ACCA P1 Governance, Risk and Ethics: Summary Synonyms for Last Minute Exam Preparation

Corporate Governance Concepts - HAIR DRIFT

Honesty or (Probity): Create a culture of honesty & ethical stance within the organization.

Accountability: Providing comprehensive information to all concerned stakeholders and effective risk management within the organization.

Integrity: Have a high standard of strict moral and ethical values or codes.

Responsibility: Having a clear responsibility for corporate governance decisions and the clarification of individual roles and responsibilities.

Decision Taking: Take clear cut decisions to improve the wealth of an organization.

Reputation: Maintain a culture to develop reputation and moral stance and also to comply with the corporate governance concepts.

Independence: There should not be a conflict of interest between the executive directors and non-executive directors. NED's or non-excutive directors should be fully free and independent to make their decisions within the organization.

Fairness: All stakeholders should be dealt ethically and equal by the organization and should take into account their legitimate interests.

Transparency: Organization agents or directors should have an honest and open relationship with all stakeholders in their decision making process. And provide full disclosure of all material matters (whether financial or non-financial) which concern the company and this should be done in a ethical and transparent manner.

Corporate Governance Purposes -PIGCREW

Practice methods - governance provides practice methods to aid those who are managing a company
Investment - governance creates assurance and trust thereby attracting investment
Growth - governance creates conditions for growth of the economy

Control - it is set in place to control excessive behaviour in the organisation
Rules - it creates rules within which the organisation is operated
Employment - it creates employment as well as deals with several employment issues
Wealth - it supports a wealth-creating capitalist system

The role of the Chairman can be defined best by the synonym (RAISE DIP) for the ACCA P1 Paper: Governance, Risk and Ethics.

The best description can be found in Derek Higgs Report and they can be summarized as follows:

R: Run or leadership of the board and effectiveness of the board to set their roles and agenda.

A: Accurate, timely and clear information to the Board of Directors.

I: Information facilitating & contribution of the non-executive directors.

S: Self sufficiency in performing complex and difficult decisions.

E: Effective communication between executive and non-exectuive directors (NEDS) and also with the shareholders.


D: Develop and process the needs of both executive and non-exectuive directors.

I: Induction and training programs for the Board of Directors.

P: Performance evaluation of the Directors.

Role of the Non-Executive Director are as follows: ("CSSR")

Non-Executive Directors should:

C: Contribute and challenge the organizational strategy for it's continued success.

S: Satisfy themselves that the there is adequate internal controls and risk management system in place. And also that the financial information generated by the organization is accurate.

S: Scrutinize management performance and monitor the reporting of performance for meeting agreed goals and objectives.

R: Responsible for the remuneration of Executive Directors and have a major role in contractual and disciplinary measures if necessary to be taken against executive directors. And are primarily involved in removing, appointing senior management and succession planning. Also, hold executive directors to account for their actions and to represent the shareholder interest.


The following quote is taken directly from Derek Higgs Report: 

"The role of the non-executive director is frequently described as having two principal components: monitoring executive activity and contributing to the development of strategy. Both Cadbury and Hampel identified a tension between these two elements.

A number of consultation responses identified the personal attributes required of the effective non-executive director. They are founded on:

• integrity and high ethical standards
• sound judgement;
• the ability and willingness to challenge and probe; and
• strong interpersonal skills."

The role and function of the Audit Committee can be defined best by the synonym (CLARISSA) from the ACCA P1 Paper: Governance, Risk and Ethics:

The below is an summary transcript of each without an broader definition:

(CLARISSA) 

C: Create a an environment of discipline and control

L: Lend accuracy and truthfulness and credibility in the financial statements.

A: Assisting the Finance Head or Chief Financial Officer in providing a forum of communication.

R: Review and check the financial statements for quality control and accuracy.

I: Independent Review & Judgement

S: Strengthen the position of the Internal Auditor within the company and provide support to their concerns and needs and provide such information to the concerned stakeholders in an transparent manner.

S: Strengthen the position of the External Auditor within the company and provide support to their concerns and needs and provide such information to the concerned stakeholders in an transparent manner.

