p1 - governance, risk and ethics

CONTENTS
Page CHAPTER 1 Theory of governance CHAPTER 2 Development of corporate governance CHAPTER 3 The Board of Directors CHAPTER 4 Directors rem neration CHAPTER 5 "elations #ith shareholders and disclos re CHAPTER 6 %orporate governance approaches CHAPTER 7 %orporate social responsi'ility ( corporate governance CHAPTER 8 )nternal control systems CHAPTER 9 * dit and compliance CHAPTER 10 "isk and the risk management process CHAPTER 11 %ontrolling risk CHAPTER 12 ,thical theories CHAPTER 13 -rofessional and corporate ethics CHAPTER 14 ,thical decision making CHAPTER 15 /ocial and environmental iss es 24 46 6 12 1! 14 1$ 16 16 1& 1& 2! 24 2& !+ !4 !4 4+ 4+ 44 44 46 4. $1 $2 $2 $! - $6

CHAPTER 1: THEORY OF GOVERNANCE

DEFINITION OF GOVERNANCE: system 'y #hich companies are directed and controlled in the 'est interest of shareholders and stakeholders0 HY E NEED GOVERNANCE

10 AGENCY THEORY: occ rs #hen one party 1principal2 appoints another party 1agent2 to perform a task on their 'ehalf0

!EY CONCEPTS OF AGENCY THEORY *n age"# is employed 'y a $%&"'&$a( to carry o t a task on their 'ehalf Age"') refers to the relationship 'et#een a principal and their agent Age"') '*+#+ are inc rred 'y principals in monitoring agency 'ehavio r 'eca se of a lack of tr st in the good faiths of agents0 By accepting to ndertake a task on their 'ehalf, an agent 'ecomes a''*,"#a-(e to the principal 'y #hom they are employed0 The agent is acco nta'le to that principal Directors 1agents2 have a .&/,'&a%) %e+$*"+&-&(&#) to the shareholders 1principal2 of their organisation 13operating in the 'est interests of the shareholders2 S#a0e1*(/e%+ are any person or gro p that can affect or 'e affected 'y the policies or activities of an organisation *gent *-2e'#&3e+ 1s ch as a desire for high salary, large 'on s and stat s for a director2 #ill differ from the principals o'4ectives 1#ealth ma5imisation for shareholders20 *gency theory can help to e5plain the actions of the vario s interest gro ps in the corporate governance de'ate0 %67-*8),/ 698,D *8D 7*8*:,D B; /*7, -,6-<, ,=-*8/)68 ",>?)",D )8@,/T6"/ 1/A*",A6<D,"/ <)7)T,D <)*B)<)T;2 D,<,:*T,D "?88)8: 6B %67-*8; T6 7*8*:,"/ 1*:,8T/2 /,-*"*T)68 6B :6*</ *:,8%; -"6B<,7/0 PRO45E6S7 Different o'4ectives 'et#eenC /hareholders "et rn Dividends 1high share price2 5EADS TO 10 AGENCY COST: arises largely from principals monitoring activities of agents, and may 'e vie#ed in monetary terms, reso rces cons med or time taken in monitoring0 *gency costs e5ist d e to the tr st placed 'y shareholders on directors to operate in their 'est interests0 These costs #ill rise #hen a lack of tr st e5ists, altho gh misplaced tr st in a relationship #ill have hidden costs that may lead to poor management and even corporate fail re0 %osts are 'orne 'y the principal, ' t may 'e indirectly inc rred as the agent spends time and reso rces on certain activities0 ,5amples incl deC %ost of monitoring the e5ec tive directors "ecr iting 8,Ds * dits ! and Directors egoDpo#er money

 *:7s )ncentive schemes and rem neration packages for directors %ost of meetings #ith financial analysts 20 RESID8A5 5OSS: an additional type of agency cost #hich relates to directors f rnishing themselves #ith e5pensive cars, and planes, nice l nches, severance pay etc0 these costs are a'ove and 'eyond the rem neration package for the director, and are a direct loss to shareholders0 ,ns ring incentives 6EAS8RES TO RESO5VE AGENCY PRO45E6S incl deC 7eetings 'et#een the directors and key instit tional investors -roposing resol tions for vote 'y shareholders at *:7s @oting rights at the *:7 in s pport of, or against, resol tions *ccepting takeovers Divestment of shares is the ltimate threat0 NEED FOR COPPORATE GOVERNANCE )f the market mechanism and shareholder activities are not eno gh to monitor the company then some form of reg lation is needed0 There are a n m'er of codes of cond ct and recommendations iss ed 'y governments and stock e5changes0 *ltho gh compliance is vol ntary, the fear of damage to rep tation arising from governance #eaknesses and the threat of delisting from stock e5changes renders it diffic lt not to comply0 E9a:$(e+ *. '*/e+ *. '*"/,'# incl deC The ?E %orporate :overnance %ode 12+1+2 for %orporate :overnance adopted 'y the Binancial /ervices * thority 1B/*2 in the ?E 6,%D code on ethics *%%* codes /pecific reg lation regarding director rem neration and city code on takeovers0 STA!EHO5DER THEORY: very similar to agency theory B?T considers fid ciary relationship 'et#een directors and all stakeholders0 The 'asis of stakeholder theory is that companies are so large and their impact on society so pervasive that they co ld discharge acco nta'ility to many more sectors of society than solely their shareholders0 *gency theory is a narro# form of stakeholder theory0 E9a: .*',+: (&"0 #* C1a$#e% 7; TRANSACTION COST THEORY: <<< Ne3e% -ee" e9a:&"e/ %orporate governance is reF ired d e to pro'lems that e5ist in all ' siness relationshipsDtransactions0 Transaction costs #ill occ r #hen dealing #ith another e5ternal partyC ,0g0 Directors ( /hareholders 7anagers ( ,mployees ,mployees ( / pplier *lison 1employee of Eaplan2 finds a ne# te5t 'ook s pplier for Eaplan 2 $%*-(e:+777 4O8NDED RATIONA5ITY Decision maker lacks the skills needed for that decision, and not OPPORT8NIS6 Decision maker acts in their o#n interest

Aence ends p #ith a poor decision #hich may not 'e 'ri'e0 )n the 'est interest of shareholders0 ,0g0 *lison cant negotiate0

that of the companys0 ,0g0 *lison takes a

!EY CONCEPTS OF CORPORATE GOVERNANCE I"g%e/&e"#+ *. a .&/,'&a%) %e(a#&*"+1&$: =AR

OF PIRI

= > =,/ge:e"# > *'ility to #eigh n mero s iss es and reach meaningf l concl sions0 *'ility to #eigh n mero s iss es and give each d e consideration0 A > A''*,"#a-&(&#) > *cco nting for yo r position having accepted yo r responsi'ility0 Be clear in comm nication #ith internal and e5ternal stakeholders0 Develop and maintain risk management and control systems0 R > Re+$*"+&-&(&#) > %lear defined roles0 9illingness to accept lia'ility for the o tcome of governance decisions0 O > O$e""e++ > having a transparent relationship0 "eveal information not to conceal it0 Do not #ithhold relevant information nless necessary0 F > Fa&%"e++ > treat all stakeholders eF al0 *n a'ility to reach an eF ita'le 4 dgement in a given ethical sit ation0 P > P%*-&#) > 'e honest and straightfor#ard0 Aonesty in financial reporting0 -erception of honesty of the finance from internal and e5ternal stakeholders0 I > I"#eg%&#) > follo#s r les 1strict moral or ethical code20 The highest standards of professionalism and pro'ity0 * prereF isite #ithin agency relationships0 R > Re$,#a#&*" > develop and s stain personal and companys rep tation0 Develop and s stain the moral stance of the acco nting profession0 I > I"/e$e"/e"'e > -e1a3e ?&#1*,# -&a+ a"/ "* '*".(&'#+ *. &"#e%e+#; )ndependence from personal infl ence of senior mgt for 8,Ds0 )ndependence of the 'oard from operational involvement0 )ndependence of directorships from overt personal motivation since the organisation sho ld 'e r n for the 'enefit of its o#ners0

CHAPTER 2: DEVE5OP6ENT OF CORPORATE GOVERNANCE

INF58ENCES ON CORPORATE GOVERNANCE: :overnance theory concl des that there are t#o ma4or factors affecting organisational operation 10 *gency Theory leads to shareholder press re and shareholder activism 20 /takeholder theory leads to stakeholder lo''ying and concerns over social responsi'ility0 )n additionC %ompany la# provides a frame#ork #ithin #hich operations occ r * dit and a ditors impact on governance %odes of governance are developed 'y government, operate as a prereF isite to mem'ership of stock e5changes, may'e gro nded in legislation, and g ide individ al professional 'odies0 $

HISTORY OF CORPORATE GOVERNANCE CODES: Development of codes of governance is closely associated #ith the ?E, i0e0 ?E led0 1&&2C Ca/-,%) %e$*%# Board po#erC %hairmanD%,6 sho ld 'e split, and %hairman independence necessary *cco nta'ilityC :ood comm nication and disclos re /hareholder relationsC 8eed for greater dialog e 1&&$C G%ee"-,%) %e$*%# Directors rem nerationC 'alance 'et#een salary and performance 1&&GC Ha:$e( %e$*%#: %om'ined 'oth reports into 3The %om'ined %ode 1&&&C T,%"-,(( %e$*%#: ,5tra g idance on internal controls0 8eed for directors to revie# internal controls and report on them0 2++!C 1; H&gg+ %e$*%#: @$*+# E"%*"A 8,D/C /pecific g idelines regarding 8,Ds and their role0 2; T)+*" %e$*%#: "ecr iting 8,DsC *dditional g idance 3; S:&#1 %e$*%#: * dit %ommitteeC relationship 'et#een a ditors and the company and the role of the a dit committee 2++&C C*:-&"e/ C*/e B2 2+1+C S&% Da3&/ a(0e% C #1e FRC @2010A:

%omplete revie# of %orporate :overnance follo#ing the financial crises 2++G - 2++& renamed ?E %orporate :overnance %ode

THE 6AIN PRINCIP5ES OF THE CODE are divided into five areasC Se'#&*" A: 5ea/e%+1&$ %hpt !C ,very company sho ld 'e headed 'y an effective 'oard #hich is collectively responsi'le for the longterm s ccess of the company The chairman is responsi'le for the leadership of the 'oard and ens ring its effectiveness 8o one individ al sho ld nfettered po#ers of decision, there sho ld 'e a clear division of responsi'ilities *s part of their role as mem'ers of a nitary 'oard, 8,Ds sho ld constr ctively challenge and help develop proposals on strategy Se'#&*" 4: E..e'#&3e"e++ %hpt ! The 'oard and its committees sho ld have the appropriate 'alance of skills, e5perience, independence and kno#ledge of the company to ena'le them discharge their respective d ties and responsi'ilities effectively There sho ld 'e a formal, rigoro s and transparent proced re for the appointment of ne# directors to the 'oard *ll directors sho ld receive ind ction on 4oining the 'oard and sho ld reg larly pdate and refresh their skills and kno#ledge 6

