Professional Accountant

ACCA Paper P1

Format of the Paper

Section A: 50 marks
A number of questions relating to a single scenario

Section B: 50 marks
Two out of three 25 mark questions

Core Areas of Syllabus

Governance and responsibility Internal control and review 35% 20%

Identifying, assessing & controlling risk 25% Professional values and ethics 20%

Syllabus Summary
Governance & responsibility

Internal control & review

Risk management

Professional values & ethics

Chapter

Theory of governance

Session Content

Company ownership and control

Definition of corporate governance

the system by which companies are directed and controlled the system by which companies are directed and controlled in the interests of shareholders and other stakeholders

Key concepts

9

Fairness Openness / transparency Independence Probity / honesty Responsibility Accountability Reputation Judgement Integrity

Operational areas affected by corporate governance

10

Agency theory

11

Agency theory and corporate governance

12

Key concepts of agency theory

Agent employed by principal Agency = relationship Agency costs Accountability Fiduciary responsibility Stakeholders Objectives

13

Cost of agency relationships

Examples include: Incentive schemes for directors Providing and reviewing data Meetings Accepting higher risks Monitoring behaviour Residual loss

14

Agency problem resolution measures

Meeting Principal/key investors Voting at AGM Resolutions at AGM Accepting takeovers Divestment of shares

15

Agency accountability
Act in shareholders interests Provide good information

Operate within legal structure

16

Transaction cost theory external transactions

17

Transaction costs can be further impacted

18

Stakeholder theory

19

Chapter

Development of corporate governance

20

Session Content

21

Development of corporate governance codes

22

UK Combined Code
Directors Directors remuneration Relations with shareholders Accountability and audit Institutional investors

23

UK Combined Code cont.

24

Reasons for developing a governance code

Reduce fraud / corruption Poor governance = poor performance Investors will pay a premium Decision factor for institutional investors Reduces risk

25

Practical problems with a governance code

Reactionary process Impact varies Restricts individual decision-making power Bureaucracy Harms competitiveness Cannot stop fraud

26

Chapter

The board of directors

27

Session Content

Essential text: p52

28

Development of governance regarding board of directors

Cadbury Report (1992) Higgs Report (2003) Tyson Report (2003)

29

Board structures

30

Advantages of two-tier board

Clear separation Implicit shareholder involvement Wider stakeholder involvement Independence of thought, discussion & decision Direct power over management

31

Problems with two-tier board

Dilution of power Isolation of supervisory board Agency problems between boards Bureaucracy Reliant upon relationship between chairman & CEO

32

Roles of NEDS

33

Threats to independence

34

NEDs on the board

Advantages: Monitoring Expertise Perception Communication Discipline Disadvantages: Unity Quality Liability
35

Chairman & CEO

36

Splitting role of Chairman & CEO

Reasons for: Representation Accountability Temptation Reasons against: Unity Ability Human nature
37

Induction and CPD

38

Legal and regulatory framework

39

Conflict of interest

40

Performance evaluation

41

Board committees

42

Chapter

Directors remuneration

43

Session Content

44

Components of directors remuneration package

45

Directors remuneration other issues

46

Chapter

Relations with shareholders and disclosure

47

Session Content

48

Institutional investors
Types Importance Potential problems

49

Potential problems

50

Institutional investors
Types Importance Potential problems Solution: shareholder activism Institutional shareholder intervention

51

Institutional shareholder intervention conditions

52

Strategy Operational performance Acquisitions and disposals Remuneration policy Internal controls Succession planning Social responsibility Failure to comply with relevant codes

Disclosure general principles

53

Disclosure: best practice

54

Mandatory vs voluntary disclosure

55

Voluntary disclosure

56

Chapter

Corporate governance approaches

57

Session Content

58

Approaches to corporate governance

59

In favour of rules-based approach

Organisations perspective: Clarity of requirements Standardisation for all companies Binding requirements Wider stakeholder perspective: Standardisation across all companies Sanction Greater confidence in compliance
60

Against a rules-based approach

Organisations perspective: Exploitation of loopholes Underlying belief Flexibility is lost Checklist approach Wider stakeholder perspective: Regulation overload Legal costs Limits Box-ticking
61

SOX / Sarbox

62

Family structure(vs joint stock)

Benefits: Fewer agency costs Ethics Fewer short-term decisions Problems: Gene pool Feuds Separation
63

Insider-dominated structure(vs outsider-dominated)

Benefits: Fewer agency problems & costs Lower cost of capital Greater access to capital Less short-termism Greater input to decisions Problems: Lack of minority shareholder protection Opaque operations Misuse of power Market does not decide or govern
64

International convergence

65

Chapter

Corporate social responsibility and corporate governance

66

Session Content

67

Corporate social responsibility (CSR)

68

Nature of CSR
Carroll defined CSR as including 4 points: Economic responsibility Legal responsibility Ethical responsibility Philanthropic responsibility

69

Social responsiveness
Reaction Defence Accommodation Proaction

70

Stakeholder classifications
Internal & external Narrow & wide Primary & secondary Active & passive Voluntary & involuntary Legitimate & illegitimate

