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1. Corporate governance aims and principles

Corporate governance is the system by which businesses are directed and controlled

A set of relationships between a company's directors, its shareholders and other stakeholders

It also provides a structure through which the companies objectives are set and the means of

achieving those objectives and the monitoring performance are determined

What is corporate Governance aiming to achieve?

Provide a framework within which a company can pursue its strategy

Seeks to ensure Directors cannot ignore others and fulfill their responsibilities to shareholders

and other stakeholders with legitimate interest in the organisation

Aims to provide a means to management of risks the controls system that contribute to risk

management must be appropriate for the organisation

For stock exchange listed companies - Should improve investor confidence and attract more

investor finance

Principles behind corporate governance

Integrity- Straightforward dealing and necessary if business relationships are to be based on

trust

Probity -telling truth not deliberately misleading anyone

Fairness - Taking all stakeholders into account

Judgement - taking decisions that enhance prosperity for company

Accountability - account for actions

Responsibility - directors accept consequences may have personal impact on themselves

Transparency - for all information

Independence - For effective monitoring

Reputation - good reputation increases investor confidence

2. Shareholders and Stakeholders

Agents have the following responsibilities to their principles including:

Accountability for what they done

Obedience to principles wishes

Fiduciary duty to act in principal's best interests

Should not delegate responsibilities

Should act with appropriate degree of skill

Should keep affairs confidential

No conflict of interests

Agency problem

Shareholders will wish directors to take action to benefit shareholders interests - Shareholder

wealth maximisation

Directors may not do this

Their performance may be to the required standard

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The directors may also seek to benefit themselves that doesn't meet shareholder approval

Agency costs include monetary costs, time spent monitoring the directors activities,

communicating with the directors, reading the company accounts and attending the AGM

The time spent by the directors preparing information for the shareholders and answering

shareholder queries

If directors salary is linked to short term goals they might work at the expense of long term

goals.

Stakeholders are anyone human or non human that can affect or be affected the actions or

policies of an organisation

Stakeholders should be classified by how much influence organisation has over them

Internal stakeholders - employees, managers, directors

Connected stakeholders - business relation - shareholders, customers, competitors

External stakeholders - government, public, pressure groups

Primary stakeholders - difficult to continue without support - employees customers, suppliers,

government

Secondary stakeholders - can do without -wider community

Active stakeholders - seek to participate in organisations activity and decisions - managers,

regulators employees, large shareholders pressure groups

Passive stakeholders - Do not seek to participate in organisations activity and decisions - local

community, most shareholders, government

Narrow Stakeholders - most affected by strategy - shareholders, managers, suppliers,

customers, employees

Wider stakeholders - less affected by strategy - government, less dependent customers, wider

community

Stakeholder Theory

Normative - businesses should try to accommodate stakeholders

Implications - businesses have economic and ethical and philanthropic responsibilities

Instrumental - Businesses mainly have economic responsibilities will thus make stakeholders

happy and get more business

3. Governance codes and legislation

Reasons for development of corporate governance:

International investors want same security and rights surrounding investments as locals

Governments and stock exchanges want to attract companies to country or stock market

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Investors want high quality financial statements

Corporate scandals (enron) help raised governance concerns

Insider stock market system - dominated by few major investors

Outsider stock market system - more dispersed shareholdings greater separation between

owners and managers

Characteristics of codes based on principles

Focus on objective of governance

Provide guidance on areas such as culture and relationship between stakeholders where it is

difficult to set rules

Can be applied across different jurisdictions

Can be used as a benchmark for guidance in other countries

Enforced on a comply and explain basis

Advantages of Principles Based codes

No need for inflexible legislation that companies can find difficult to implement

Less costly to apply principles than to apply rules

Allows companies to develop their own approach to governance that is appropriate to the

companies needs

Enforcement puts emphasis on effective disclosure and investors can draw their own

conclusions

Disadvantages of Principles Based codes

Can be so broad that can be little help in practice

May be difficult to ascertain what companies can do and cannot do

Explain can be used as an easy option for non compliance with little explanation

Advantages of Rules Based codes

Emphasis on companies meeting required compliance

Allow no leeway

Issue is whether company complied or not

Should be easy to decide whether a company has complied or not

Disadvantages of Rules Based codes

Rules have to be drafted so they are unambiguous

May find difficulty with situations not covered in the rulebook

Companies may concentrate on the rules rather than the spirit of the rules

Corporate governance should be incorporated into a company's processes

OECD

Stresses the importance of companies maintaining the rights of shareholders and treating them

equitably

Aims to protect stakeholders and allowing stakeholders access to relevant information

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Companies should develop performance enhancing mechanisms for employees

Stresses need for timely and accurate disclosure of all relevant information

Board should maintain direction of the company, be well informed and exercise independent

judgement

Codes have been seen to be lagging behind advances in other developed countriesInternational codes are non binding

Difficult to strengthen them because of global differences in legal structures, financial systems

and ownership patterns

Enron weaknesses

Misleading financial accounts with off balance sheet financing

Arrogant executive management team

Failure of NEDs to monitor effectively

Failure of external auditors Arthur Andersen to consider problems

Directors selling their own shares when the company was beginning to fail but the employees

being left with worthless shares

Manipulation of short term profits to enhance bonuses

Various law breaking and dishonesty

SOX

Should contain appropriate disclosure of any financial arrangements not included in the balance

sheet

Accounts must contain information on internal controls

Must include internal control reports that state directors are responsible for internal control

structure and financial reporting requirement

Should include an assessment of the effectiveness of control procedures that relate to financialreporting

Should state if a code of conduct has been adopted for senior financial officers

Emphasised CEO and CFO are responsible for ensuring accounts are accurate

CEO and CFO must certify accounts are appropriate and fairly reflect the operations and

financial condition of the company

If accounts need to restated CEO and CFO must forfeit their bonuses

Compulsory rotation of audit partners

Retention of audit working papers

Quality control standards

Auditors to review internal control procedures

Auditors cannot provide internal audit, bookkeeping systems, development appraisal and

valuation services, actuarial services, management functions, Human resources, investment

management, legal and expert services

All listed companies to have an audit committee of independent non executive directors and one

or more members should have financial expertise

Audit committee should be responsible for appointment, compensation and oversight of auditors

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Audit committee should discuss key aspects of the accounts with auditors and setup whistle

blowing mechanisms for reporting misdemeanors

4. Governance and social responsibility

4 levels of corporate social responsibility (Carroll)1

Economic responsibilities

to shareholders wanting a good return on their investment

Employees demanding fair conditions

Customers seeking good quality products

2

Legal responsibilities

Organisations should obey the law as the law codifies society's moral views

3

Ethical responsibilities

Organisations should act in Fair and unjust ways even if not compelled to do so

4

Philanthropic responsibilities

contribution to local communities, charitable donations and better opportunities for employees