 *ll directors sho ld 'e a'le to allocate s fficient time on the company to discharge their responsi'ilities The 'oard sho ld ndertake a formal and rigoro s ann al eval ation of its o#n performance and that of its committees and individ al directors *ll directors sho ld 'e s 'mitted for re-election at reg lar intervals, s '4ect to contin ed satisfactory performance0 Se'#&*" C: A''*,"#a-&(&#) C C*"#%*(+ %hpt G 11 The 'oard is responsi'le for determining the nat re and e5tent of significant risks it is #illing to take in achieving its strategic o'4ectives0 The 'oard sho ld maintain a so nd risk mgt and internal controls systems0 The 'oard sho ld esta'lish formal and transparent arrangements for considering ho# they sho ld apply the corporate reporting and risk mgt and internal control principles and for maintaining an appropriate relationship #ith the companys a ditor0 Se'#&*" D: Re:,"e%a#&*" - %hpt 4 <evels of rem neration sho ld 'e s fficient to attract, retain and motivate directors of the F ality reF ired to r n the company s ccessf lly, ' t a company sho ld avoid paying more than is necessary for this p rpose0 * significant proportion of e5ec tive directors rem neration sho ld 'e str ct red so as to link re#ards to corporate and individ al performance0 There sho ld 'e a formal and transparent proced re for developing policy on e5ec tive rem neration and for fi5ing the rem neration packages of individ al directors0 8o director sho ld 'e involved in deciding his or her o#n rem neration0 Se'#&*" E: S1a%e1*(/e% %e(a#&*"+1&$+ %hpt $ There sho ld 'e a dialog e #ith shareholders 'ased on the m t al nderstanding of o'4ectives0 The 'oard as a #hole has responsi'ility for ens ring that a satisfactory dialog e #ith shareholders takes place0 The 'oard sho ld se the *:7 to comm nicate #ith investors and to enco rage their participation0 REASONS FOR DEVE5OPING A CODE: )t red ces instances of fra d and corr ption improving shareholder perception and market confidence -oor governance eF ates poor performance :lo'al investors #ere #illing to pay a significant premi m for companies that are #ell governed The e5istence of good governance is a decision factor for instit tional investors ,ven if it does not add val e, it red ces risk and h ge potential losses to shareholders PRACTICA5 PRO45E6S )t cannot stop fra d0 The process is reactionary rather than proactive, responding to ma4or fail res in governance rather than setting the agenda The impact varies depending on the nat re of the company and the glo'al vie#point Directors complain that it restricts or even dil tes individ al decision-making po#er )t adds red tape and ' rea cracy in the se of committees and disclos re reF irements *dherence to governance reF irements harms competitiveness and does not add val e ITH A GOVERNANCE CODE:

CHAPTER 3: THE 4OARD OF DIRECTORS

RO5ES AND RESPONSI4I5ITIES The Board are collectively responsi'le forC 5 E A D E R S H I P S

< 5ea/&"g the company0 -rovide entreprene rial leadership of the company , E"+,%e the company has s fficient reso rces 1financial and h man2 to meet its o'4ectives * A$$*&"# ne# directors as needed 1delegated to the 8omination %ommittee2 D De'&/e the company strategy, i0e0 the companys mission and p rpose, val es and standards0 , E3a(,a#e the companys performance and report it ann ally to shareholders " ReDe(e'#&*" process 1every ! years, in the ?E, directors retire and can only ret rn if re-elected20 ,very 1 year if it is a listed company / S'1e/,(e of matters reserved for 'oard decisions A H*(/ reg lar 'oard meetings 11 2 months2 to discharge its d ties effectively ) I"#e%"a( '*"#%*(+ eval ation0 ,sta'lish appropriate )nternal %ontrols that ena'le risk to 'e assessed and managed0 - > P,-(&' a''*,"#a-&(&#)0 "epresent company vie# and acco nt to the p 'lic0 1%artoon /o thpark H B-20 / S,''e++&*" $(a""&"g 1planning f t re roles2

CHAIR6ANECEO )t is vital for good corporate governance to separate the roles of the %,6 and chairman0 The importance of the appointments of %,6 and chairman are f rther nderlined 'y the fact that the %,6 freF ently has most say over the appointment of e5ec tive directors to the 'oard, #hile the chairman #ill freF ently have a great deal of infl ence over the appointments of 8,Ds0 REASONS FOR SP5ITTING THE RO5E To red ce the po#er at the top of the company Both are demanding roles, it #o ld 'e good to split the #ork load 8eed an independent person to challenge the %,6, and that person is the %hairman0 RO5ES: C1a&%:a": " ns the 'oard C H A I R 6 E N

C > C*:$a")F+ lead representative in p 'lic, e5plaining aims, policies to the shareholders0 H H*(/ the %,6 acco nta'le on 'ehalf of the shareholders A AG6 '1a&%:a"; %hair the *:7 and other shareholder meetings, sing these to provide effective dialog e #ith shareholders0 ,ns re that the vie#s of shareholders are comm nicated to the 'oard as a #hole I I"#%*/,'e ne# directors to the shareholders at the *:7 R R,"+ 'oard meetings 1attendance, participation20 /et the 'oards agenda and plan 'oard meetings0 ,ns re the 'oard receives appropriate, acc rate, timely and clear information0 G

6 6a"age ind ction, trainings and appraisals of directors E E"+,%e the company implements its strategies effectively as set 'y the 'oard0 N N*:&"a#&*" C*::&##ee Hea/; Aold meetings #ith the 8,Ds, #itho t the e5ec tive directors present0

CEO: r ns the company i0e0 operations 6 R 6 R

6 > 6a"age companys assets 1financial and physical assets2 R > Re+$*"+&-(e for companys performance, as determined 'y the 'oards strategy 6 > 6*"&#*% ' dgets0 %losely monitor operations and financial res lts in accordance #ith plans and ' dgets R > Re$*%#+ to 'oard of directs andDor the chairman0 Ae is the interface 'et#een 'oard and employees0

4OARD STR8CT8RES

8NITARY 4OARD CHAAIR6AN S8PERVISORY

T ODTIER 4OARD 6ANAGE6ENT 4OARD @5TA 4OARD @8TA CHAIR6AN

CEO

CEO

Dir mem'ers

dir

dir

dir

,5ec tives - r ns operations

I8on-e5ec tives - approve the decisions I 86T

7i5 of e5ec tives and 8,Ds )8D,-,8D,8T

J /takeholders e0g0 Banks ADVANTAGES > icker decision-making III)ndependent 8,Ds, hence increase in shareholder confidence )ncrease in e5pertise from 8,Ds %heaper to r n one 'oard ADVANTAGES 7ore considered decisions 1approval is needed2 %learly defined roles 1'et#een those that manage the company and those that o#n it or m st control it for the 'enefit of the &

 "ed ction in fra d, malpractice since there is a #ider involvement in the act al management of the company DISADVANTAGES <ess consideration for decisions made "oles are not clearly defined 8o 'enefit of stakeholder e5pertise 8arro# stakeholder involvement

shareholders2 Benefit of the stakeholder e5pertise Direct po#er over management thro gh the right to appoint mem'ers of the 7gt 'oard DISADVANTAGES /lo#er decision-making0 *dded ' rea cracy 8,Ds are not independent hence, decrease in shareholder confidence ,5pensive to r n t#o tier 'oard /lo#er comm nication )t relies on a strong relationship #ith the %,6 and the %hairman / pervisory 'oard are isolated from participating in 7anagement meetings

NED+ *re mem'ers of the 'oard of directors of a company #ho do not form part of the e5ec tive management team0 They are not f ll-time employees of the company or affiliated to it in any other #ay 7 st 'e independent 7 st represent at least half of the 'oard 1e5cl ding the %hair2 6ne is going to 'e called a /enior )ndependent Director 1/)D2 #ho is directly availa'le to shareholders if they have concerns #hich cannot or sho ld not 'e dealt #ith thro gh the appropriate channels of chairman, %,6 or finance director0

INDEPENDENCE "eF ires a certain detachment from the company /ho ld 'e independent in 4 dgement and have an enF iring mind

Fa:&(&a%&#) T1%ea#: @-&a+A There can 'e no family connections on the 'oard /ho ldnt have 'een an employee or an e5ec tive of the company0 1there are time limits 1$ years2 that vary from one co ntry to the other2 The 8,Ds need reg lar independence revie# done 'y the %hairman %ross directorship in other companies 1this is #here t#o or more directors #ork together on a 'oard of more than one company2 7aterial ' siness relationship #ith the company in last ! years /ho ld not serve on 'oard for more than & years

Se(.DI"#e%e+# T1%ea#: @:*"e)A They only receive 'asic salary only 8o shares m st 'e o#ned 'y them

RO5ES %hallenge the e5ec tive and represent shareholders

PEOP5E RO5E: *ppointments of ne# directors N*:&"a#&*" 1+

/ ccession planning /ort o t rem neration

C*::&##ee - Re:,"e%a#&*" '*::&##ee

RIS! RO5E: ,val ate controls - A,/&# '*::&##ee

Develop risk management policies - R&+0 '*::&##ee

SCR8TINISING RO5E: *nalyse the companys performance %hallenge the e5ec tive directors and hold them acco nta'le for decisions taken and res lts o'tained

STRATEGY RO5E: :ive advice on developing strategy 6ffer e5perience or advice on direction

ADVANTAGES )ncrease in independence )ncrease in shareholder confidenceC instit tional and #atchdog perception is enhanced 'eca se of their presence <ess fra d and error as 8,Ds kno# they are 'eing #atched )ncrease e5pertise on the 'oard ,5perience from other ind stries %ompliance #ith the ?E %ode )mproved comm nication 'et#een shareholders interests and the company0

DISADVANTAGES Aigh costs 1agency cost2 <ack of operational kno#ledge "isk of confidentiality 'reach :ood 8,Ds are hard to find <ack of tr st and needless inp t can affect 'oard operations

4OARD OPERATIONS HO A$$*&"#:e"#+ THE 4OARD OPERATES

C*"#%a'#

I"/,'#&*"

By shareholders at *:7 %andidate is fo nd 'y 8omination %ommittee "eg lar re-election at *:7 at least every three years 1,very director in a listed company sho ld 'e p t for#ard for re-election every year2 This is a (ega(() -&"/&"g /*',:e"# covering the terms of service 1employment2 of a director0 8e# contract ann ally or pdated ann ally )t sho ld incl de the follo#ingC *ppointment commencement date 8otice reF ired 'y either party to terminate the agreement Date of a tomatic termination 1normal retirement date2 D ties of the director "em neration details %onstraints 6ther 3ordinary employment terms ,vidence that the contract has 'een approved 'y the 'oard )t is the process to integrate a director into the company as efficiently as possi'le0 The %ompany /ecretary is generally responsi'le for directors ind ction0 11

<<< T1e C1a&%:a" *3e%+ee+ #1e &"/,'#&*" $%*'e++; CONTENTS )nformation on company 1prod cts, services etc2 7eet key stakeholders and team )nformation on policies 1fire, health ( safety2 /ite visits Binancial information 1financial statements2 Ko' description

D,#&e+ C*"#&",*,+ P%*.e++&*"a( De3e(*$:e"# @CPDA

O4=ECTIVES OF IND8CTION - To comm nicate vision and c lt re - To comm nicate practical proced ral d ties - To red ce the time taken for an individ al to 'ecome prod ctive in their d ties - To assimilate an individ al as a #elcome mem'er of the 'oard - To end re retention of individ als for f t re periods - D ty of good faith 1#ith shareholders2 - 4%ea'1 *. /,#) III %onflict of interest III )nsider dealing @E9a: #&$A - *ll directors m st comply - )ts a'o t pdating skills and kno#ledge of the directors - <<<T1e C1a&%:a" *3e%+ee+ #1&+; The chairman sho ld lead in identifying the development needs of individ al directors, #ith the company secretary playing a key role in facilitating provision0 - 8,Ds sho ld 'e prepared to devote time to keeping their skills p to date O4=ECTIVES OF CPD - To s pport directors in their personal development - To comm nicate challenges and changes #ithin the ' siness environment effectively to directors - To ens re directors have s fficient skills and a'ility to 'e effective in their role - To improve 'oard effectiveness and thro gh this, corporate profita'ility - *t least once a year, the %hairman oversees the appraisal of ,ach director #hole 'oard ,ach committee III8o self-revie# - /)D overseas chairmans appraisal - III% rrent advice is to se e5ternal firm of cons ltants CONTENTS - %onsider a'ility 1skills2 - %ontri' tion to the role 1strategy, risk management2 - %ontri' tion to other #ork 1committees #ork2 - *ssess independence and commitment to the p 'lic interest - %onsider composition of the 'oard and its committee 1right mi5 of kno#ledge and skills to ma5imise performance in the light of f t re strategy2 - %onsider effectiveness of relationships inside and o tside the 'oard - ,ffectiveness of the se of *:7 and the ann al report - Timeliness of response to pro'lems or crises that have emerged or co ld these have 'een foreseen0 RE6OVA5 DISG8A5IFICATION @4ANNEDA 8o re-election )nsider dealing "esign Bra d Death in service 8o preparation of B/ and ta5 -ersonal 'ankr ptcy ret rns Bail re of the company Trading #hen insolvent 1#rongf l By stat te tradingDfra d lent trading2 *'sence for 6 months, #itho t 8ot keeping proper acco nting permission of the directors, from records meetings of directors held d ring that Bailing to pay ta5 period and the directors have resolve Taking actions that are deemed to that the office 'e vacated0 'e nfit in the mgt of a company *n 3agreed depart re Being g ilty of three or more 12