71

Stakeholder mapping: Mendelow

Low Low

Level of interest

High

Minimal effort
Power

Keep informed

Keep satisfied
High

Key players

72

Organisational motivations regarding stakeholders

Instrumental view: To not do so would have an impact on primary objectives of organisation Devoid of any moral obligation Normative view: Moral duty towards others Act in general sense of what is right
73

Chapter

Internal control systems

74

Session Content

75

Objectives of an internal control system

To ensure as far as practicable: - Orderly and efficient conduct, including adherence to internal policies - Safeguarding assets - Prevention / detection of fraud & error - Accuracy and completeness of records - Timely preparation of financial information

76

Sound control systems

77

Roles

78

Elements of an effective internal control system

Control environment Risk assessment Control activities Information and communication Monitoring

79

Management levels

80

Chapter

Audit and compliance

81

Session Content

82

Internal audit

83

Factors affecting need for internal audit

Scale, diversity and complexity of companys activities Number of employees Cost / benefit Changes in organisational structures Changes in key risks Problems with existing internal control systems Recent events
84

Risks if auditors are not independent

85

Threats to independence

86

Audit committee roles

87

Audit committee: internal control

Review the companys internal financial controls Review all the companys internal control and risk management systems Give approval to internal control and risk management statements in annual report Receive reports from management about effectiveness of control systems Receive reports on tests carried out on controls by internal auditors

88

Audit committee: internal audit

89

Audit committee duties: external audit

90

Recommendation on appointment, reappointment and removal of auditors Oversee selection process Approve terms of engagement and remuneration Ensure independence and objectivity Review scope of audit Ensure appropriate plans at start of audit Carry out post-completion audit review

Chapter

10

Risk and the risk management process

91

Session content

92

Why incur risk ?

93

Risk management process

94

Enterprise risk management

95

Strategic and operational risk

96

Risks facing a business (ACCAs)

Risks

Market

Credit

Liquidity

Health & Safety / Environmental

Technological

Legal

Reputation

Business probity

Derivatives

97

Sector-specific risks

98

Impact on stakeholders

99

Analysing risks

100

Risk mapping

101

Role of the board

104

Risk attitudes

105

Risk committee

106

The risk manager

107

Risk awareness

108

Embedding risk in systems

109

Embedding risk in culture

110

Risk management strategies TARA

111

Risk avoidance and retention

112

Diversifying / spreading risk

113

Types of diversification

114

Risk auditing

115

Stages of a risk audit

116

External reporting

117

Chapter

12

Ethical theories

118

Session content

119

Approaches to ethics
Absolutism vs relativism

Dogmatic vs pragmatic

120

Approaches to ethics

121

Kohlbergs CMD
3. Post-conventional
3.2 Universal ethical principles 3.1 Social contract and individual rights

2. Conventional
2.2 Social accord and system maintenance 2.1 Interpersonal accord and conformity

1. Pre-conventional
1.2 Instrumental purpose and exchange 1.1 Obedience and punishment
122

Gray, Owen and Adams: Seven positions on social responsibility

123

Variables determining cultural context

124

Ethical stances

125

Chapter

13

Professional and corporate ethics

126

Session content

127

Profession vs professionalism

128

Profession

129

Accountants role and influence

130

Limits on influence of accounting

Extent of organisational reporting Conflicts of interest in selling services Long-term relationship with clients Overall size of accountancy firms Focus on growth and profit

131

Influence

132

Corporate ethics

133

Professional practice and codes of ethics

134

ACCA professional code of ethics

Integrity Objectivity Professional competence Confidentiality Professional behaviour

135

Conflicts of interest and ethical threats

136

Approaches to conflict resolution

137

Ethical conflict resolution

1. 2. 3. 4. 5. 6. 7. 8. Gather facts Establish ethical issues Refer to fundamental principles Flow internal procedures Investigate alternative courses of action Consult within firm Obtain advice from institute Withdraw from role

138

Chapter

14

Ethical decision making

139

Session content

140

Applying ethical decision making

141

American Accounting Association Model

7 questions in the model: 1. What are the facts of the case ? 2. What are the ethical issues of the case ? 3. What are the norms, principles and values related to the case? 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 step 3 ? 6. What are the consequences of each possible course of action ? 7. What is the decision ?
142

Tuckers 5 question model

The decision should be: Profitable Legal Fair Right Sustainable or environmentally sound

143

Ethical decision making

144

Ethical behaviour

145

Factors affecting moral intensity

Concentration of effort Proximity Temporal immediacy Magnitude of consequence Social consensus Probability of effect

146

Chapter

15

Social and environmental issues

147

Session content

148

Sustainability

149

Definitions
Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs Sustainability is an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future
150

Accounting for sustainability

151

Footprints
Environmental footprint:
Resource consumption Pollution emissions Measurement

Social footprint:
Social capital Human capital Constructed capital
152

Management systems

153

Social and environmental audit

154

Elements of a social audit

155