Charities may have representatives on their board or a separate stakeholder board

Corporate Citizenship key conceptsminimising harm

maximising benefit

being responsible and accountable to stakeholders

Organisations provide social reports/accounts as they want to be seen to be ethical and

because of pressure from stakeholders

Some people believe that by buying a right to a dividend people also buy the responsibility to

ensure that a company behaves ethically

However because of a wide dispersal of shareholdings small shareholders have little influence

Institutional shareholders have a large influence as they have large investments in organisations

Institutional shareholders should provide investors in pension scheme their policies

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There should be regular meetings between boards of directors and representatives of

institutional shareholders at which institutional shareholder representatives can give companies

their views

Institutional shareholders can use their votes at AGMs and contribute to lists of good or badly

performing companies

They should intervene if they are unhappy with operational performance or strategy or if theyare concerned with risks being too high or they are concerned with directors remuneration

Criticism of corporate social responsibility

some people believe a company's responsibilities are economic responsibilities to shareholders

Also been criticised as an inadequate response to underlying problems in society and failing to

address the needs for fundamental structural reform of society

Board responsibilities

Overseeing strategy

Monitoring risk

Control systems and governance

Communicating with shareholders and other stakeholders

In order to effectively run a company a board must decide which matters it should decide upon

such as:

Mergers and takeovers

Major asset sales and purchases

Significant investments

Entering into new loans or borrowing facilities

Major foreign currency transactions

Boards should:

Demonstrate a duty of care

attend board meetings reguarly

Avoid conflict of interests

Time limits on appointments

Limits on length of service contracts

Service contracts should be available for inspection

Procedures for leaving office

Prohibition of insider dealing

Nomination committee role and responsibilites

Oversee board appointments

Regularly review the size structure and composition of the board

and whether NEDs are spending enough time on their duties

Needs to consider the following:

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Balance between executive and NEDs

Skills, knowledge and experience of current board and whether there are obvious gaps

Need for continuity and succession planning

Desirable size of the board

Need to recruit members from a variety of backgrounds

Other measures of preserving board quality are annual board appraisals and professional

training

Directors Induction programme

Build an understanding of the nature of the company, its business and its markets

Build a link with the company's people

Build an understanding of the company's main relationships including meetings with auditors

Unitary board - All directors member of board - UK

Two tier board - Executive board will run the company - Supervisory board with workers and

stakeholders representatives - main responsibilities are to review company strategy and to

ensure safeguard of assets - Germany

Three tier board - Monocratic board - Symbolic role

Policy board - long term strategic issues

Functional board - Made up of Senior executives with a functional role

Advantages of unitary boards

(a) All participants in the single board have equal legal responsibility for management of the

company and strategic performance. This implies a more involved approach by those directors

who are not executive directors and therefore act in an independent and 'supervisory' capacity.

(b) the independent directors are less likely to be excluded from decision-making and givenrestricted access to information.

(c) The presence of non-executive directors with different perspectives and viewpoints to

question the actions and decisions of executive directors as they are taking place should lead to

better decisions being made.

(d) The relationship between different types of directors may be better as a single board

promotes easier co-operation.

Disadvantages of unitary boards

(a) Asking a non-executive or independent director to be both manager and monitor is too

awkward and demanding a task.

(b) The time requirements on non-executive directors may be onerous, both in terms of the time

spent in board meetings and the commitment required to obtain sufficient knowledge about the

company to properly fulfil their monitoring role.

(d) The unitary board emphasises the divide between the shareholders and the directors as

there is no crossover between them, and it means that the general meeting is the only place

where shareholder grievance or concern can be heard.

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Role of CEO

Responsible for risk management and ensuring internal controls are adequate

Responsible for company strategy and objectives

Investment strategy and appraisal

Recommendation for remuneration policyManaging risk profile of organisation

Non-executive directors

Should be independant and have no other business with company

Should not take part in Share option schemes

Should not be paid a pension

Should be appointed for a specified term

Reappointment not automatic

Role

Monitoring the activities of the company and its executive directors

Uk corporate governance codes - at least half of board should be NEDs

NEDs will likely concentrate on:

Will critically examine strategy

Will scrutinise the performance of executive management in meeting goals and objectives and

they will monitor their performance

should satisfy themselves that financial information is accurate and financial controls and

systems of risk management are robust

Should be involved in the selection and removal of senior directors and in determining their

remuneration

2.6.1 Advantages of non-executive directors

Non-executive directors can bring a number of advantages to a board of directors.

(a) They may have external experience and knowledge which executive directors do not possess.

external experience and knowledge which executive directors do not possess.

The experience they bring can be in many different fields. They may be executive directors of other

companies, and thus have experience of different ways of approaching corporate governance,

internal controls or performance assessment. They can also bring knowledge of markets within

which the company operates.

(b) Non-executive directors can provide a wider perspective than executive directors who may bemore involved in detailed operations.

(c) Good non-executive directors are often a comfort factorfor third parties such as investors or

creditors.

(d) The English businessman Sir John Harvey-Jones pointed out that there are certain roles

nonexecutive

directors are well-suited to play. These include 'father-confessor' (being a confidant for

the chairman and other directors), 'oil-can' (intervening to make the board run more effectively)

and acting as 'high sheriff' (if necessary taking steps to remove the chairman or chief executive).

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(e) The most important advantage perhaps lies in the dual nature of the non-executive director's role.

Non-executive directors are full board members who are expected to have the level of knowledge

that full board membership implies.

Should take an objective view

At the same time they are meant to provide the so-called strong, independent element on the

board. This should imply that they have the knowledge and detachment to be able to monitor the

company's affairs effectively. In particular they should be able to assess fairly the remuneration of

executive directors when serving on the remuneration committee, and to be able to discuss

knowledgeably with auditors the affairs of the company on the audit committee.

In addition, of course, appointing non-executive directors ensures compliance with corporate

governance regulations or codes.

Disadvantages of Non executive directors

May be difficult to recruit sufficient high calibre NEDs

NEDs may find it difficult to impose their views or prevent problems

The limited time of their appointment may restrict their contribution

Remuneration committee role - staffed with only NEDsEstablishing general policy on remuneration

Complying with laws and best practice

Determining disclosures

Determining remuneration packages for directors

Remuneration corporate governance policies (Greenbury code)

Set by independent board members

Remuneration in particular bonuses should be related to measurable performance

The accounts should include disclosures of any remuneration arrangements

Key issues when determining remuneration policy:

The pay scales applied to each directors package

The different elements of each package

The period within which performance related elements become payable

what proportion of rewards should be related to performance

The disclosures in the accounts

Need to consider when determining remuneration

what are other companies in the same sector paying?

The need to attract directors

Whether directors are likely to leave

Packages will need to attract, retain and motivate directors of sufficient quality, whilst at the same timetaking into account shareholders' interests as well.