Pe%.*%:a"'e E3a(,a#&*"

RE6OVA5 @5EAVINGA

defa lts in complying #ith companies legislation regarding filing doc ments #ith %ompanies Ao se d ring the preceding five years The co rts handle disF alification proceedings and if the co rts find against the director, heDshe co ld 'e disF alified for 'et#een 2 and 1$ years0 9hile disF alified, a director cannotC - Be a director of any company - *ct like a director, even if there is no formal appointment - )nfl ence the r nning of a company thro gh the directors - Be involved in the formation of a ne# company )gnoring a disF alification order is a criminal offence and a director co ld 'e fined and sent to prison for p to 2 years0 CONF5IC OF INTEREST The fid ciary d ty of directors is to act in the 'est interest of shareholders0 * conflict of interest is a 'reach of this d ty0 A%ea+ *. '*".(&'# *. &"#e%e+# &"'(,/e+: D&%e'#*%+ '*"#%a'#&"g ?&#1 #1e&% *?" '*:$a"): in general, directors cannot contract #ith their o#n company0 Ao#ever, the articles allo# the director to have an interest as long as he discloses this interest to the 'oard of directors S,-+#a"#&a( $%*$e%#) #%a"+a'#&*"+: the %ompanies *ct in the ?E for e0g0 reF ires that any s 'stantial asset sale a'ove 1+L of net #orth to 'e approved 'y shareholders thro gh ordinary resol tion C*"#%a'#+ ?&#1 (&+#e/ '*:$a"&e+: the <isting " les of the </, for e0g0 stip late that nay s 'stantial contract 'et#een the company and an interested party m st 'e agreed 'y ordinary resol tion 'efore the contract takes place 5*a"+ #* /&%e'#*%+: generally, loans to directors are prohi'ited0

D&+'(*+,%e: the %ompanies *ct 1&G6 states that companies are reF ired, in the form of notes in the ann al acco nts, to disclose any information concerning material transactions or arrangements involving the directors0 INSIDER DEA5INGETRADING )nsider trading is the illegal p rchase or sale of shares 'y someone 1 s ally a director2 #ho possesses inside information a'o t a companys performance and prospects #hich, if p 'licly availa'le, might affect the share price0 )nside information is information #hich is not availa'le to the market or general p 'lic and is s pposed to remain confidential These types of transactions in the companys o#n shares are considered to 'e fra d lent The 3director insider simply 'y accepting employment, has made a contract #ith the shareholders to p t the shareholders interests 'efore their o#n, in matters related to the company 9hen the insider ' ys or sells 'ased pon company-o#ned information, he is violating his contract #ith, and fid ciary d ty to, the shareholders0

4OARD CO66ITTEES Board s '-committees are a generally accepted part of 'oard operations 1!

?s ally consists of 8,Ds They are meant to represent shareholder vie# on key decisions They red ce the #orkload of e5ec tive directors so they can foc s on their 4o's )ncrease in shareholder confidence %omm nicates to stakeholders the importance of rem neration and risk /atisfy reF irements of the ?E %orporate :overnance %ode 12+1+2 1or other governance reF irements RE68NERATION CO66ITTEE - NED+ *"() HO O4=ECTIV ES *ttract, retain and motivate directors

NO6INATION CO66ITTEE - 7i5 of e5ec tives and 8,Ds - %,6 involved - %hairman is head of this committee - ,ns re the 'oard is effective F&"/ 'a"/&/a#e+ .*% "e? /&%e'#*%+: identify and nominate for the approval 'y the 'oard candidates to fill 'oard vacancies as and #hen they arise P%e$a%e 2*- /e+'%&$#&*"+: prepare a description of role and capa'ilities reF ired for any partic lar 'oard appointment incl ding that of the chairman S,''e++&*" $(a""&"g: give f ll consideration to s ccession planning for directors Re3&e? +0&((+ "ee/e/ *" #1e -*a%/: reg larly eval ate the 'alance of skills, kno#ledge and e5perience of the 'oard 6*"&#*% &"/e$e"/e"'e *. #1e NED+: consider the 'alance 'et#een e5ec tives and 8,Ds on the 'oard of directors "evie# reg larly the str ct re, siMe and composition of the 'oard and make recommendations to the 'oard

RO5ES

Se# %e:,"e%a#&*" $a'0age .*% "e? /&%e'#*%+: this is to attract, retain and motivate the ne# directors - Re3&e? %e:,"e%a#&*" $*(&') %eg,(a%(): to ens re it is in line #ith ind stry 1retention p rposes2 - O%ga"&+e '*:$e"+a#&*" .*% (*++ *. *..&'e: of any e5ec tive director0 To ens re that there is no re#ard for fail re III86 ",9*"D B6" B*)<?", - Re3&e? /&+'(*+,%e &" #1e a"",a( %e$*%#: ens re that provisions regarding disclos re of rem neration, incl ding pensions are f lfilled0 To ens re its relia'le for shareholder - ,sta'lish pension provision policy for all 'oard mem'ers - "ecommend and monitor the level and str ct re of the rem neration of senior managers - Demonstrate to shareholders that the rem neration of the e5ec tive directors and key mgt is set 'y individ als #ith no personal interest in the o tcome of the decisions of the committee0

CHAPTER 4: DIRECTORFS RE68NERATION

8o director sho ld 'e involved in setting his o#n salaryN J e5ec tive directorsO rem neration committee J 8,Ds O Board H shareholders approval

RE68NERATION PAC!AGE S6A55 - Demotivating - may leave 5ARGE - cost to shareholders 1resid al loss2 14

8,,D * B*<*8%, T6 ATTRACTH RETAIN AND 6OTIVATE D)",%T6"/ J 4 %67-68,8T/

4ASIC SA5ARY 4ENEFITS D 8ot too e5cessive %onsiderC -accommodation - "ole - /kills III - )nd stry 1key2

PENSION -<ong tern incentive

PERFOR6ANCE RE5ATED IIsho ld form a significant part motivate directors to act in 'est interest of the shareholders - car - health care

/A6"T T,"7 - -rofit - Dividend J 4ON8S (&"0e/ #* $e%.*%:a"'e ' y ,0g0 -BT, ,-/, Dividend cover price0 /trengthens fid ciary relationship *ligns the directors and shareholders o'4ectives

<68:-T,"7 - increase in share price J SHARE OPTIONS: This is the right to shares in the f t re at a fi5ed

OTHER FOR6S OF CO6PENSATION GO5DEN HE55OEHANDSHA!E AND G8ARANTEED 4ON8S: this is a one-off payment to sign a contract0 1*ttract20 *ltho gh not common, g aranteed 'on ses are sometimes sed to retain %,6s in str ggling organisations0 The same is tr e for signing on 1t rning p2 'on ses 13golden hellos20 5OYA5TY 4ON8SES AND RETENTION PAY6ENTS: *s #ith g aranteed 'on ses mentioned a'ove, loyalty 'on ses are also sed to retain senior e5ec tives0 Ao#ever, they have come nder criticism for the follo#ing reasonsC The c rrent preference in 9estern co ntries is for rotation of directors to ens re freshness and independence, rather than an emphasis on loyalty %orporate governance codes recommend linking 'on ses #ith performance There have 'een many cases of directors leaving soon after receiving their loyalty 'on s

RETIRE6ENT 4ENEFITS: *ll a#ards are ltimately given 'y the shareholders and sho ld 'e vie#ed in relation to performance achieved 'y the director0 * retirement 'enefit s ch as a lifetime se of the company plane or a siMea'le pension pay-o t co ld 'e a#arded0

RE68NERATION CO66ITTEE The role of the rem neration committee is to have an appropriate re#ard policy that attracts, retains and motivates directors to achieve long-term interests of shareholders0 O4=ECTIVES OF THE CO66ITTEE The committee is, and is seen to 'e, independent #ith access to its o#n e5ternal advice or cons ltants 1$

)t has a clear policy on rem neration that is #ell nderstood and has the s pport of stakeholders -erformance packages prod ced are aligned #ith the long-term shareholder interests and have challenging targets "eporting is clear, concise and gives the reader of an ann al report a 'irds-eye vie# of policy payments and the rationale 'ehind them0

Re:,"e%a#&*" is defined as payment of compensation received for services or employment and incl des 'ase salary, any 'on ses and any other economic 'enefits that an employee or e5ec tive receives d ring employment0 4EAHAVIO8RA5 I6PACT ON DIRECTORS OF RE68NERATION CO6PONENTS 9hatever rem neration package is determined, it is essential to ens re that the directors have a stake in doing a good 4o' for the shareholder0 ,ach element of a rem neration package sho ld 'e designed to ens re that the director remains foc sed on the company and motivated to improve performance0 * 'alance m st 'e str ck 'et#een offering a packageC That is too small and hence demotivating for e5isting directors and leading to potential nderachievement or nattractive for potential ne# appointees, hence a fail re to recr it reF ired cali're of individ al, and That is too easily earned 1i0e0 too 'ig2, hence shareholders not getting 3val e for money in terms of performance0

The company, follo#ing the #ork of the rem neration committee, sho ldC -rovide a package needed to attract, retain and motivate e5ec tive directors of the F ality reF ired, ' t avoid paying more than is necessary K dge #here to position the rem neration package relative to other companies Be a#are of #hat compara'le companies are paying and sho ld take acco nt of relative performance Be sensitive to the #ider scene, incl ding pay and employment conditions else#here in the company 1especially #hen determining ann al salary increases2

NED+F RE68NERATION: To avoid the sit ation #here the rem neration committee 1consisting of only 8,Ds2 is solely responsi'le for determining the rem neration of the 8,Ds, the ?E %orporate :overnance %ode 12+1+2 states that the 'oard and shareholders sho ld determine the 8,Ds rem neration #ithin the limits set o t in the companys constit tion0 8,D rem neration consists of a 'asic salary no performance related element is a#arded0

CHAPTER 5: RE5ATIONS

ITH SHAREHO5DERS AND DISC5OS8RE

SHAREHO5DER RE5ATIONS /ho ld 'e openDtransparent relationship

16

2 6AIN 6ETHODS

to

DIA5OG8E I *nn al :eneral 7eeting *ll shareholders m st 'e invited *ll directors m st attend /hareholders vote 1 ne# directors, re-electing directors, * ditors, dividend2 @ote 'y pro5y if shareholders cannot attend -ro5y voting is allo#ing another mem'er to vote on yo r 'ehalf0 There m st 'e an opport nity for F estion and ans#er session OTHER CO668NICATION ,mailD-hone <ettersDte5t -ress releases Bace'ookDt#itter 6ther meetings 1:eneral 7eeting2

DISC5OS8RE I *nn al report 6a"/a#*%) - Binancial statements - * ditors report - Directors report @%e:,"e%a#&*"A O$#&*"a(E V*(,"#a%) - %/" - ,nvironmental - :raphs - "isk information - 6perating revie#

4e"e.&#+ S A F E R S > S1a%e1*(/e% '*".&/e"'e &"'%ea+e+: ena'les the company address specific shareholder concerns as they arise, hence, increasing confidence shareholders have in the company0 A > Age"') '*+# %e/,'e+ F > F*',+ *" a(( +#a0e1*(/e%+: greater vol ntary disclos re

assists in discharging the m ltiple acco nta'ilities of vario s stakeholder gro ps E E"'*,%age+ &"3e+#:e"#: )nstit tional investors are attracted 'y red ces information risk, strategic and ethical criteria, and e5pectations R > Re$,#a#&*" g*e+ ,$; :ives the ser ass rance that the management are active and competent in terms of managing the operations of the organisation0 SHAREHO5DERSF CO668NICATION ITH THE CO6PANY increased disclos re and transparency0 :reater disclos re risk and #ith it the cost of capital to the company0 7ore helps investors decide #hether the company matches investors

G,&/a"'e: S1a%e1*(/e%+ "ee/ #* #a0e a :*%e a'#&3e %*(e &" #1e '*:$a"&e+ #1e) *?"; PRO45E6S7 /ome shareholders have limited control 1L2, so sho ld 'e given limited responsi'ilities I SHAREHO5DER ACTIVIS6 - "ead the #hole ann al report - %ontact company #ith F eries - *ttend *:7 every year - ?se yo r voting rights #isely or vote 'y pro5y if na'le to attend - *sk F estions at the > ( * sessions of *:7 SERIO8S ISS8ES: ,0g0 #here the company has not got good controls in place "eF est a general meeting 1formerly ,:72 and present resol tions -ropose o#n resol tions 1shareholders decide #hat to vote on2 /ell shares 1.

