICIES AND PROCEDURES 148
IMPLICATIONS OF FRAUD 148
ROLE OF MANAGEMENT IN PREVENTING/DETECTING FRAUD 149
ROLE OF INTERNAL AUDIT IN PREVENTING/DETECTING FRAUD 149
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IDENTIFYING AND PREVENTING FRAUD
What is fraud?
Fraud is an intentional act by one or more individuals among management, those
charged with governance, employees or third parties, involving the use of deception
to obtain an illegal or unjust advantage. (Auditing Practices Board).
In the context of the organisation, fraud can occur in one of two categories:
● Removal of Funds or Assets from the business
● Intentional misrepresentation of the financial position of the business.
Fraud may be perpetrated by a variety of people:
● Management
● Employees
● Third parties.
The prerequisites of fraud
For fraud to occur there must be:
● Dishonesty
● Motive
● Opportunity
Factors increasing the risk of fraud
When these factors are present there is a high risk that fraud may occur:
● Poor control systems
● Poor control environment
● Lack of supervision
● Low morale
● Unusual transactions
Preventing fraud
To prevent fraud the organisation needs to ensure that the following:
● Adequate internal controls
● Personnel policies and procedures.
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Internal controls
● Physical controls
● Segregation of duties
● Authorisation policies
● Management control
● Documentation
● Supervision
● Whistleblowing
● Personnel policies
● Investigation
Personnel policies and procedures
Specific personnel controls for the prevention of fraud include:
● Recruitment process
● Appraisals
● Staff development and training
● Emphasis on Ethics.
Implications of fraud
This depends entirely on the scale of the fraud, which can range widely
● Minor fraud
● Major fraud
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Role of management in preventing/detecting fraud
Management has a variety of roles to play:
● The board
● The audit committee
● Line management.
Role of internal audit in preventing/detecting fraud
Directors decide the exact role of internal audit, however their duties are likely to
involve:
● Testing controls
● Investigating specific instances of potential fraud.