3.4.1 Basic salary

Basic salary will be in accordance with the terms of the directors' contract of employment, and is not

related to the performance of the company or the director. Instead it is determined by the experience of

the director and what other companies might be prepared to pay (the market rate).

3.4.2 Performance related bonuses

Directors may be paid a cash bonus for good (generally accounting) performance. To guard against

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excessive payouts, some companies impose limits on bonus plans as a fixed percentage of salary or pay.

Transaction bonuses tend to be much more controversial. Some chief executives get bonuses for

acquisitions, regardless of subsequent performance, possibly indeed further bonuses for

spinning offacquisitions that have not worked out.

3.4.3 Shares

Directors may be awarded shares in the company with limits (a few years) on when they can be sold in

return for good performance.

3.4.4 Share options

Share options give directors the right to purchase shares at a specified exercise price over a

specified time period in the future. If the price of the shares rises so that it exceeds the exercise

price by the time the options can be exercised, the directors will be able to purchase shares at

lower than their market value.

3.4.5 Benefits in kind

Benefits in kind could include transport (eg a car), health provisions, life assurance, holidays, expenses

and loans. The remuneration committee should consider the benefit to the director and the cost to the

company of the complete package. Also the committee should consider how the directors' package

relates

to the package for employees; ideally perhaps the package offered to the directors should be anextension

of the package applied to the employees.

3.4.6 Pensions

Many companies may pay pension contributions for directors and staff. In some cases however, there

may be separate schemes available for directors at higher rates than for employees. The UK Combined

Code states that as a general rule only basic salary should bepensionable. The Code emphasises

that the remuneration committee should consider the pension consequences and associated costs to the

company of basic salary increases and any other changes in pensionable remuneration, especially for

directors close to retirement.

Directors performance should not be assessed on short term gains only and a variety of measures areused to assess directors individually

Service contracts should be no longer than 12 months otherwise the company may have to pay

significant compensation if contract is terminated before its due to end

Accounts should include information regarding the remuneration policy and remuneration for each

director

Shareholders may be able to vote on the remuneration statement in the accounts

3.3.1 Performance measures related to Directors remuneration

A key issue in determining remuneration policy is what performance measures to use to determine the

remuneration of directors. There are a number of potential problems with this decision:

Simply, the choice of the wrong measure, achieving performance that does not benefit the

company significantly and does not enhance shareholder valueSimply, the choice of the wrong measure, achieving performance that does not benefit the

company significantly and does not enhance shareholder value

Excessive focus on short-term results, particularly annual financial performance (which can also

be manipulated)

Excessive focus on short-term results, particularly annual financial performance (which can also

be manipulated)

Remuneration operating with a time delay, being based on what happened some time ago rather

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than current performance

Other issues the remuneration committee have to consider include:

The potentially complex relationships with a variety ofstrategic goals and targets (including cost

of capital, return on equity, economic value added, market share, revenue and profit growth, cost

containment, cash management, compliance goals, revenue and environment goals)

The differentials at management/director level (difficult with many layers of management)

The ability of managers to leave, taking clients and knowledge to a competitor or their own new

business

Individual performance and additional work/effort

6. Communication policies

Directors should have to stand for reelection regularly at least once every 3 years

Companies should hold regular meetings with institutional shareholders

Should use briefings and opinion surveys

AGMs

Shareholders should receive at least 20 working days notice of the AGMBoards should give a business presentation

There should be Q&A sessions with leading board members such as committee shares

Shareholders should be able to vote separately on different issues

A motion on the annual reports and accounts should be included in order to allow shareholders to

express their opinion on how the company is doing generally

Communication with other stakeholders

Companies may allow employee representatives on the board

Best practice of accounts disclosure

Should contain a narrative report on how the principles of the corporate governance codes were applied

Should state if the company has complied with the code and give reasons for non compliance

Specific disclosure are likely to include:

Information about the board of directors

Reports from the main board committees

Details of relationships with auditors and shareholders

A review of internal controls

A statement that the company is a going concern

An operating and financial review

Companies may also include voluntary disclosures such as:

Risk data

Social impact reportenvironmental reports

Sustainability reports

Elements of internal control systems

Plan - what the system is designed to achieve - must be based on objectives

Sensor - gathers information about system behaviour while the main elements of operations (the inputs,

processes and outputs) are going on

Comparator - compares actual systems behaviour with the plan

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Effector - takes action to change the behaviour with the system

Turnbull report report on Main purposes of Internal control systems

Control systems should facilitate the organisation operating efficiently and effectively

Should enable the organisation to respond appropriately to risks

Should help to ensure the quality of internal and external reporting

Should help to ensure compliance with applicable laws and regulations

Controls must be embedded in the operation of the organisation and form part of its culture

Must be capable of responding quickly to evolving risks

Should include procedures for reporting significant control failings to management

Controls at best reduce the chances of losses but they cannot eliminate the risk of losses

Controls may be undermined by human error when operated

They may be deliberately circumvented

Managers may override them

Most controls are designed to cope with circumstances that can be foreseen and may be unable to cope

with the unexpected

COSO enterprise risk management framework

1. The internal or control environment- this include management attitudes,Risk appetite, the stress on

integrity and ethical values

2. Objective setting - The objectives set should align with the companies mission statement and be

consistent with its risk appetite

3. Event identification - Events that may determine whether or not a company achieves its objectives

need to be identified

4. Risk assessment - Risks need to be analysed systematically with consideration of their likelihood

impact

5. Risk response - Management must select an appropriate response

6. Control procedures - Controls should ensure risks are dealt with effectively

7. Information and communication - Management and staff should have enough information to carry out

their responsibilities and important stakeholders should receive the information they require

8. Monitoring - Risk management processes should be monitored and modifications made if requiredAn alternative framework is the Canadian framework (COCO) that emphasis

1. Purpose - all activities should be directed with a sense of purpose

2. Commitment - managers and staff should actively commit to the organisations values

3. Capability - Managers and staff must be equipped with the resources and competenceneccesary

4. Action - If employees are given the right opportunities and and are committed to doing their best they

should be successful

5.Monitoring and learning - These are essential if the organisation is to evolve successfully

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Assessing an Internal control framework

The turnbull report stresses the link between the Internal control framework and How it copes with the

risks facing the company?