INST8TIONA5 INVESTORS

*n entity that invests in other companies 1managed 'y f nd managers20 They manage f nds invested 'y individ als0 I :*%e $*?e%H +* 1a3e :*%e %e+$*"+&-&(&#&e+; )n the ?E, there are fo r types of instit tional investorC Pe"+&*" .,"/+ 5&.e a++,%a"'e '*:$a"&e+ 8"&# #%,+# I"3e+#:e"# #%,+#+

They m st &"#e%3e"eH if there are iss es #ithC SOS RAINS S > S#%a#eg): if the plans for the f t re does not look good0 This might 'e in terms of prod cts sold, e5pansion p rs ed or any other aspect of strategic positioning0 O > O$e%a#&*"a( $e%.*%:a"'e @JA: if the company is making a loss0 This might 'e in terms of divisions #ithin the corporate str ct re that have persistently nder-performed0 S > S,''e++&*" $(a""&"g: if theres a need to employ a ne# %,60 This might relate to a fail re to adeF ately 'alance 'oard composition or recommendation of replacement e5ec tives #itho t adeF ate consideration of the F ality of the candidate0 R > Re:,"e%a#&*" $*(&'): #here salaries are not in line #ith ind stry standards0 This might relate to a fail re of the rem neration committee to c rtail e5treme or self-serving e5ec tive re#ards0 A > A'K,&+&#&*"+ C D&+$*+a(+: This might 'e in terms of e5ec tive decisions that have 'een inadeF ately challenged 'y 8,Ds0 e0g0 Brederick :ood#in of "oyal Bank of /cotland I > I"#e%"a( '*"#%*( $%*-(e:+: Bail re in health ( safetyP F ality control, ' dgetary control or )T pro4ects0 N > N*"D'*:$(&a"'e: #here the company is 'reaking the la# or not follo#ing the ?E %ode0 %onsistent and ne5plained non-compliance in a principles-'ased co ntry #ill 'e penalised 'y the market0 )n a r les-'ased co ntry it #o ld have 'een penalised as a matter of la#0 S > S*'&a( %e+$*"+&-&(&#): if the company ref ses to donate to the charity or protect the environment0 7ight damage rep tation of the company, #hich #ill red ce shareholder confidence0

CHAPTER 6: CORPORATE GOVERNANCE APPROACHES

)s %orporate :overnance relevantQ

C1a%&#) ,0g0 65fam ;,/ D e to the agency relationship 'et#een 'et#een Donors and mgt of the %harity politicians ;,/

P,-(&' Se'#*%

- d e to the agency relationship 'et#een the ta5 payer and the

III6'4ectives

III6'4ectives

1G

- is to meet the %haritys %onstit tion (ed cation2

is

to

meet

social

needs

1health

III"ead article onC 38on corporate corporate governance S6A55 CO6PANIES )s corporate governance relevantQ

YES - )f there are shareholders not on the 'oard0 1There is an agency relationship2 i0e0 8ot o#ner-managed0 PRO45E6S %ost of complying not eno gh directors to perform the roles Time spent or needed too high /6<?T)68 %omply or e5plain 1i0e0 follo# the code or e5plain #hy yo havent follo#ed the code to shareholders 1disclos re2

NO - if the company is o#ner-managed 1no *gency relationship2

APPROACHES TO CORPORATE GOVERNANCE

R85ESD4ASED - <egal reF irements 1?/2 - %omp lsory - penalties for fail re to comply - very clear instr ctionsC theres clarity in #hat the coy m st do coys2 - standardisation for all companies there is no choice as to e5pectations %omplying or e5plaining and this creates a standardised and -ossi'ly fairer approach for all ' sinesses - strong deterrent 1people comply thro gh fear2C the sanction is %riminal and therefore a greater deterrent to transgression0

PRINCIP5ESD4ASED - : idance 1?E2 - 6ptional 1Ao#ever if a listed company, m st follo# it2 - more fle5i'ility 1good for small - companies often e5ceed - %heaper to comply

S AP FOR DISADVANTAGES

A%g,:e"#+ aga&"+# #1e R,(e+D-a+e/ a$$%*a'1 e5ploitation of loopholesC the e5acting nat re of the la# lends itself to the seeking of loopholes <egal costsC to enact ne# legislation to close loopholes 3"eg lation overloadC the vol me of r les and amo nt of legislation may give rise to increasing costs for ' sinesses and for the reg lators0 1&

fle5i'ility is lost- there is no choice in compliance to reflect the nat re of the organisation, its siMe or stage of development %hecklist approach this can arise as companies seek to comply #ith all aspects of the r les and start 3'o5-ticking Bo5-ticking rather than compliance this does not lead to #ell governed organisations <imits there is no room to improve, or go 'eyond the minim m level set

SAR4ANESDOL5EY @SOLA )ntrod ced in 2++2 after ,nron and 9orld%om *pplies to ?/ listed companies and their s 'sidiaries and a ditors #orking on ?/ listed ' sinesses0 )t is a r les-'ased approach to governance )s e5tremely detailed and carries the f ll force of the la#

4 > 4a" *n loans to e5ec tive directors I > I"#e%"a( '*"#%*( +#a#e:e"# T > T?* a dit partners needed to sign a dit reports T > T?* days notice to the rest of the 'oardC Directors are prohi'ited from dealing in shares at 3sensitive times E > E+#a-(&+1 an independent a dit committee #ill 'e disallo#ed from trading if it does not have one R > R*#a#e senior a dit partners every $ years0 This is comp lsory C > Ce%#&.&'a#e signed 'y the %,6 ( %B6 on the validity 1acc racy2 of the B/ O > O#1e% +e%3&'e+ provided 'y the a ditors 1cons ltancy2 'anned to increase independence D > D&+'(*+e a(( *.. -a(a"'e +1ee# .&"a"'e 1apply s 'stance over form2 E > E#1&'a( '*/e m st 'e follo#ed

!EY EFFECTS OF SOL )mproved comm nication of material iss es to shareholders )mproved investor and p 'lic confidence in corporate ?/ )mproved internal control and e5ternal a dit of companies :reater arms length relationships 'et#een companies and a dit firms )mproved governance thro gh a dit committees -ersonal lia'ility of directors for mismanagement and criminal p nishment

NEGATIVE REACTIONS TO SEL Do 'ling of a dit fee costs to organisations 6nero s doc mentation and internal control costs 2+

"ed ced fle5i'ility and responsiveness of companies "ed ced risk taking and competitiveness of organisations

INSIDERDDO6INATED STR8CT8RES )t is a company controlled 'y a small n m'er of shareholders * small n m'er of shareholders are also on the 'oard I INSIDERS ,0g0 *B% %ompany /A 1 Bank /A 2 :overnment /A ! 1+++ individ als /hareholders J 1+++ !+L $$L 2$L J %68T"6< 4$L

PROS A C E A > Age"') '*+# is red cedC the insiders are on the 'oard, hence no monitoring needed0 *lso, fe#er agency pro'lems0 C > C*+# *. 'a$&#a( '1ea$e%: access to insider cash is greater0 E > E9$e%#&+e *. #1e &"+&/e%+: greater, sta'le e5pert inp t to managerial decisions0

CONS 6 A T E 6 > 6&"*%&#) +1a%e1*(/e%+ are poorly protected C they dont have m ch say A > A-,+e *. $*?e% 'y insiders T > T%a"+$a%e"') is poor 1ann al reporting is not very good2C the insiders have no need and the minority have no po#er E > E9&# &+ 1a%/e% for an insiderC 1sell shares H resigns from the 'oard2

FA6I5Y CO6PANYESTR8CT8RES %ompany dominated 'y the family 1)nsider %ompany2, i0e0 a family has a controlling n m'er of shares in a company Bamily are on the 'oard They often have preferential voting rights CONS 6 A T E M - Bamily may not have the right skills to manage the company effectively 1:ene pool2 - *ny personal fe ds may affect the company - Aard to remove a family mem'er 1other family mem'ers get involved20 )f families separate, this co ld 'e costly in terms of ' ying o r shareholding and restr ct ring

PROS A C E M - <ong term vie#C less risks 'eca se they #ant to pass on to the ne5t generation - The company sho ld 'e more ethical in 'ehavio r C 'eca se they are trying to protect the family name

G8IDANCE GET THE FA6I5Y O8T7 "emove the family from the 'oard /et p an 3advisory 'oard for the familyC hence, they have no po#er, they only give advice "ecr it e5ternally to the main 'oard 21

CHAPTER 7: CORPORATE SOCIA5 RESPONSI4I5ITY AND CORPORATE GOVERNANCE

IS A CO6PANY SOCIA55Y RESPONSI45EN

NO YES %ompanys *"() legal have an increased Bor the shareholder #hich #hich is their legal Ae 'elieved that %/" d ty0 INTEREST Ae arg es that for governments sho ld /ocial iss es 'ecome active %ompanies are not in legal artificial person, so it 8o responsi'ilities0 DVD: #1e C*%$*%a#&*"H Fa+# F**/ Na#&*" d ty is to ma5imise profit responsi'le companies rep tation 7)<T68 B"),D7*8 increases sales and profits, is theft from the shareholder EN5IGHTENED SE5FD governments are responsi'le are #eak, so companies

people, hence sho ld have terms, a company is an /ho ld have the same rights ( responsi'ilities0 - CORPORATE CITIOENSHIP

HAT IS CSRN: CARRO55 6ODE5 - 3%/" encompasses the economic, legal, ethical and philanthropic e5pectations placed on organisations 'y society at a given point in time0

PHI5ANTHRO

ETHICA5

5EGA5
ECONO6IC RESPONSI4I5ITY
ECONO6IC RESPONSI4I5ITY: connected #ith #hy the organisation #as esta'lished0 7 st 'e achieved in order to attain the higher level responsi'ilities0 To make a profit for shareholders on their investments 22

,mployees to 'e provided #ith safe and fairly paid 4o's % stomers to 'e a'le to o'tain good F ality prod cts at a fair price