A: Assist in any disputes between the External Auditors and the Board of Directors and provide solution in relation to such matters.

Agency theory - directors act as agents of shareholders

Potential problem - strategy to benefit directors, not shareholders, different attitude to risk (not their investment), short-termism
Goal congruence - incentives to align interests (profit related pay and share option schemes)

Rules or principles-based approaches

Rules - SOX, legally enforced, section 404 ICFR penalises SMEs
Principles - UK Combined Code of CG, comply or explain, SMEs more leeway, not legally compulsory, market benefits or penalties for non-complier

Risk Committee - majority of NEDs, 1 - from AC, 1 - risk expertrole

Assess ICs
Performs risk assessment of key operations
Oversees implementation and effective operation of risk strategy

Nomination committee - majority of NEDsrole

Identify appropriate people to join board
Determine packages and their compositions for prospective EDs

Remuneration committee - majority of NEDsrole

Determine appropriate packages and their compositions for EDs
Cross directorship and cross shareholdership are prohibited

THE TURNBULL CRITERIA TO ASSESS THE NEED FOR INTERNAL AUDIT

CCC PINS

C: Cost-benefit considerations
C: Changes in organisational structure
C: Changes in key risks

P: Problems with internal control systems
I:  Increased number of unexplained or unacceptable events
N: Number of employees
S:  Scale, diversity and complexity of the company’s operations

Turnbull guidance for sound ICs (sound = effective)

Principles of ICs embedded to activities (not stand alone)
Quickly response to risks
Immediate reporting to man-t

Public sector organisations

Hospitals, schools, local government authorities, state-controlled companies, NGOs
Purpose - implement government policy. It cannot be left for profit (eg. loss-making route may be retained to support economic development in a region)
Focus - value for money (EEE)
Agency relationship - man-t as an agent for taxpayers
Problem - strategic objectives hardly to define and monitor their achievements

Charities & voluntary organisations
Accountability relationship - charity - donor - purpose of donation and actual use of it


Risk


Strategic risk

responsible - board
arises from fundamental decisions related to organisation's objectives
Business and Non-business
Business - product and service related (marketing and development, economic risk, technological risk)
Non-business not related to product and service (long-term financing)

UK Cadbury report - matters:
significant acquisition and disposal
investments
capital projects
treasury policies

Managing - if problem is global (raw material supplier uncertainty), - not avoided in short term, - redesign production - reduce or eliminate risk in long-term
Avoid risk - lost business opportunity - competitor may take up these opportunities and boost its business

Operational risk
responsible - risk committee - line managers - employees
arises from internal resources, systems, processes, employees risks
stoppage line - machine failure
key staff leaving - dissatisfied
lost of sales - poor quality

Managing - controls to detect or correct problem - to reduce or eliminate risk

Guide to risks - FROP LIFE

Financial risk
Reputation risk
Operational risk
Product risk

Legal & political risk
Information technology risk
Fraud risk
Entrepreneurial or economic risk

Risk framework - ALARM

Appetite
List (risk register)
Assess (TARA)
Response
Monitor

TARA

High probability * High impact = Avoid
High probability * Low impact = Transfer
Low probability * High impact = Reduce
Low probability * Low impact = Accept

ERM model COSO's enterprise risk management 8 components

1 - Internal environment - tune of organisation influencing risk appetite, attitude to risk man-t & ethical values (criticism - external environment ignored)
2 - Objective setting - to support company's mission (consistent with risk appetite)
3 - Event identification - which may affect achievements of objectives. Negative impact - risks, positive impact - opportunities
4 - Risk assessment - probability and impact of risks
5 - Risk response - reduce, accept, transfer, avoid
6 - Control activities - policies & procedures to check effectiveness of risk responses
7- Implementation & communication - data - man-t & staff responsibility
8 - Monitoring - modified if necessary

Ethics

Gray, Owen & Adams - 7 positions on CSR
PRESSSD

Pristine capitalist - shareholders most important
Radical feminist - do not fellow male dominate, soft treatment of female
Expedients - opportunities for business > SR is secondary
Social contract - entity exists till it serves the society
Social ecologist - recognise social & environmental footprint
Socialist - SR is first, good production is second
Deep ecologist - attention to nature, save planet for the future generations

Pristine capitalist:

• underpinning value is shareholder wealth maximisation.
• anything that reduces shareholder wealth (such as acting in a socially responsible way) is theft from shareholders.