The control systems will be affected by the risks facing the organisation and whether these risks are likely

to materialise

The board should consider:

What level of risks it regards as acceptable,

How much the organisation can reduce these risks and

The costs and benefits of doing so- a small company will not need a complex and an expensive system

Costs of controls include:

Direct costs -the salary of internal auditors and the time taken by management in monitoring- a rigid

control system may also have the added costs of reduced flexibility, reduced responsiveness and

reduced creativity

Benefits of controls

Financial -not incurring costs of compensating dissatisfied customersNon-Financial - Improvements in design and effectivesness

8. COSO 1st stage. Control environment

The control environment is made up of:

1. the philosophy and operating style of the directors and managers

2. The companies culture particularly whether control is seen as an integral part of the corporate

framework or something imposed on the company

3. The organisational structure and methods of assigning responsibility such as segregation of duties

4. the directors methods of imposing control (for example the internal audit function)

5. The integrity, Ethical values and competence of directors and staff

Turnball highlights elements of a strong control environment such as:

Clear risk management strategies

Culture and systems supporting business and controlobjectives

Senior management demonstrating their commitment

Clear definitions of authority and accountability

Communication to employees of what's expected of them and their freedom to act

Staff having the knowledge, skills and tools to play their roles in risk management and internal control

Control environment does not address physical or quantitative controls but also encompasses

management style and culture

Risk Culture

The culture will affect attitude to risk and how successfully risks are managed

Risk management should be embedded in the organisations culture with an active emphasis placed on

active management of risk

Needs to focus on risk that will seriously affect the organisation such as risks linked with the core

business and future growth opportunities

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Managers need to be aware of how a culture can be changed including:

Internal communication programs

Staff training

Involvement of staff in risk identification

Staff remuneration and incentives need to be linked to the way in which staff deal with risks

Changing culture can be easier if supported by key personnel and if staff are protected from practical

problems when changes come into effect

9. COSO. Risk management responsibilities

Risk management responsibilities may be divided between operational managers and staff and specialist

risk management staff

All staff will have some responsibility for managing risk

Risk Committee

Responsible for determining the organisations risk management strategy and policy

Should monitor the organisations overall risk exposure and the way changing circumstances are likely to

alter the risks it facesShould review internal reports on risks

Should regularly assess the effectiveness of risk management systems

Should review the disclosures in the accounts on risk management and internal control

Can be made up of executive and NEDs and other senior managers

If role is to monitor managers should be made up of only NEDs

Specialist risk management personnel

Risk manager/Risk management function may assist the Risk committee and champion risk management

in the organisation

Responsible for building a risk awareness culture in the organisation

Establishing risk policy and structures

Developing and reviewing risk management processes

Line managers will also be responsible for identifying and evaluating risks in their areas

Staff will be responsible for following risk management procedures and having a good understanding of

the risks associated with what they do and reporting dangers

Risk policy statement

defines risk management objectives and demonstrates how risk management is linked to strategic

decision making

Defines the responsibility of key individuals

Details the control and reporting framework

Risk register

Collects risk and response information

Lists and prioritises risks

states who is responsible for dealing with risks and the action taken

10. COSO 2nd stage. Objective setting

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Highlights need for risk management to be compatible with organisations strategy

Board should set clear objectives that should be consistent with organisations mission and its risk

appetite

Risk appetite - the extent to which a company or an individual is prepared to take risks in order to achieve

its objective

Risk averse attitude - an investment should not be undertaken if there is an alternative investment

offering either the same return with lower risk or a higher risk with the same risk

However a higher risk investment may be undertaken if it has a higher return

Risk seeking attitude - Believes an investment should be undertaken if it offers higher possible returns

even if risk is higher

Attitudes to risk depend on:

The views of shareholders

The size, structure and stage of development of the organisation

Managers personal views

A formal organization may be risk averse because of the checks on decision making

An organisation where results are emphasised is likely to take more risks

A larger organisation may have varying attitudes to risks depending on the department or locations

Managers attitudes to risk will depend on taking preference for risks whether they believe their actions

could seriously affect risk levels

Risk tolerance should be aligned with risk appetite

COSO framework classifies objectives into four categories

1. Strategic - high level goals aligned with mission

2. Operational - effective and efficient use of resources

3. Reliability of reporting

4. compliance with applicable laws and regulations

Objectives should be set for all departments in the organisation and the organisation as a whole

They should relate to the key factors that will ensure the company succeeds including profitability, market

share, cash flow, customer satisfaction and product quality

11. COSO Risks

Risk - when there is a variation in the outcomes that could arise from a situation or event

Hazard - The result of those outcomes

Uncertainty - occurs when the possible outcomes or the chances of each outcome are unknown

Risks can result in positive or negative outcomes

Some risks can be controlled by individuals or organisations and some risks cannot be controlled

Good risk management means cashflows are more predictable and the risks of verse effects are

minimised

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Risk is inherent in any situation. Companies cannot avoid all risks and to make a profit a company will

need to incur some level of risk and it could be said that managers are not working to the best interests of

shareholders

Managers should consider what level of risk is acceptable

Categories of risk

Strategic risks - Risks are linked to what the organisation does - will have a major impact on costs, prices,

products and sales - significant factors include: Type of industry, dependence on raw materials inputs, the

competition, financial structure

Major changes in the business environment will also generate strategic risks (for example new products

generated by research or development or advances in technology)

Operational risks - risks arising from failure in internal business and control processes representing what

could go wrong from day to day - (for example IT failures loss of key staff human error)

Financial risks - threats to the organisations existence due to a lack of available funds arising because

actual financial conditions may differ from those expected- important financial risks include risks fromchanges in exchange rates, interest rate or the market value of investments

Also credit risks that customers will not pay risks arising from the volatility and uncertainty of timings of

cashflows

Legal risks - risks of suffering fines, being closed down or incurring costs to fight legal action

Political risks - Risks to disruption of operations or cashflows arising from political actions such as

nationalisation, exchange controls or tariffs

Environmental risks - risks that arise from the environmental effects of operations such as pollution or

waste generation - organisations may face fines or consumer boycotts

Technological risks - Loss to the organisation through their IT systems being disrupted or being unable to

cope with the demands placed upon them including accidents, human error, fraud and computer hacking

Health and Safety risks - can arise from insufficient health and safety policies, a poor culture, lack of

emergency procedures and failure to deal with hazards

Consequences of health and safety risks include - loss of employees time due to injury at work and

having to pay compensation and legal costs

Property risks - include risks from damage, destruction or theft of property

Resource wastage risks - include incurring excessive costs through poor purchasing policies andemployees time and resources being wasted

Trading risks - risks to disruption to an organisations trading activities - include goods going astray during

distribution and the customer refusing to accept the goods

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Product risks - risks of financial loss due to producing a poor quality product - include the need to

compensate dissatisfied customers, loss of future sales because of customer unhappiness and the costs

of improving quality control procedures

Fraud risks - the risks of loss through the fraudulent activities of employees, managers or outsiders

Fraud risks are often increased through poor corporate governance procedures allowing staff to commit

fraud because mechanisms to challenge their behaviour are ineffective

Fraud risks include - questionable management integrity, incompetent management, serious financial

reporting pressures, poorly designed systems, unusual transactions and problems in obtaining audit

evidence

Organisational risks - risks that managers of employees will behave in ways that are detrimental to the

organisation for example failing to adapt to change

Reputation risk - risk of a loss of reputation resulting of the adverse consequences of another risk.