5EGA5 RESPONSI4I5ITY: implies that an organisation #ill follo# the la#s of the 4 risdiction in #hich it is 'ased as #ell as any internal moral vie#s that the organisation has set0 8on-compliance means a lack of social responsi'ility0 ,0g0 price fi5ing, my coll sion 1oil ind stries2 To comply #ith the la# 1Aealth ( /afety, ,mployment <a#, ,nvironmental <a#, )*/, Data -rotection2 )t is an accepta'le r le 'ook for company operation0

ETHICA5 RESPONSI4I5ITY: relates to #hat is e5pected 'y society from organisations compared #ith #hat those organisations have to do from an economic or legal point of vie#0 Therefore, it relates to doing #hat is seen to 'e right compared #ith doing #hat is simply legal0 ,0g0 /hell disposed of an oil platform on land rather than sinking it at sea 1as it legally co ld have done2 d e to concern a'o t the environmental conseF ences of this action20 ,thical responsi'ilities are therefore higher than 'oth economic and legal responsi'ilities0 %ompanies sho ld do the right thing Do #hat is 4 st and fair ,0g0 paying a'ove the minim m #age *ctions taken in this area provide a reaffirmation of social legitimacy

PHI5ANTHROPIC RESPONSI4I5ITY: generally concern actions desired of organisations rather than those reF ired 'y organisations0 Bor e0g0 Tate ( <yle sponsoring the Tate :allery in <ondon0 These activities are carried o t more 'eca se the organisation 'elieves it is the correct thing to do rather than 'eca se it m st0 The term 3philanthropic derives from the :reek 3love of society, so there is no o'ligation to act0 Discretionary 'ehavio r to improve other peoples lives %harita'le donations and recreational facilities /ponsoring the arts and sports events

DEVE5OPING A CSR STRATEGY IDENTIFY STA!EHO5D ERS C5ASSIFY STA!EHO5D ERS @E9a: F*',+A HO A CO6PANY APPROACHES CSR - *ny person or gro p that can affect or 'e affected 'y the activities of an organisation - I"#e%"a( C e9#e%"a(: this is the distinction 'et#een /TE inside the organisation and those o tside0 )nternal incl des employees, management and possi'ly, trade nions0 ,5ternal incl des c stomers, competitors and s ppliers0 - Na%%*? C &/e: this is the e5tent to #hich the /TE gro p is affected 'y organisational activity0 8arro# are those most affected or #ho are dependent on corporation o tp t, s ch as shareholders, employees, management, c stomers, s ppliers0 9ide are those less affected or dependent on company o tp t s ch as government, the #ider comm nity and non-dependent c stomers0 - P%&:a%) C Se'*"/a%): this foc ses on the opposing vie# in Breemans definition, that /TEs affect organisations as #ell as 'eing affected 'y organisations0 -rimary are those that have a direct effect on the company #itho t #hom it #o ld 'e diffic lt to operate, s ch as government, shareholders and c stomers0 /econdary are those that have a limited direct infl ence on the organisation and #itho t #hom the company #o ld s rvive s ch as the comm nity and management0 - A'#&3e C Pa++&3e: this disting ishes those that seek to participate in organisational activity and those that do not0 *ctive are those that #ish to participate incl ding management and employees, ' t may also incl de reg lators, environmental press re gro ps and s ppliers0 -assive are those that do not #ish to participate incl ding shareholders, local comm nities, government and c stomers0 - V*(,"#a%) C I"3*(,"#a%): this categorisation removes the element of choice associated #ith active and passive participation, s 'dividing the active gro p into 2 elements0 @ol ntary are those /TEs that choose to 'e involved in organisational decision making s ch as mgt, employees environmental gro ps and active 2!

ESTA45ISH STA!EHO5D ER C5AI6S ASSESS THE I6PORTANCE OF ST!+ @6e"/e(*? :*/e(A

shareholders0 These /TEs can #ithdra# their stakeholding in the short-term0 )nvol ntary are those that do not choose to 'e involved in organisational decisions, ' t 'ecome involved for a variety of reasons0 This co ld incl de reg lators, key c stomers, s ppliers, govt, nat ral environment and local comm nities0 They cannot #ithdra# in the short-to-medi m term0 - <egitimate ( illegitimate 1terrorist2C this is the e5tent to #hich the claim of the /TE is considered a valid claim0 )t can 'e a s '4ective classification #ith de'ate s rro nding certain gro ps claims, and can lead to the concept of #hether /TEs are recognised 'y the organisation or not0 <egitimate are those #ith an active economic relationship #ith an organisation s ch as c stomers and s ppliers0 )llegitimate are those #itho t s ch a link, s ch as terrorists, #here there is no case for taking their vie#s into acco nt #hen making decisions0 ,sta'lish the stakeholders demands 1e5pectations of the company2 - Direct claim 1stakeholder reF ests2 - )ndirect claim 1/takeholder has no voice2 ?se 2 criteriaC - -o#er - <evel of interest 6e"/e(*? :*/e(: assesses the importance of stakeholders sing a matri50 ,0g0 7ac DonaldsC 7eat / ppliers, Eitchen #orkers 116 yr old2, :overnment, % stomer, %,6 5O PO E R HIGH 6INI686 EFFORT Eitchen #orker !EEP SATISFIED :overnment INTEREST !EEP INFOR6ED 7eat s pplier !EY P5AYERS %,6 )nstit tional investors HIGH

5O

P*?e%: relates to the amo nt of infl ence 1r po#er2 that the /TE gro p can have over the organisation0 Ao#ever, the fact that a gro p has po#er does not necessarily mean that their po#er #ill 'e sed0 5e3e( *. &"#e%e+#C indicates #hether the /TE is actively interested in the performance of the organisation0 The amo nt of infl ence the gro p has depends in their level of po#er0 6INI686 EFFORT @5*? &"#e%e+#H (*? $*?e%A: these /TEs typically incl de small shareholders and the general p 'lic0 They have lo# interest in the organisation primarily d e to lack of po#er to change strategy0 !EEP INFOR6ED @H&g1 &"#e%e+#H (*? $*?e%2C these /TEs #o ld like to affect the strategy of the organisation ' t do not have the po#er to do this0 /TEs incl de staff, c stomers and s ppliers, partic larly #here the organisation provides a significant percentage of sales or p rchases for those organisations0 ,nvtal press re gro ps #o ld also 'e placed in this category as they #ill seek to infl ence company strategy, normally 'y attempting to pers ade high po#er gro ps to take action0 !EEP SATISFIED @5*? &"#e%e+#H H&g1 $*?e%A: these stakeholders normally have a lo# interest in the organisation, ' t they do have the a'ility to affect strategy sho ld they choose to do so0 /takeholders in this gro p incl de the national government and in some sit ations instit tional shareholders0 The latter may #ell 'e happy to let the organisation operate as it #ants to, ' t #ill e5ercise po#er if they see their stake 'eing threatened0 !EY P5AYERS @H&g1 &"#e%e+#H 1&g1 $*?e%A: these /TEs have a high interest in the organisation and have the a'ility to affect strategy0 /TEs incl de directors, ma4or shareholders and trade nions0 S*'&a( %e+$*"+&3e"e++: refers to the capacity of the corporation to respond to social 24

DECIDE HO

TO RESPOND

press re and the manner in #hich it does so0 Ca%%*(( s ggests fo r possi'le strategiesC %ea'#&*"H a''*::*/a#&*"H $%*a'#&*" a"/ /e.e"'e R A P D R D Rea'#&*": the corporation /e"&e+ any responsi'ility for social iss es A D A''*::*/a#&*": the corporation a''e$#+ %e+$*"+&-&(&#) and does #hat is demanded of it 'y relevant gro ps 1Do as /TE demands2 P D P%*a'#&*": the corporation seeks to g* -e)*"/ &"/,+#%) "*%:+ 1e5ceed the /TEs claim2 D D De.e"'e: the corporation admits responsi'ility ' t fights it, doing the very least that seems to 'e reF ired0 1Do minim m reF ired2 "esponses are affected 'y the companys vie#P i0e0 8ormative ( )nstr mental vie#s

ORGANISATIONA5 6OTIVATIONS REGARDING STA!EHO5DERS: Donaldson and -reston dra# a distinction 'et#een motivations as to #hy organisations act in relation to the concerns of stakeholders0 STA!EHO5DER VIE S E;G; C,+#*:e% '(a&:: +,$e%:a%0e# #* %e')'(e -ag+

The s permarkets response depends on vie#RR

NOR6ATIVE VIE %ompany responds to claims if there is a moral helps to d ty0 ,0g0 recycle the 'ags to save the planet0 increase to sales, GOOD CORPORATE CITIOENSHIP INTEREST ASSESSING ST! I6PORTANCE

INSTR86ENTA5 VIE - company responds to the claim only if it meet o'4ectives0 1profit S2 ,0g0 recycle to increase rep tation, therefore increase to profit0 IIIThe company has SE5F EN5IGHTENED

% stomers, shareholders and employees may 'e the most important stakeholders ' t contin al assessment helps to foc s in on those that reF ire immediate action0 Three attri' tes may 'e assessedC 10 P*?e%: the perceived a'ility of the stakeholder to affect organisational action 20 5eg&#&:a'): #hether the company perceives the stakeholder action to 'e legitimate !0 8%ge"'): #hether the stakeholder claim calls for immediate action De.&"&#&3e stakeholders 1possessing all three2 reF ire immediate action, the others are (a#e"# stakeholders0 E9a:&"e%F+ a%#&'(e $,-(&+1e/ &" S#,/e"# A''*,"#a"# &" Fe-%,a%) 2008H PA(( a-*,# +#a0e1*(/e%+ > $a%# 2F I6PACT OF STA!EHO5DERS ON CORPORATE GOVERNANCE * key area of impact is in relation to the increased need for, and e5istence of, social acco nting0 There are vario s forms of social acco nting prod ced for incl sion in the B siness "evie# as part of ann al reporting reports0 E#1&'a( a''*,"#&"g: tends to foc s on internal management systems or codes of practice at an individ al level and ho# the company a dits and complies #ith this0 2$

E"3&%*":e"#a( a''*,"#&"g: tends to foc s e5cl sively on the organisations impact on the nat ral environment S*'&a( a''*,"#&"g: has a 'roader remit to incorporate employee conditions, heal and safety, eF al opport nities, h man rights, charity #ork S,+#a&"a-&(&#) a''*,"#&"g: is a grand title that incorporates the triple 'ottom line of the first three #ith possi'le emphasis on environmentalism0

CORPORATE CITIOENSHIP %orporate citiMenship s ggests an e5panded vie#point of the corporate role, moving 'eyond the 'o ndaries of direct stakeholder relationships0 )t implies a role for corporations in the societies pon #hich they impact0 )t is linked to the concept of corporate acco nta'ility0 C*%$*%a#e a''*,"#a-&(&#) refers to #hether the organisation is in some #ay ans#era'le for the conseF ences of its actions 'eyond its relationship #ith shareholders0 The demands for corporations to 'e more acco nta'le and step p to the ne# role as valid mem'ers of society comes from t#o main so rcesC GOVERN6ENT FAI5RE AND CORPORATE PO ER; GOVERN6ENT FAI58RE: one conseF ence of a modern society #ith an a' ndance of prod cts and services is the fail re of governments to deal #ith risks that accompany these rapid changes0 /ometimes the risks are 'eyond the control of a single government /ometimes electoral impact dampens political #ill /ometimes they are part of the pro'lem /ometimes it is simply too diffic lt to change lifestyles0

CORPORATE PO ER: %orporation shapes lives in many #aysC <i'eralisation ( dereg lation of markets increase market po#er and restrict the a'ility of govts to intervene -rivatisation of many previo s state monopolies places greater po#er in the corporate hand %o ntries str ggle #ith nemployment and yet the decision to locate and s pport societies is often not theirs ' t that of corporations The press re on lo#-#age economies to maintain lo# #ages 1and hence lo# costs to attract c stomers2 is vast %omple5 cross-'order legal agreement is very diffic lt and so corporations are enco raged to selfreg late0