Radical feminist:

• society and business should be based on feminine characteristics such as equity, dialogue, compassion and fairness.

Expedients:

• recognise some social responsibility expenditure may be necessary to strategically position an organisation so as to maximise profits.
• this is back to the concept of 'enlightened self-interest'.

Proponents of social contract:

• businesses enjoy a licence to operate granted by society so long as the business acts in an appropriate way.

Social ecologist:

• recognises that a business has a social and environmental footprint and therefore bears responsibility for minimising that footprint.

Socialist:

• actions of business are those of the capitalist class oppressing other classes of people.
• business should be conducted so as to redress imbalances in society.

Deep ecologist:

• humans have no more intrinsic right to exist than any other species.

AAA model
FEN ABCD

Fact
Ethic
Norm

Alternative course
Best course
Consequence
Decision

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tucker's model - 5 questions

Please Look For Red Shoes

Profitable?
Legal?
Fair?
Right?
Sustainable? (or environmental)?

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mendelow framework
influence of stakeholder = Power * Interest

Low power * Low interest = Minimal effort
Low power * Hight interest = Keep informed
High power * Low interest = Keep satisfied
High power * High interest = Key players

Instrumental & normative motivations of stakeholder theory

Instrumental - take into account stakeholders opinion only if they are consistent with other, more important objectives (profit maximisation, gaining market share, etc.)

Normative - Kant's theory based, moral framework, see shareholders as ends in themselves, not to achievements of other ends)

Category of stakeholders - PINK LAVR

Primary / secondary
Internal/ external
Narrow / wide
Known / unknown

Legitimate / unlegitimate
Active / passive
Voluntary / involuntary
Recognised / unrecognised

Approaches to Corporate Social Responsibility (CSR) - PRAD

Proactive - promote interests of stakeholders & stakeholders
Reactive - avoid CSR, try to hide from stakeholders / society
Accommodative - balance the interests of shareholders with other stakeholders
Defensive - rely only on legally established rules to take minimal CSR

Corporate Social Responsibility (CSR) - PELE

Philanthropic - what is desirable?
Ethics - what is right?
Legal - compliance with law
Economy - focus on profitability

Kohlberg's stages of moral development

3 levels (6 stages)

Level 1 - Pre-conventional
1. Obedience & punishment orientation (How to avoid punishment)
2. Self-interest orientation (What's in it for me?)

Level 2 - Conventional
3. Interpersonal accord & conformity (social norms, good boy/girl attitude)
4. Authority & social-order maintaining orientation (Law & order morality)

Level 3. Post-conventional
5. Social contract orientation
6. Universal ethical principles


Pre-Conventional Level:

Stage 01: is generally found in the elementary school level where people behave according to generally accepted norms. Because they are ordered to do so by someone with authority e.g. school teacher or their parents and non-obedience is generally met with punishment.

Stage 02: is where they behave according to their own interests so that they are rewarded. E.g. a parent may encourage a child with potential rewards for good behaviour or grades.

Conventional Level: Generic norm of thinking within our society.

Stage 03: Good boy / girl attitude where the approval others are sought so as to be accepted within the society or culture.

Stage 04: Obedience to law and order as an obligation by an responsible corporate citizen.

Post-Conventional Level: This level of thought or moral attitude are not reached by most individuals within our society as per Kohlberg.

Stage 05: Social Contract is mutual dependence and having an genuine interest in the betterment & welfare of others in general. Have a understanding between moral and legal rights and the recognition that rules should not be followed where it is deemed ethically & morally wrong.

People believe that rules & regulations should exist for their general good and where this is deemed otherwise, under Social Contract obligations they must be broken.

Stage 06: Principle Conscience is where universally accepted ethical principles are followed and this may sometimes not fit the law. Examples of such are: Human Rights, Justice and Equality. Some individuals will be prepared to break the law, in order to defend such principles.


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