Reputation risk is not only affected by the chance that other risks will materialise but also the reaction

of important stakeholders. If stakeholders arent worried reputation risk will be low but if stakeholders

are concerned and respond to a loss of reputation by ceasing to do business with the organisation theconsequences could be serious

12. COSO Risk Identification 1st stage of reviewing risk

Many techniques can be used to identify risk including - Brainstorming sessions, Swot analysis, physical

inspection, utilising past experience, statistical analysis, interviews and meetings

Aim to identify events or conditions that result in risk

Risk identification should be a continuous process

Risk identification procedures need to be able to identify the following types of events:

External events such as economic changes, political developments or technological advances that affect

the business

Internal events such as problems with products,faulty equipment or human error

Business should be also aware of leading event indicators (conditions that could give rise to problems) for

example customers owing money for a long time

Escalation triggers - events businesses must watch for as they will need immediate action

Once risks have been identified business may develop their analysis and seek to identify trends and

causes of risks. This may help to deal the risks in the best way. May also be able to identify links between

risks and risks that could materialise

Businesses need to be aware of both positive and negative risks

As risk identification is a costly processes business may focus their attention on unacceptable risks

13. COSO - Risk assessment (a review of all the risks facing an organisation)

If risks are underestimated risk management procedures may be inadequate

If risks are overestimated the costs of dealing with them may be excessive

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How frequently organisation assess risk will depend on the amount of environmental change and

turbulence that they face

Risks will have to be assessed frequently if sudden changes in risks could be significant particularly if the

ways those risks are managed will have to change

1st stage of risk assessment - analyse the risk in terms of the nature of the risk, what its implication might

be and make an initial judgement of the seriousness of the risk

Some risks may need to be quantified

2nd stage of risk assessment - risk mapping - the process of evaluating risks in order to manage them

effectively- The organisation should create a risk profile

Many risks will have to be subjectively assessed since the consequences of the risks materialising and

the financial implications cannot be predicted confidently

Final stage of risk assessment - consolidate the risks over the whole organisation, categorising them intogroups, highlighting related risks and keeping major risks under review

Turnbull recommends that the board:

Regularly receive and review reports on risk management and internal control

Boards will focus on strategic risks and the high likelihood of risks

Stakeholders attitude may influence how seriously risk are viewed, Different stakeholders will have

different attitudes to risks

14. COSO - Risk Responses

Risk responses will depend on the consequences and the likelihood and the consequences of risks

materialising

There are 4 main types of response

1. Acceptance

2. Transfer

3. Reduction

4. Avoidance

Risk acceptance - Low likelihood, Low consequences

An organisation is likely to accept risks that are unlikely to materialise and the possible consequences if

they do arise will be small

All organisations face risk partly because no risk management system will be able to identify all risks an

organisation could possibly faceAnother reason to accept risk may be the costs of taking the risk may outweigh the benefits of reducing or

avoiding the risks

Risk transfer - Low likelihood, High consequences

An organisation is likely to transfer the risks that are unlikely to materialise but will have serious

consequences if they do for example one off catostrophes

Methods of transferring risk include using insurance and transferring responsibilities of operations to other

parties for example carriers of goods

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Risks can also be shared (joint venture)

Risk Reduction - High likelihood, Low consequences

An organisation will likely reduce risks that are likely to materialise but have small consequences if they

do

Risk reduction involves attempting to reduce the chances of an adverse event happening and attempting

to minimising the consequences if the risks do materialise

Risk reduction methods include risk diversification and contingency methods if there is a breakdown in

operations

Risk Avoidance - High likelihood, High consequences

An organisation is likely to avoid risks that are likely to materialise and have serious consequences if they

do An extreme case with be to cease business operations if the risk of loss is too high and the costs of

taking action to combat the risk are too great

Organisations should give regular disclosures about risks to ensure investor confidence

15. COSO - 6th Stage - Control ActivitiesSPAMSOAP

Segregation of duties

Physical controls (a lock on a door)

Authorisation

Management

Supervision

Organisation

Arithmetic and accounting

Personell

Prevent, Detect and Correct controls

Prevent controls - Prevent mistakes (check invoices against delivery records before paying the invoices)

Detect controls - Detect error (inventory checks)

Correct controls - Minimise the effect of problems (regular computer backup)

Pyramid controls

Corporate controls - general policy statement and board comittees

Management controls - performance monitoring and accountability structure

Business process controls - Authorisation limits and reconcilliations

Transaction controls - Accuracy and completeness checksFinancial controls - designed to ensure proper accounting records are kept and financial information is

reliable

Non-Financial controls - Quantitative and qualitative controls

Quantitative controls include performance indicators such as the Balanced scorecard

Qualitative controls include strategic plans and organisational structure and policies

16. COSO - 7th Stage - Information and Communication

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Effective communication about the risks the organisation faces is important if risks are to be

managed effectively

Directors need information about risks the organisation faces particularly risks to the strategic

objectives of the organisation

Directors will obtain information about risks from regular reports from subordinates and controlfunctions such as internal audit

Staff should be able to report serious concerns to directors and directors may make their own

contact with staff

Having obtained the relevant information directors should consider and compare the information

They should take the necessary actions and give feedback to those who need to know

Directors should also regularly consider whether they are receiving sufficient information and

whether communication channels need to be approved

Accurate

Information should be:

Accurate

Complete

Cost beneficial

User targeted

Relevant

Authoritative

Timely

Easy to use

Communication needs to be two way

Turnbull - Staff need to be aware of policies in

Customer relations

Service levels

Health and safety

Environment

Asset security

Business continuity

Permissible expenditure

Accounting and finance

Directors should use a variety of communication methods including

Guidance from the CEO

Risk manuals

Staff involvement in policy development

Workshops and training

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17. COSO - 8th Stage - Monitoring - Internal audit

Monitoring means the regular assessment of the design and operation of control systems in

order to ensure they continue to operate effectively

Internal audit can include:Review of accounting systems and controls

Examination of financial or operating information

Review of systems for risk identification and management

Review of compliance with corporate policies, laws or regulations

Value for money analysis

Checking whether assets are safeguarded

Review of whether the organisations objectives are being implemented

Special investigations such as suspected fraud

Review of risk management may be Internal audits most important role

The work Internal audit does will depend on the risks the organisation faces and the

organisations appetite for risk

Internal audit will either take out their own assessments or rely on the assessments

management have made

Internal audit departments key attribute is its independence. Internal audit department should be

granted special status to set them apart from other departments and should be unbiased in the

way they treat other departments.

