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62830448 ACCA P1 Revision

62830448 ACCA P1 Revision

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Published by Minhajul Khan Sajal

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Published by: Minhajul Khan Sajal on Aug 24, 2012
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ACCA
 
P1
 
Professional
 
Accountant
 
Revision
 
ACCA P1 Professional Accountant
1
Concepts underpinning corporate governance
1)
Fairness:
means taking into account all stakeholders who have legitimate interests in thecompany2)
Openness / Transparency:
means clarity, lack of withholding of relevant information unlessnecessary and a default position of information provision rather than concealment. This isparticularly important in financial reporting, as this is the primary source of information thatinvestors have for making effective investment decisions.3)
Independence:
need for independent non-executive directors who can monitor the companywithout conflicts of interests4)
Probity / Honesty:
means telling the truth, not misleading shareholders and other stakeholders bypresenting information in a slant way.5)
Responsibility:
means being able to correct and hold managers to account for poormanagement.6)
Accountability:
refers to whether an organisation (and its directors) are answerable for theconsequences of their actions. The UK Cadbury report emphasis that boards of directors areaccountable to shareholders.7)
Reputation:
the purely commercial reason for promoting the organisation’s reputation is that theprice of publicly traded shares is often depended on reputation and hence reputation is often avery valuable asset of the organisation.8)
Judgement:
means the board making decision that enhance the prosperity of the organisation.Board members must acquire a broad enough knowledge of the business and its environment tobe able to provide meaningful direction to it.9)
Integrity:
means straightforward dealing and completeness. Integrity can be taken as someone ofhigh moral character, who sticks to principles no matter the pressure to do otherwise.
TB 49-51 / PK P70-28-C-P159Definition of corporate governance
Corporate governance is the system by which organisations are directed and controlled. It is a set ofrelationships between directors, shareholders and other stakeholders.
Passcard P3The major issues in corporate governance
-
Duty of directors (Separate of Chairman and CEO)
Corporate governance regulation normally requires that the roles of the chairman and the CEO aresplit. The reason for this is to ensure that no one person has too much influence over the running ofthe company. The only exception to this rule is that the roles can be combined for a short period oftime where the company faces significant difficulties and giving more power to one person willassist in overcoming those difficulties.
 
-
Composition and balance of the board (NED)
The board will normally be made up of executive directors who work full time for the company andhave specific roles. The board should also consist of some NEDs who will be part-time and have no
1
 
 
ACCA
 
P1
 
Professional
 
Accountant
 
Revision
 
specific operational role in the company. The combined Code states that at least half the boardshould be independent non-executive directors. This is to ensure that their views carry sufficientweight and that power and information is not concentrated in the hands of one or two individuals.-
Board committees (4 committees):
The Higgs report recommends that no one individual shouldserve on all committees; most reports recommend that the committees should be staffed bypreferably independent non-executive directors.
 
-
Reliability of financial reporting and external auditors
Greater transparency, sufficient disclosure and reduction in risks faced by investors-
Director’s remuneration and rewardsRemuneration:
levels should be enough to attract directors of sufficient calibre, but companiesshould not pay more than is necessary. Directors should not be involved in setting their ownremuneration packages. A remuneration committee, staffed by independent NEDs, shoulddetermine specific remuneration packages.
Service contract:
need to be limited to 3 years, with re-appointment for a third term being classedas unusual. NEDs who have been on the board for a few years may become too familiar with theoperations of the company and therefore not provide the necessary external independent checkthat they are supposed to do.-
Responsibilities of the board for risk management and internal control systems
-
Rights and responsibilities of shareholders (Communication with shareholders)
Under corporate governance codes, the annual general meeting should be the principal forum forcommunication between the board and shareholders.-
Corporate social responsibilities and business ethics
-
Compliance with laws and regulationsTB P67-69 / PK P49-3-a-P79 / PK P50-5-b-P85 / PK P67-27-b-P152 / PK P68-28-b-P157 / PKP225-1-a-P234
2
Different categories of stakeholders
1)
Definition of stakeholder
Stakeholders are any entity (person, group or possibly non-human entity) that can affect or beaffected by the actions or policies of an organisation. It is a bi-directional relationship. Eachstakeholder group has different expectation about what it wants and different claims upon theorganisation.
TB P56
2)
Definition of stakeholder theory
- Instrumental view of stakeholders: this reflects the view that organisations have mainlyeconomic responsibilities (plus the legal responsibilities that they have to fulfill in order to keeptrading) to maximise the company’s profit.- Normative view of stakeholders: this suggests the existence of ethical and philanthropicresponsibilities as well as economic and legal responsibilities and organisation focusing onbeing altruistic.
TB P57 / PK 65-26-a-P147
3)
Classification of stakeholdersThe level of involvement with the business
-
Internal:
employees, management
2
 
 
ACCA
 
P1
 
Professional
 
Accountant
 
Revision
 
-
Connected:
shareholders, customers, suppliers, lenders, trade union, competitions-
External:
The government, local government, the public, pressure groups, opinion leaders
How much the business’s activities affect them
-
Narrow:
those most affected by the organisation’s strategy – shareholders, managers,employees, suppliers, dependent customers
 
-
Wide:
those less affected by the organisation’s strategy – government, less dependentcustomers, the wider community
 How much power and influence they have
-
Primary:
those without whose participation the organisation will have difficulty continuing as agoing concern, such as customers, suppliers and government (tax and legislation)
 
-
Secondary:
those whose loss of participation won't affect the company’s continued existencesuch as broad communities (and perhaps management)
How much they participate in the business’s activities
-
Active:
those who seek to participate in the organisation’s activities. Obviously includesmanagers and shareholders, but may also include other groups not part of the organisation’sstructure such as regulators or pressure groups.
 
-
Passive:
those who do not seek to participate in policy-making such as most shareholders,local communities and government
 TB P57-58 / PK P49-4-a-P81
4)
Mendelow’s matrix
Mendelow classifies stakeholders on a matrix. The matrix is used to identify the type ofrelationship the organisation should seek with its stakeholders, and how it should view theirconcerns. The two axis show:- The level of interest the stakeholder has in the company- The amount of power that stakeholder has to influence the decision of the companyUsing these two axes, stakeholders can be divided into four groups as follows:
Level of interest Low High Low 
A BC D
High 
Section A:
Stakeholders in this section have a low level of interest in the company and haveminimal power to influence the decision of the company. Minimal effort is expended on section A.(Government)
Section B:
Stakeholders in this section have a high level of interest in the company, but haveminimal power to actually influence its activities. This group will normally attempt to influence thecompany by lobbying groups that have high levels of power and they should therefore be keptinformed. (The local community, suppliers, employees)
Section C:
Stakeholders in this section have a low level of interest in the company, although they
3
 

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