CHAPTER 8: INTERNA5 CONTRO5 SYSTE6S

F8 RECAP: 4ASICS OF CONTRO5S C*"#%*(+ attempt to ens re that risks, those factors #hich stop the achievement of company o'4ectives are minimised0 I"#e%"a( '*"#%*( +)+#e:+ comprises the #hole net#ork of systems esta'lished in an organisation to provide reasona'le ass rance that organisational o'4ectives #ill 'e achieved0 I"#e%"a( :a"age:e"# '*"#%*(+ refer to the proced resDpolicies p t in place to ens re the company meets its o'4ectives The control proced res and policies provide the detailed controls implemented #ithin the company 26

E P,%$*+e "elia'le reporting for the shareholders 1acc rate and complete to protect the shareholders investments to prevent mis se of shareholders f nd to ens re compliance #ith the la# e0g0 health ( safety, fire 1to #hich #o ld red ce profits of the company and also to protect to ma5imise profit for shareholders 1timely preparation of fin0

O-2e'#&3e A > A'',%a#e %e'*%/+ records2 S > Sa.eg,a%/ a++e#+ @'a+1A P > P%e3e"# .%a,/ C e%%*% I > I"#e%"a( $*(&'&e+ .*((*?e/ prevent fines rep tation2 E > E..&'&e"') information2 -

)n order to achieve these o'4ectives, there is a need to p t p controls effectively0 The lack of internal controls implies that directors have not met their o'ligations nder corporate governance0 )t specifically means that the risk management strategy of the company #ill 'e defective0 Ao#ever, controls alone are not eno gh to achieve this0

CASE ST8DY: %*g,e #%a/e% 4a%&"g+ 4a"0 There #as a trader called 8ick <eeson Ae acc m lated TG++mH losses 'y gam'ling #rongly Bank co ldnt recover and event ally collapsed0

S*'&e#e Ge"e%a(e There #as a trader called Kerome Eerviel *cc m lated T$'n losses

Both 'ank had controlsNNN Trades a thorised 'y managers 7anagers ignored it at /: *t Barings Bank, 8ick #as the manager self-revie# threat Both had trading limits 7anagers ignored self-interest threat2 'eca se the 'igger the risks taken, the 'igger the ret rns, meaning 'ig 'on ses0 /ame applies to 8ick Both 'anks had an acco nts team to reconcile trades daily 8ick <eeson #as head of team at Barings Bank, hence no segregation of d ties0 -1 emphasises that controls on its o#n are not eno ghN %ompanies need an EFFECTIVE control system0 E5E6ENTS OF AN EFFECTIVE CONTRO5 SYSTE6 %6/6 Brame#orkC #as formed in 1&G$ to sponsor the national commission on fra d lent reporting0 %6/6 prod ces g idance on the implementation of internal control systems in large and small companies0 )t defines internal control as a 3process, effected 'y the entitys 'oard of directors, management and other personnel, designed to provide reasona'le ass rance regarding the achievement of o'4ectives, in three partic lar areasC 2.

10 ,ffectiveness and efficiency of operations 20 "elia'ility of financial reporting !0 %ompliance #ith applica'le la#s and reg lations IIIThe a'ove ! are also -e"e.&#+ *. a" &"#e%"a( '*"#%*( +)+#e: C R I 6 E E9a:$(e EaplanC Aigh pass rates "eg lar comm nication from the %,6 on the importance of pass rates T tors are r ''ish 7aterials are poor ,nvironment not cond cive for learning %ompetitors are strong "eg lar revie#s of t tor feed'acks ,5aminer revie#s materials prod ced 'y Eaplan T tor iss es are reported to Aead of T tors 7aterials 1i0e0 'ooks2 iss es are reported to the Aead of - 'lishing )nternal a dit do spot checks on t tors

C*:$*"e"# *. #1e +)+#e: E > E"3&%*":e"#C commitment from the 'oard to set p and maintain good controls 1good *ttit de, *#areness ( *ction20 The overall 3tone or approach to internal control set 'y management R > RIS! ASSESS6ENT: )dentify , assess and manage the risks that threaten the companys o'4ectives 12$L of sylla' s2 C > C*"#%*( a'#&3&#&e+: proced res to ens re instr ctions are follo#ed I > I".*%:a#&*" C C*::,"&'a#&*": gather reg lar information ( comm nicate it to the right people 6 > 6*"&#*%&"g: need independent revie# of controls system for effectiveness A,/&# C*::&##ee: Ao#ever, they lack the operational kno#ledge hence they need the I"#e%"a( A,/&# .,"'#&*"

GOVERNANCE REG8IRE6ENTS

8! T8RN4855 REPORT Directors need to

I:$(e:e"# a SO8ND +)+#e: *. '*"#%*( To 'e so nd, they are recommending the %6/6 frame#ork CRI6E They also introd ced ! e5tra criteria 10 E:-e/ the system into the company 1make it part of the %ompanys c lt re and systems2 i0e0 val es ( 'eliefs @CONTRO5 ENVIRON6ENTA 20 Re+$*"/ to evolving risk 1)0e0 if risks changes, the systems 6f controls need to change2 III"isks are dynamic @RIS! ASSESS6ENTA !0 C(ea% %e$*%#&"g (&"e+ for iss es @INFOR6ATION C CO668NICATIONA

Re3&e? &# %eg,(a%() - 7inim m of once per year

- Delegate to * dit %ommittee

Re$*%# #* +1a%e1*(/e%+

<<<5I6ITATIONS OF CONTRO5S 2G

A man errorC all internal control systems are at risk from mistakes or errors0 Bra d lent coll sion 1segregation of d ties2C internal control systems can 'e 'y-passed 'y coll sion ( events *' se of a thority 7anagement ignore controls 6'solete controls are not effective %osts vs 'enefits * good internal control system cannot t rn a poor manager into a good one0

)t is good corporate governance to esta'lish the system, risks #ithin the company #ill 'e minimised, ' t those risks can never 'e entirely eliminated0

8S SAR4ANESDOL5EY 4 I T T E R C O D E

I6verd e for e5ams III INTERNA5 CONTRO5 STATE6ENT: ?s ally 2 page report0 - Directors m st disclose the follo#ing in the ann al reportC F E A R F > F%a:e?*%0 .*((*?e/ E > E3a(,a#&*" of controls <<<A > A,/&#*%+ %e$*%# on controls R > Re+$*"+&-&(&#) *. #1e -*a%/ for controls

RO5ES IN RIS! 6ANAGE6ENT AND INTERNA5 CONTRO5 *ll employees have some responsi'ility for monitoring and maintain internal controls0 )t is not solely the responsi'ility of e5ec tive managements "oles in monitoring range from the %,6 setting the 3tone for internal control compliance, to the e5ternal a ditor, reporting on the effectiveness of the system0

The T rn' ll "eport provides the responsi'ilities of directors in relation to internal control systems in the mnemonic, %")7,0 *nd states that management sho ldC )mplement 'oard policies )dentify and eval ate the risks faced 'y the company

The T rn' ll report also s ggests that internal a dit makes a significant and val a'le contri' tion to a company0 )t also stated that #ith regards to the %e3&e? *. #1e e..e'#&3e"e++ *. &"#e%"a( '*"#%*(C The revie# of internal control is a normal responsi'ility of the management The revie# itself, ho#ever, #ill 'e delegated to the a dit committee 1the 'oard do not have the time or the e5pertise to carry o t the revie# themselves2 The 'oard m st provide information on the internal control system and revie# in the ann al acco nts The revie# sho ld 'e carried o t at least ann ally0 2&

CONTRO5 ACTIVITIES These are the detailed internal controls #hich are em'edded #ithin the operations of the company0 S P A 6 S O A P @T AA

S > Seg%ega#&*" *. /,#&e+: %orporate governance codes state that the d ties of the chairman of the 'oard and the %,6 sho ld 'e segregated, to prevent one individ al from acF iring a dominant position on the 'oard0 17is se of po#er2 *ltho gh segregating d ties provides protection against fra d 'y one individ al, it is not effective against coll sion to commit fra d 'y t#o or more individ als P > P1)+&'a( '*"#%*(+: are meas res and proced res to protect physical assets against theft or na thorised access and se0 They incl deC ?sing a safe to hold cash and val a'le doc ments ?sing sec re entry systems to ' ildings or areas of a ' ilding -eriodic inventory checks Aigh sec rity g ards and sing %%T@

A > A,#1*%&+a#&*" a"/ a$$%*3a( '*"#%*(+: are esta'lished to ens re that a transaction m st not proceed nless an a thorised individ al has given his approval, possi'ly in #riting0 6 > 6a"age:e"# '*"#%*(: are controls e5ercised 'y management on the 'asis of information they receive S > S,$e%3&+&*": is oversight of the #ork done 'y other individ als, 'y someone in a position of responsi'ility0 / pervisory controls help to ens re that individ als do the tasks they are reF ired to and perform them properly0 O > O%ga"&+a#&*" '*"#%*(+: refer to the controls provided 'y the organisations str ct re, s ch asC The separation of an organisations activities and operations into departments #ith a clear division of responsi'ilities Delegating a thority #ithin the organisation ,sta'lishing reporting lines #ithin the organisation

A > A%&#1:e#&' a"/ a''*,"#&"g: controls are provided 'yC "ecording transactions properly in the acco nting systems Being a'le to trace each individ al transaction thro gh acco nting records %hecking arithmetic calc lations, s ch as do 'le-checking the fig res in an invoice 'efore sending it to a c stomer 1sales invoice2 or approving it for payment 1p rchase invoice2 to make s re that they are correct0

P > Pe%+*""e( '*"#%*(+: controls sho ld 'e applied to the selection and training of employees, to make s re that s ita'le individ als are appointed to positions #ithin the organisationP individ als sho ld have the appropriate personal F alities, e5perience and F alifications #here reF iredP individ als are given +,&#a-(e &"/,'#&*" a"/ #%a&"&"g to ens re that they carry o t their tasks efficiently and effectively0 /taff sho ld 'e given training in the p rpose of controls and the need to apply them, #hich sho ld increase employee a#areness and nderstanding of the risks of failing to apply them properly0 T > T*$ (e3e( %e3&e?+: the 'oard of directors or senior management might call for a performance report on the progress of the organisation to#ards its goals0 Bor e0g0 senior management might revie# a report on the progress of the organisation to#ard achieving its ' dget targets0 > estions sho ld 'e asked 'y senior management, prompting responses at lo#er management levels0 )n this #ay, top level revie#s are a control activity0 !+

A > A'#&3&#) '*"#%*(+: at departmental or divisional level, management sho ld receive reports that revie# performance or highlight e5ceptions0 B nctional revie#s sho ld 'e more freF ent than top-level revie#s, on a daily, #eekly or monthly 'asis0 *s #ith top-level revie#s, F estions sho ld 'e asked 'y mgt that initiate control activity0 *n e0g0 of control 'y mgt is the provision of reg lar performance reports, s ch as variance reports, comparing act al res lts #ith a target or ' dget0