There shouldn't be any no go areas for audit departments and they should not be intimidated by

aggressive managersThey shouldnt be auditing any departments that they have worked in - No self review

Should report directly to board of directors or audit committee

Benefits of internal audit

Produce reports more efficiently and show compliance with regulations

Monitor accuracy of reports to board

Liaise with external auditors

Monitor effectiveness of control and advise management of improvements

Carry out value for money audits and other audits on different departments/functions/operations

Carry out risk assessment

Internal auditors should be assessed on the following quality standards:

Independence and scope of work

Professional proficiency (using staff with relevant experience and complying with professional

standards and due care)

Audit performance - using structured approach to all audit assignments

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Management - A well run internal audit department should have a mission statement, written

policies, a quality assurance system and be coordinated with the external auditors

The board or audit committee should conduct an annual review that looks at internal audits

scope, independence, authority and resources

Audit committee

Required for all American listed companies (SOX)

Should be staffed with all NEDs

At least one member should have relevant recent financial experience

Duties

1. Review of the financial statements focusing on key accounting policies and areas of

judgement

2. Liaison with external auditors -should be responsible for recommending the appointment and

removal of external auditors - should also address any concerns surrounding the independence

of external auditors - Should discuss the scope of the audit with the external auditors and act

as a liaison point for the external auditors and the internal auditors and finance director - the

external auditors should be able to raise any matters of concern with the audit committee

3. Review of internal audit - annual review of internal audit department - should review what

Internal audit has done throughout the year - Should consider if Internal audit plans are well

directed and should review the results of internal audit work - The head of internal audit should

have direct contact with audit committee and be able to raise any concerns with the audit

committee

4. Review of internal control and risk management systems - Audit committee should consider

adequacy of internal control and risk management systems - Review should consider whether

control comply with laws and ethical requirements and how systems address the risk of fraud

Advantages of an audit committee include:

Improving the quality of financial reporting

Creating a climate of discipline and control

Providing an environment for NEDs to contribute an independent judgement

Strengthen the position of both internal and external auditors by providing a greater degree

of independence from management and providing a channel of communication for issues of

concern

18. COSO - 8th Stage - Monitoring and Reporting

Monitoring means the regular assessment of the design and operation of control systems in

order to ensure they continue to operate effectively involving ongoing monitoring of controls and

separation evaluation work

If weaknesses in control systems are identified they should be reported and assessed and

action taken to deal with them

Monitoring should be part of management's role to implement board policies on risk and control

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The size and complexity of the organisation will be important influences on the amount of

monitoring that takes place

Effective monitoring requires a strong control environment and and emphasis from top

management on the importance of internal control and the assignment of responsibilities of

monitoring to the right staff

Monitoring procedures may include:

Internal audit testing

Monitoring programs within IT systems

Operational reports

Reconcilliations

Audit committee inquiries

Turnbull report emphasises the need for the board to carry out regular reviews of risk and

internal controls

The review should concentrate on the main risks and the strategy for dealing with them

considering whether actions are being taken to reduce the risks identified

The review should also consider the effectiveness of the management and internal control

systems

They should help answer the question - should internal control systems be monitored more

extensively?

A review of internal control systems effectiveness should cover:

The control environment

Information systems

Communication systemsMonitoring procedures

These issues should be considered at every board meeting

Turnbull - The board should carry out a deeper wide ranging annual review of controls

This review should look at how things have changed throughout the year covering changes in

the risk that the organisation faces and changes in the organisations ability to respond to risks

This review should cover

Internal audit (assuming the company has an internal audit department)

If it does have an internal audit department they should consider what its scope should be

The annual review should cover the scope and quality of management monitoring

a key issue will be how effectively directors can monitor given the extent and frequency of the

reports to the board

The board will need to consider the key accounting controls and any failings or weaknesses that

may impact the accounts

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Board will need to be forward thinking about risks

As part of corporate governance reports boards should report on how they have managed risks

They should state that a process exists and they have reviewed its effectiveness

They should identify whether the process complies with corporate governance guidance in the

Turnbull reportDirectors should state their responsibilities for the internal control system and state that they are

responsible for reviewing its effectiveness

The report should make clear the internal control manages but not eliminates risks and it

provides reasonable but not absolute assurance against loss

The report should summarise the review the directors have carried out and state how the

directors have dealt with any problems they have found

The report should also give details in weaknesses that have resulted in material losses

19. Personal ethics

There is a temptation for businesses to act unethically in order to maximise profits

Ethical behaviour should be a fundamental aspect of a companies mission

Society places a lot if trust in professionals such as accountants so if they are to maintain that

level of trust or respect accountants should behave ethically

3 major ethical positions

1st position

There are no absolute ethical standards that will apply in all circumstances - non cognitivist

states we cannot acquire knowledge of objective ethical standards

Moral relativist - objective standards do not exist

Ethics vary in different times and in different cultures

The relative approach highlights the importance of culture and how our senses shapes our

ethical views

However it can lead to a philosophy that anything goes and neglect possibility that the concepts

of truth and objectivity have some value

The 2nd position is the cognitivist ethical position - objective universal principles do exist and

people can identify them

Deontological approach (Kant)

Acting ethically should be an end in itself not a means

The outcome of the act is irrelevant to whether its ethical or not

Acts can be judged in advance by 3 criteria:

1. We should act as if what we do will establish universal ethical rules

2. We should regard those rules as binding

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3. We should respect other humans as autonomous beings and we should see others

solely as means to achieving our own ends

An absolutist viewpoint implies what is regarded as ethical by society cannot ever change for

the better

Can acts be considered ethical if we know they will have undesirable consequences?

3rd Ethical position Teleological ethics - we must consider the outcomes of what we do

How do we judge what is the best ethical outcome?

Utilitarian ethics - What is the greatest good for the greatest number of people

Criticism - could lead to a large majority achieves great happiness at the expense of creating

great misery for a small minority

Pluralism - the best outcome is consensus - Ethics are a social phenomenon

Egoism - If everyone seeks individual self interest the operation of the free market means that

this will produce the best outcome for society

Even if ethics are regarded as absolute an individual's ethical decision making is influenced by a

variety of factors

Models of these ethical decision making divide these factors into 2 categories

1. Individual factors - the characteristics of the individual making the decision

2. Situational factors - the features within the context the decision is made

Important individual factors include beliefs (such as the importance of the individual versus thecollective good and how the exercise of power is accepted in society

The education and employment experience will also be important factors

Psychological factors will also be influential

The locus of control (How much influence individuals believe they have over their own lives)

individuals will be more inclined to take up strong ethical positions of their own if they believe

they can make a significant difference

Individuals may also be influence by how much awareness they have of the moral

consequences of their own acts

Kohlberg ethical decision making stages of moral development

Pre Conventional stage - make decisions depending on the benefits and punishments they will

receive by making a decision

Conventional stage - Will act on the basis of what is expected of them by those they know or

society in general

Post Conventional stage - Will make ethical decisions on what they believe to be right

Situational factors that influence individuals (Jones)

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Individuals use various criteria related to the situation to to decide how ethically significant a

decision is

They will look at the decision in the following order -

1st The magnitude of the consequences

2nd How society views the problem

3rd The probability of the harms or benefits that could result from the decision actually4th when the consequences of the decision are likely to occur

5th The proximity to the decision maker of those who will bear the consequences of the decision

6th How much those affected by the decision will suffer

Ethical decisions may also be influenced by the nation or culture in which they are made

The organisational culture may be very important - This includes the values and beliefs of those

that work in the organisation, what they naturally assume and what is regarded as acceptable

conduct within the organisation

A key aspect of culture is how ethical issues are perceived in an organisation

The stress placed on fairness and honesty and how much managers see issues in ethical terms

will be very significant

Other organisational influences include:

The reward system

Whether managers set a good example

The structure of the organisation

In a very bureaucratic structure rules will override an individual's viewpoint and ethics is likely to

be seen in terms of following procedures

The roles individuals have at work may influence their decisions

Individuals may have different ethical decisions depending on if they are in work or not

Step by step approach for questions on Ethics

1. Identify the key facts

2. Identify the ethical issues and related norms principles and values

3. Consider alternative actions and their consequences

4. Recommend an appropriate course of action

5. Justify your decision in practical business terms and ethical terms

American accounting association model stages

1. What are the facts of the case?

2. What are the ethical issues in the case?

3. What are the norms principles and values related to the case? (This may include the

required professional codes of conduct or the societys expectations)

4. What are the alternative courses of action?

5. What is the best course of action that is consistent with the norms principles and values

identified in stage 3?

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6. What are the consequence of each course of action?

7. What is the decision? (This should be based on analysis of stages 1-6)

Tuckers model

1. Is the decision profitable?

2. Is the decision legal?3. Is the decision fair?

4. Is the decision right?

5. Is the decision sustainable?

20.Professional ethics and the Public interest

Accountants have to comply with the corporate code of conduct established by their employer

as well as their professional codes of conduct.

Corporate codes set out an organisations expectations of how its employees should behave

They are formal documents that focus on regulating the behaviour of employees. They are

likely to be founded on ethical principles and state the various commitments the organisation is

making to Fair competition, the Environment and the Community.

They are likely to include guidance on the treatment of customers and suppliers

The code needs to have clear backing from Senior managers

Staff need to understand the importance of the code and be committed to it

The organisation needs to introduce various measures to support the code

These include

An ethics training programme

Channels for whistleblowing

and Ethics auditInsuring that reward schemes do not encourage unethical behaviour is important

Staff need to understand that ethical behaviour is in their and their organiations best interest

Problems with codes

Codes may be seen as inflexible and unclear sets of rules that are not relevant to the ethical

situations that managers and employees encounter

Accountants must also comply with their own professional codes.

Accountants codes stress the importance of acting in the public interest and then set out the

fundamental principles on which they are based. They then provide a conceptual framework that

requires the accountant to identify and deal with threats to compliance

they then mention that accountants should apply safeguards to eliminate the threats or reduce

them to an acceptable level

Fundamental principles of accountants

ACCA code of Ethics (principles Based)

Integrity - should be straightforward and honest in all business and personal dealings

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Objectivity - should not allow bias, conflicts of interest or undue influence of others to override

professional judgement

Professional competence and due care- duty to maintain professional knowledge and skill at a

level to ensure a client or employer receives a competent professional service. Members should

act diligently and in accordance with applicable technical and professional standards whenproviding providing professional services

Confidentiality - Should respect information acquired by as a result of business or professional

relationships and shall not disclose this to third parties without authority or unless required by

law or professional duty. confidential information should not be used for personal advantage of

members or third parties

Voluntary disclosure may be applicable in the following situations:

necessary to protect the member's interests, for example to enable him to sue for fees or defend an

action for, say, negligence.

compelled by process of law, for example where in an action a member is required to give evidence of

discovery of documents.public duty to disclose, say where an offence has been committed which is contrary to the public

interest.

Disclosure is to non-governmental bodies which have statutory powers to compel disclosure the

profession

Professional behaviour - Should comply with relevant laws and regulations and should avoid

any action that would discredit

Advantages of basing codes on principles

Emphasises the need for accountants to actively consider ethical issues

The aim is to go beyond a legalistic approach that reduces ethics to compliance with narrowly

drawn rules

However principles based codes can be supported with specific guidance - for instance

prohibition on clearly unethical behaviour and examples of difficult situations

A principles based approach allows greater flexibility in different situations and can respond to

changes in circumstances

Disadvantages of basing codes on principles

They cannot provide examples of all ethical dilemmas

They require a good understanding of the principlesThey can be difficult to enforce legally

The auditor must be and be seen to be independant. They detail specific threats to

independence which are:

Threats to independence

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Self interest - personal, audit firm or family has direct financial or indirect material interest in

client -

Mitigate threat

Dispose of interest or remove from audit Or using an independent partner to review the audit work

- Auditors should also have quality control processes that require staff to declare any financial interests

held by themselves or their immediate family

No acceptance of gifts unless trivial. If client is a public entity and for two consecutive years

companies fees account for 15% of audits total fees must disclose to board, arrange for

independent accountant/regulator to do a pre or post issuance review. Pre issuance is better

If not public entity must discuss with audit committee, take steps to reduce dependence on

client, obtain internal/external quality reviews

Self review - Provision of other services in addition to audit to client and reviewing your own

work

Mitigate threat

safeguards use separate team - if public interest company an auditor must not prepare financialreports and audit the reports. Can provide tax services although cant provide calculations of

current or deferred tax for the financial accounts that will be then audited by the same firm

except in exceptional circumstances. Must not assume management responsibilities when

providing tax info or when providing an internal audit function. Cannot be advocate in tax

dispute if amounts are material.

When providing internal audit function for public interest firms cannot provide:

Services that relate to a significant part of internal controls

Financial Accounting Systems that generate significant financial information of financial

statements being audited

Material amounts or disclosures

Can provide IT legal or litigation support services

Advocacy - Auditor promotes a position or opinion to the point that subsequent objectivity is

compromised

Commenting publicly on future events or acting as an advocate on behalf of a client during a dispute

with third party

Familiarity - Member become too sympathetic to the interests of others which can result in a

significant loss of professional scepticism can occur because of family links or long association with client

Mitigate threat

Rotation of key audit partners after no more than 7 years

Intimidation - Close business relationship or family relationship or threats of legal action by the client

against the auditor the threat of loss of business and bad publicity may make the auditors feel

pressured into producing a favourable audit report

Mitigate threat

Disclose to audit committee

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Get additional audit work done

Resign from audit

Registration, eligibility and training of auditor is regulated by ACCA, CIMA etc

These organizations have stringent entrance requirements, strict codes of ethics and conduct

and requirements of continuing professional development

How does an accountant weigh up his responsibilities to his employer with his responsibilities to

other stakeholders?