6ANAGE6ENT 5EVE5S: 9ithin an organisation, management are normally divided into three different levelsC /trategic, tactical and operational0 5EVE5 S#%a#eg&' @-*a%/ *. /&%e'#*%+A ACTIVITY )nvolved #ith monitoring and controlling the organisation as a #hole, making decisions on areas s ch as opening of ne# shops and factories or investment in ne# prod ct line0 6a"age:e"# *. &"#e%"a( '*"#%*(+: /trategic managers tend to 'e foc sed on planning 1detailed control is a lo#er mgt f nction20 Ao#ever, strategic mgt are normally charged #ith ens ring that the internal control system is effective0 They #ill therefore 'e responsi'le for ens ring that the importance of internal control id recognised in the organisation and providing the necessary reso rces to esta'lish and monitor this system0 6a"age:e"# *. %&+0: "isk management is a responsi'ility of strategic management0 /trategic decisions s ch as deciding #hich prod cts to man fact re or #hich areas to trade in #ill 'e taken here #ith those decisions impacting on the amo nt of risk faced 'y the company0 )nformation #ill 'e needed on the potential o tcomes of different decisions so the amo nt of risk can 'e adeF ately assessed0 /trategic managers #ill 'e advised 'y the risk committee0 "esponsi'le for implementing the decisions of strategic managers and ens ring that the different divisions or departments #ithin the organisation are operating correctly 6a"age:e"# *. &"#e%"a( '*"#%*(+: 7anagers #ill have responsi'ility for implementing strategic managements decisions in this case the act al internal control systems #ithin the company0 /imilarly, #here control #eaknesses are identified, tactical managers #ill need to remedy those #eaknesses and #here necessary inform strategic mgt of :a#e%&a( #eaknesses0 6a"age:e"# *. %&+0: 7anagers #ill 'e responsi'le for implementing strategic mgts decisions0 They #ill also 'e reporting identified risks to strategic mgt, either from environmental monitoring or from se of decision-making tools s ch as the decision s pport system 1D//20 The latter may identify risks from falling sales for e5ample, #hich #ill need strategic management action0 Tactical managers #ill 'e collecting information on operational risk from lo#er level managers and recommending control activities to mitigate those risks0 DSS: is a comp ter 'ased system #hich ena'le managers to confront illstr ct red pro'lems 'y direct interaction #ith date and pro'lem-solving programs0 %ontrolling the day-to-day operations of the organisation, reporting F eries or pro'lems 'ack to tactical management for decisions as necessary0 6a"age:e"# *. &"#e%"a( '*"#%*(+: 6perational managers #ill 'e responsi'le for the operation of specific detailed internal controls0 ,0g0 controls to ens re that stock is not stolen from company premises0 6a"age:e"# *. %&+0: 6perational managers #ill have little or no infl ence over the risk appetite of the !1

Ta'#&'a( @/&3&+&*"a( :a"age:e" #A

O$e%a#&*"a( @2,"&*% :a"age:e" #E#ea: (ea/e%+A

company0 They are, tho gh, in a position to identify risks at the operational level ( therefore report these to tactical management0

CHARACTERISTICS OF INFOR6ATION: The information received 'y management needs to 'e of a certain standard to 'e sef l in internal control and risk management and monitoring0 The information sho ld meet the criteria of 3good informationC A C C 8 R A T E

A > A'',%a#e C > C*:$(&a"'e C > C*+#D-e"e.&'&a( 8 > 8+e%D#a%ge#e/ R > Re(e3a"# A > A,#1*%&#a#&3e T > T&:e() E > Ea+) #* ,+e

I6PORTANCE OF ACC8RATE INFOR6ATION FOR THE 6ANAGE6ENT OF INTERNA5 CONTRO5S The 'oard have to meet their corporate governance responsi'ility to ens re that an effective internal control e5ists #ithin the organisation0 )n order to do this they #ill reF ire acc rate reports from a ditors and managers #ithin the company regarding the c rrent controls, and any #eaknesses identified0 :ood information #ill ena'le the 'oard to confirm that the monitoring activities, ndertaken 'y a ditors and critical to the internal control system, are 'eing carried o t in an effective and efficient manner0 )nformation regarding the costs and 'enefits of internal controls #ill ena'le the 'oard to ens re that reso rces are not #asted on ineffective, or nnecessary controls0 *cc rate information regarding the risks facing the organisation #ill ena'le the 'oard to 'e a#are of any critical iss es that may rise in the near f t re, and hence take action accordingly to mitigate any pro'lems Board can provide the appropriate direction to the management of the company if they are f lly a#are of all the facts relating to any given sit ation0 )f the facts are distorted, the direction provided may 'e inappropriate0

!2

CHAPTER 9: A8DIT AND CO6P5IANCE

CONTRO5 RESPONSI4I5ITIES INTERNA5 4OARD %e$*%# *" e..e'#&3e"e++ #* - 6verall responsi'ility - )mplement so nd system - "evie# reg larly ELTERNA5 SHAREHO5DER /hareholder activismC i0 voting on controls ii0 reading the financial statements 1%hapter $2

INSTIT8TIONA5 INVESTOR SOS RAINS I D I"#e%"a( '*"#%*(+ A8DIT CO66ITTEE > %e3&e?H *3e%+ee C a++e++ - financial reporting - controls - e5ternal a dit - internal a dit ELTERNA5 A8DITOR 8! > provide feed'ack on control deficiencies 8S SOL > * dit report

INTERNA5 A8DIT - m st 'e independent - role REVIE S - all companies m st consider the need depending onC i0 siMe ii0 comple5ity iii0 costD'enefit A8DIT CO66ITTEE Bormal engagements for Binancial reporting, controls ( a ditor relationships

)t is a committee of the 'oard of directors consisting entirely of independent 8,Ds, of #hom at least one has had recent financial e5perience 7ost of the 'oard o'4ectives relating to internal controls #ill 'e delegated to the a dit committee

4OARD

I7)8)7?7 ! 8,Ds

ELTERNA5 A8DIT

!!

I1 needs recent financial e5perience

INTERNA5 A8DIT They manage the relationships 'et#een the 'oard ( a ditors This preserves independence 1red ces familiarity and intimidation2

RO5E Re3&e?H O3e%+ee a"/ A++e++

FINANCIA5 REPORTING PROCESS SYSTE6S 7onitor integrity of the B/ Treatment of acco nting items0 ,0g0 lo#er of cost and 8B@ or "eval ed amo nt system Disclos re *cco nting policies e0g0 depreciation method sed /traight line or red ced 'alance

INTERNA5 CONTRO5 - independent eval ation of control system - revie# financial controls - monitor adeF acy of internal control - approve ann al report )% statement - receive reports from internal and e5ternal a ditors regarding controls

ELTERNA5 A8DIT -repare a short list of a dit firms for shareholders to choose from0 Do post-completion revie#s 1revie# of ho# the a dit #orked2 7onitor independence no )nvestigate resignations of e5ternal a ditors *pprove engagement letter

INTERNA5 A8DIT - recr it Aead )nternal * ditor

- set #ork 1i0e0 4o' description2 - revie# a dit reports - monitor independence - meet #ith them once a year #ith managers - revie# effectiveness of #ork performed

6ONITORING INDEPENDENCE E9a:$(e %loseDfamily connection to 'oard T1%ea# FA6I5IARITY - 7ay 'e 'iased to the director A,/&# '*::&##ee +*(,#&*" - 7onitor length of service 1$ years2 - "evie# family connections

!4

Too dependent on fees

SE5FDINTEREST - * ditor may please the client to keep the #ork SE5FDREVIE - 6verlook o#n errors FA6I5IARITY - Biased0 Beca se spending lots of time on the client SE5FDINTEREST - Bees 'ecomes h ge INTI6IDATION - Bee ADVOCACY - )f represent the company

7onitor siMe of the fee )f the fee is too 'ig, they #o ld recommend removing other services Decide the most appropriate services for the company0 PN*"Da,/&# +e%3&'e $*(&')F

-roviding non a dit services

INTERNA5 A8DIT <isted companies I '*:$,(+*%) 7 st 'e independent 1as m ch as possi'le2 *ll companies m st consider if an )nternal * dit is reF ired0

INDEPENDENCE The internal a ditors sho ld 'e independent of e5ec tive management and sho ld not have any involvement in the activities or systems that they a dit The head of internal a dit sho ld report directly to a senior director or the a dit committee0 )n addition, ho#ever, the head of internal a dit sho ld have direct access to the chairman of the 'oard of directors and to the a dit committee, and sho ld 'e acco nta'le to the a dit committee The a dit committee sho ld approve the appointment and termination of appointment of the head of internal a dit T1%ea# FA6I5IARITY - Biased SE5F REVIE - 9o ld overlook o#n errors INTI6IDATION - Bear of losing 4o' S*(,#&*" The internal a ditor rotates departments reg larly /egregate d ties

E9a:$(e "evie# controls of a person yo kno# "evie# control yo implemented

Denied access to information 1e5ec tive directors2

"eport to 8,Ds only 1i0e0 a dit committee2

AYS 4Y

HICH INDEPENDENCE IS 6AINTAINED 4Y THE INTERNA5 A8DITOR

6a"ag&"g &"#e%"a( a,/&#: )ndependence is maintained 'y the internal a ditor 'eing a'le to decide the scope of internal a dit #ork #itho t 'eing infl enced 'y the 'oardDsenior management0

!$

R&+0 :a"age:e"#: independence is maintained 'y the internal a ditor 'eing given access to information on all areas of the organisation 1risk, controls, financial and operation information2 and 'eing a'le to report freely in any errors or omissions fo nd0 C*"#%*(: independence is maintained 'y ens ring f ll provision of information and independent reporting lines 1via the a dit committee2 G*3e%"a"'e: independence is maintained 'y the internal a ditor 'eing a'le to report 'reaches of corporate governance code #itho t fear of dismissal 1as happened in the ?/ prior to /6=2 I"#e%"a( a,/&# ?*%0: independence is maintained 'y the internal a ditor 'eing a'le to sho# that normal standards of internal a dit #ork have 'een follo#edP there has 'een no press re to 3c t corners either from senior management or 'eca se the internal a ditor decided to carry o t #ork to a lo#er standard0 C*::,"&'a#&"g %e+,(#+: independence is maintained 'y the internal a ditor 'eing a'le to comm nicate to a committee or person separate from the 'oard #ho also has the po#er to take appropriate action to the internal a ditors report0

RO5ES OF INTERNA5 A8DIT R C*"#%*(+ -a+e/ E V I E S

R > Re3&e? '*"#%*( a'#&3&#&e+ @.&"a"'&a( a"/ *$e%a#&*"a( '*"#%*(+A: to ens re they are effective and there are no fra d and error E > E9a:&"e #&:e(&"e++ *. &".*%:a#&*": to ens re iss es are dealt #ith F ickly V > Va(,e .*% :*"e) a,/&#&"g @3E+A: to ens re the 'est service is o'tained from s ppliers I > I/e"#&.) #1e %&+0+ #* #1e '*:$a"): to ens re they are managed and dont affect the companys o'4ectives E > E9a:&"e '*:$(&a"'e ?&#1 #1e (a?: to ens re no penalties or damage to the rep tation of the company > *%0 ?&#1 a,/&# '*::&##ee: to provide operational s pport 1to the 8,Ds #ho come in only 6 months a year2 S > S$e'&a( &"3e+#&ga#&*"+ @*"eD*.. :a##e%+A: to ens re one-off iss es are not repeated 1s ch as B- oil spill2

TYPES OF A8DIT

OR!:

The internal a dit department #ill carry o t many different types of a dit, as highlighted 'y the departments varied roles0 ,5amples of a dit types areC F&"a"'&a( a,/&#: involves e5amining records and evidence to s pport financial and management reporting in order to detect and prevent fra d0 O$e%a#&*"a( a,/&#: covers e5amination and revie# of a ' siness operation, the effectiveness of controls and identification of areas for improvement in efficiency and performance incl ding improving the !,s of @B7 a diting P%*2e'# a,/&#: a'o t looking at a specific pro4ect 1e0g0 commissioning a ne# factory2 and asking #hether these #ere done #ell and lessons that can 'e learnt from any mistakes made0 !6