The public interest is the collective well being of the community the accountant serves

Professionalism means complying with laws and regulations and avoidance of actions that may

bring discredit to the accounting profession

However some critics believe accountants dont act in the public interest because the work that

they do has helped make decisions that impact on society (for example helping businesses

decide to close operations down and assisting governments in deciding on the tax regime.

Critics claim accounting standards are too flexible, auditing standards are too weak and ethical

standards wrongly emphasis confidentiality over the public interest.

They also criticise the assumptions that lie behind sets of accounts and that the accounts

emphasis profit and not labour

21. Corporate and Social responsibility stances

Corporate citizenship shapes an organisations basic values and the decisions made by its

directors and managers

Key concepts are Minimising harm, maximising benefit and being responsible and accountableto stakeholders

How far corporate citizenship extends is debatable - for example should organisations be

actively promoting civil and political rights.

Possible ethical positions (Johnson and Scholes)

Short-term Shareholder position - emphasis on maximising shareholder wealth in the near

future - Business ethics will be confined to obeying laws and regulations

Long-term Shareholder position - Goes beyond strict obeying of rules and regulations and

acknowledges wider ethical responsibilities - However this stance is taken on pragmatic

grounds - being seen to act ethically is seen a being better for the organisations reputation and

is preventing stricter regulation being imposed on it

Multiple stakeholder position - This focuses on building relationships with a variety of

stakeholders - However the organisation will have to consider which stakeholders have

legitimate interests that it should pursue

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Shaper of society position - Organisations should be primarily accountable for how they

contribute towards building a better society (most relevant for public sector organisation and

charities)

Gray, Owens and Adams Social responsibility stancesPristine capitalist - similar to short term shareholder position (Johnson scholes) - It emphasis

property rights, that companies exist to make profits and achieve economic efficiency

Expedient position - similar to long term shareholder position (Johnson scholes) - For pragmatic

reasons business should acknowledge that there activities may have undesirable consequences

and they should accept limited moral and social responsibilities

Social contract proponents - Emphasize that businesses must deliver to the stakeholders who

provide the business with power - this includes society in general thus businesses must adhere

to societys norms

Socialists - Socialists claim that the economic framework of society should promote equality.

The requirements of capitalist businesses should not be given priority

Radical feminists - state that a fundamental readjustment of society is needed away from

masculine values such as competition to more feminine values such as cooperation and

reflection

Social ecologists - believe there needs to be modification of economic processes that result in

resource exhaustion waste and pollution

Deep ecologists - stress that human rights to existence should not exceed other species rights.

economic imperatives should not be pursued if they threaten the survival of other species

22. Social and environmental issues

Businesses deplete natural resources by taking the raw materials they need for manufacturing

The noise operations make, the visual impacts of factories, drilling and so on all spoil the local

environment.

The disruption businesses cause can be considerable through for example the increased

traffic they generate, the emissions businesses generate and waste disposal activities can

also have adverse impacts not just on the wellbeing of the local community but in terms of their

contribution to climate change.

Interaction with the environment can also generate significant costs for businesses including

waste management costs, rectification of adverse impacts, costs of obtaining permits to carry

out activities and costs of complying with legislation.

Environmental impacts can also lead to contingent liabilities such as adverse impacts on

employees or the need to pay compensation if problems arise

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Reputation risk is also important- increasingly customers are aware of environmental impacts

and they require businesses to do more with them - If businesses get the reputation as poor

corporate citizens they could be faced with consumer boycotts

Businesses position on the environment is a key part of an organisations ethical strategy

Environmental impact is often discussed in terms of sustainabilitySustainability means ensuring economic development meets the needs of the present without

compromising the future ability to meet its own needs

Sustainability for business means a business should only use resources at a rate that can be

replenished and that emissions of waste dont exceed the environments ability to absorb them

Supporters of strong sustainability claim that a fundamental change is need in societys

perceptions - Society needs to consider whether it should continue to pursue economic growth -

Society should be aiming to live in harmony with the natural world

Sustainability should mean sustainability of all species

Supporters of weak sustainability argue that the focus needs to be on preventing catastrophe

and sustaining humanity -resource usage needs to be regulated but it should be possible to do

this in the current system

Other issues are the level of population that should be sustained

Sustainability may just be related to the natural world or it may be extended to discussing

maintenance of humanities social and economic needs

Other questions are what to do about raw materials that may only be available for a finite period

and whether the aim should be to preserve the current environment or invest in replacing

aspects of it

Business must also consider how they report their environmental impacts

The Global Reporting initiative (GRI) aims to develop sustainability reporting

The guidelines that have been published suggest organisations need to report on their overall

strategy and management systems. They ought to also use a series of performance indicators

such as:

Direct impact on stakeholders

Environmental impacts including use of natural resources and emissions

Labour and employment practices including training, health and safety and diversity

Human rights including policies on discrimination or use of low paid labour

Society including community contributions and political activities

Products including policies connected with customer rights, advertising and privacy

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Full cost accounting allows the incorporation of all costs and benefits into the accounting

equation including environmental and social externalities - This should assist decision making

particularly in assessing different investment options

knowing the extent of your businesses environmental footprint can help to reduce it however

information gathering may be difficult and it may be hard to assess all the financial implications

of all environmental impacts on the business

Businesses need to make Environmental Management Systems (EMS) part of their overall

control systems and they will be most effective if built into strong control systems and shouldnt

be regarded as a separate add on to other systems

European Unions Eco-Management and audit scheme is a rigorous model that emphasizes

continuous improvement in environmental performance

To obtain registration under this scheme organisations not only have to have policies and

systems in place they will also have to undergo environmental audits

The results of these audits must form the basis for setting new environmental objectives and

revising environmental policies to achieve those objectives

Organisations must also make a detailed public statement thats validated by external verifiers

The ISO14000 model places greater emphasis on management systems and internal audit

The disclosures it requires are less rigorous than the EU Eco management and audit scheme

Even if it does not adopt an external model an organisation should have appropriate monitoring

and risk management systems in place. It should be monitoring Emerging environmental issues,

Likely changes in legislation and Evolving attitudes of stakeholders

Risk assessment should include environmental impact assessmentWaste minimisation and pollution prevention should be a part of risk management

A business may have social or environmental audits carried out on it activities

Social audits can concentrate on particular decisions for example whether to rationalise

operations or the impact of employment practices on the local community

More general social audits can assess whether social responsibility are set out clearly as part of

their mission where the mission feeds through as part of objectives and evaluating whether the

organisations activities are consistent with that mission

Environmental audit assess how the organisation is safeguarding the environment

Environmental audits may be SWOT surveys or concentrate on particular products or projects

Environmental audits are necessary for products that are to be eco labelled indicating that they

meet the highest environmental standards

A general environmental audit is likely to examine board review, management systems,

performance targets, extent of recent improvements, and reporting

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Auditors will consider the adequacy of environmental policy and test whether the organisation

has followed it