Va(,e .*% :*"e) a,/&#: an area that internal a ditors have 'een getting increasingly involved in the @B7 a dits0 *lso kno#n as P-e+# 3a(,eF a dits, it assess servicesDs ppliers in ! main areasC E'*"*:) > -e+# $%&'e: looking at the inp ts to the ' siness 1or process, and deciding #hether these are the most economical that are availa'le at an accepta'le F ality level0 E..&'&e"') > -e+# ,+e *. %e+*,%'e+: considering ho# #ell the operation converts inp ts to o tp ts0 ,0g0 monitoring #astage in a man fact ring company or F ality control fail res E..e'#&3e"e++ > -e+# %e+,(#: e5amining #hether the organisation is achieving its o'4ectives0 There m st 'e clear o'4ectives for this p rpose0 Diffic lt for 8B- organisations0

S*'&a( a"/ e"3&%*":e"#a( a,/&#: *n e"3&%*":e"#a( a,/&# aims to assess the impact of the organisation on the environment0 8ormally involves the implementation of appropriate environmental standards s ch as )/6 14++1 and ,7*/0 The +*'&a( a,/&# #ill look at the companys contri' tion to society and the comm nity0 %ontri' tions co ld 'e made thro gh donations, sponsorship, employment, ed cation, health ( safety 6a"age:e"# a,/&#: a management a dit is defined as an o'4ect and independent appraisal of the effectiveness of managers and the corporate str ct re in the achievement of the entities o'4ectives and policies0 )ts aim is to identify e5isting and potential management #eaknesses and recommend #ays to rectify them0

FACTORS EFFECTING THE NEED FOR INTERNA5 A8DIT T1e +'a(eH /&3e%+&#) a"/ '*:$(e9&#) *. #1e '*:$a")F+ a'#&3&#&e+: the larger, the more diverse and the more comple5 a range of activities is, the more there is to monitor 1and the more opport nity there is for certain things to go #rong2 T1e ",:-e% *. e:$(*)ee+: as a pro5y for siMe, the n m'er of employees signifies that larger organisations are more likely to need internal a dit to nderpin investor confidence than smaller concerns C*+#E-e"e.&# '*"+&/e%a#&*"+: management m st 'e certain of the 'enefits that #ill res lt from esta'lishing internal a dit and they m st o'vio sly 'e seen to o t#eigh the costs of the a dit0 C1a"ge+ &" 0e) %&+0+: the introd ction of a ne# prod ct, entering a ne# market, a change in any of the -,/T,< factors or changes in the ind stry might trigger the need for internal a dit P%*-(e:+ ?&#1 e9&+#&"g &"#e%"a( '*"#%*( +)+#e:+: any pro'lems #ith e5isting systems clearly signify the need for a tightening of systems and increased monitoring A" &"'%ea+e/ ",:-e% *. ,"e9$(a&"e/ *% ,"a''e$#a-(e e3e"#+: system fail res or similar events are a clear demonstration of internal control #eakness

HY AN ORGANISATION 6AY CHOOSE TO REPORT ON INTERNA5 CONTRO5S TO ITS SHAREHO5DERS - %ompanies that are more open #ith their disclos res regarding internal controls may 'enefit from increased shareholder satisfaction as they kno# their asses are 'eing #ell looked after By reporting on their internal controls, a company opens itself to additional scr tiny 'y shareholders 1and other interested parties2 #hich may improve corporate governance The kno#ledge that their #ork #ill 'e reported on e5ternally may help reg late the #ork of the a dit committee By making the chair of the a dit committee availa'le for F estions at the *:7, the company demonstrates that it has nothing to hide, therefore increasing shareholder confidence0

!.

CHAPTER 10: RIS! AND THE RIS! 6ANAGE6ENT PROCESS

DEFINITION OF RIS!: )t is an opport nityDdanger associated #ith an ncertain f t re event0 "isks can have an adverse 13do#nside e5pos re2 or favo ra'le 13 pside potential2 impact on the organisations o'4ectives0 ,g0 * company decides to introd ce a ne# prod ct FAI5S S8CCESS J 7*"E,T /A*", ",D?%,/ J 7*"E,T /A*", )8%",*/,/ 8eeds to 'e managed I RIS! 6ANAGE6ENT R&+0 6a"age:e"#: &+ #1e $%*'e++ *. %e/,'&"g #1e $*++&-&(&#) *. a/3e%+e '*"+eK,e"'e+ e&#1e% -) %e/,'&"g #1e (&0e(&1**/ *. a" e3e"# *% &#+ &:$a'#H *% #a0&"g a/3a"#age *. #1e ,$+&/e %&+0; )t is key to effective internal control0 )n t rn, follo#ing good corporate governance proced res 1incl ding having so nd internal control systems2 #ill decrease the impact of many risks on an organisation0 )t is the responsi'ility of mgt to esta'lish a risk mgt system0 PROCESS OF RIS! 6ANAGE6ENT STAGE RIS! IDENTIFICATION: risks are identified 'y key stakeholders0 "isks m st o'vio sly 'e identified 'efore they can 'e managed0 RIS! ASSESS6ENT: risks are eval ated according to the likelihood of occ rrence and impact on the organisation0 This assessment provides a prioritised risk list identifying those risks that need the most rgent attention0 /trategic ( operational risks B siness risk 6CR5TP5ED - *ssessing importanceC 2 criteria 10 -ro'a'ility 1L2 20 /everity 1S2 J RIS! 6AP <<<Ne? +)((a-,+: ,nvironmentD%orrelationD-erception T > #%a"+.e% A > A3*&/: if cant avoid risk, then, A 5 A R P R > Re/,'e A > A''e$# -

RIS! STRATEGYEP5ANNING D T A R A > P3: planning involves esta'lishing appropriate risk mgt policies0 -olicies incl de ceasing risky activities thro gh to o'taining ins rance against nfavo ra'le f t re events0 %ontingency planning involves esta'lishing proced res to recover from adverse events, sho ld they occ r0 RIS! 6ONITORING: risks are monitored on an - "isk a dits 1,5aminer *rticle2 ongoing 'asis0 9here risks change, ne# risks are - Done 'y the internal or e5ternal a ditor identified then those risks are added to the risk assessment for appropriate categorisation and action RIS! IDENTIFICATION: The risks ' sinesses face #ill vary greatly 'et#een companies and derive from a n m'er of different so rces, incl ding those sho#n 'elo#0 ACCA 48SINESS RIS!S: *ccording to the e5aminer, -,+&"e++ %&+0+ a%e strategic risks that threaten the health and s rvival of the company RIS! 7; 6AR!ET DETAI5: T1e %&+0+ a++*'&a#e/ ?&#1QQ;; R0the ind stry the company operates in and from its c stomers SO8RCESEELA6P5ES - Bail re to provide goods c stomers reF ire - 7arket sector overall declines - "eso rce is r nning o t 1shortage2 - %ompetition - %ompanys credit rating is decreased - % stomers are not paying on time or dont pay at all - There are going concern I6PACT - %ompany ceases to trade

C<*//

CREDIT

R giving credit to c stomers 1'ad de't2, or taking credit from s ppliers

- %ompany may not 'e a'le to o'tain loans or credits - %ompany may not !G

pro'lems so s ppliers are paid late R,*<< ; REP8TATION R damaging the companys 'randDimage 1red ces confidence, lo#ers f t re sales2 R non-compliance #ith legislationDla# - -rod ction of poor F ality prod cts - -rod ct recallsDadverse p 'licity against company - There is a 'reach of reg lations0 ,0g0 %ompanies *ct - %ompany is s ed 'y third party for 'reach of contract - There is lack of investment in "(D - %ompetitors achieve technological advantage

o'tain materials for prod ction - <oss of market share - /hare price drops - )n the e5treme company clos re - *dverse p 'licity - Bines and penalties paya'le 'y company andDor officers - -rod cts appear to 'e o t of date - There is loss of market share - *dverse p 'licity - -ossi'le 'oycott of company prod cts

5)E,/

5EGA5

T*E)8 :

TECHNO5OGIC A5

P1

PRO4ITY

R se of technology in the ' siness 1e0g0 o'solete eF ipment2 R appearing dishonest 1directors2 e0g0 directors take a 'on s #hen the company makes a loss

5,//6 8/

5IG8IDITY

- Directors receive high 'on ses #hen company is making losses - %ompany trading in sector #ith adverse rep tation 1e0g0 arms trade #ith 3enemy co ntries2 R the companys - % stomers are not paying cash flo# and F ickly eno gh a'ility to repay de't - There is a poor credit 1going concern2 rating - There is poor cash management

- %ompany may not o'tain materials needed for prod ction or not pay for la'o r - %ompany may have to 'orro# at a high rate for short-term f nding to cover liF idity pro'lems - %ompany cannot meet its commitments #hich may lead to company fail re - *dverse p 'licity - Bine paya'le 'y company

E@,";

ENVIRON6ENT A5

D*;

DERIVATIVE

R poor environmental performance 1rep tation goes do#n and 'reach of environmental la#, therefore fines 000 the se of financial instr ments0 Derivatives are comple5, #hich increases the risks of fra d and error0 "isk that

- Breach of relevant legislation - %ompany trading in sector #ith adverse rep tation 1e0g0 testing on animals2 - <osses made on for#ard e5change contracts - Binancial statements do not adeF ately disclose companys transactionsD assetsDlia'ilities

- Binancial loss to company - *dverse p 'licity - -ossi'le clos re of ' siness if losses are large

OTHER S PROD8CT !&

CO6ODITY PRICE

c stomers #ill not ' y ne# prod cts 1or services2 provided 'y the organisation or sales demand for c rrent prod cts and services #ill decline ne5pectedly B sinesses might 'e e5posed to risks from ne5pected increases 1or falls2 in the price of a key commodity

C8RRENCY *rises from the possi'ility of movements in foreign e5change rates, and the val e if one c rrency in relation to another "isk of ne5pected gains or losses arising as a conseF ence of a rise or fall in interest rates Depends to a large e5tent on the political sta'ility in the co ntries in #hich an organisation operates and the attit des of governments to#ards protectionism *rises from the possi'ility that reg lations #ill affect the #ay an organisation has to operate )s the risk of losses, possi'ly fines, res lting from noncompliance #ith la#s or reg lations "isks facing organisations from 4+

INTEREST RATE

PO5ITICA5

REG85ATORY

CO6P5IANCE

ECONO6IC

ENTERPRENE8 RIA5 RIS!

changes in economic conditions, s ch as economic gro#th, recession, ta5ation policy, international trading conditions This is the necessary risk associated #ith any ne# ' siness vent re or opport nity 7any companies engage in potentially haMardo s activities, s ch as coal mining, that can give rise to in4 ry or the loss of life Bor non-'ank companies, it is the risk arising from e5pos res to high financial gearing and large amo nts of 'orro#ing

HEA5TH C SAFETY

GEARING

CATEGORIES OF RIS!: 10 STATEGIC RIS!S: affect the *3e%a(( :&++&*" of the company0 )t threatens the going concern of the organisation These are risks arising from the possi'le conseF ences of strategic decisions taken 'y the organisation0 ,0g0 one company might p rs e a strategy gro#th 'y acF isitions, #hilst another might seek slo#er, organic gro#th0 :ro#th 'y acF isition is likely to 'e m ch more high-risk than organic gro#th, altho gh the potential ret rns might also 'e m ch higher0 )t also arises from the #ay that an organisation is strategically positioned #ithin its environment0 ,0g0 a company may decide to e5pand into higher or lo#er risks areas perhaps 'y man fact ring ne# prod cts or simply enhancing older prod cts0 /trategic risks sho ld 'e identified and assessed at senior mgt and 'oard or director level0 -,/T,< and /96T techniF es can 'e sed to identify these risks0 1-!2 20 OPERATIONA5 RIS!S: affect the /a)D#*D/a) activities of the company )t refers to potential losses that might arise in ' siness operations0 )t may arise as a res lt of inadeF ate r failed internal processes, people and systems or e5ternal events0 )t incl des risks of fra d or employee malfeasance, poor F ality prod ction or lack of inp ts for prod ction0 They can 'e managed 'y internal control systems0

RIS! ASSESS6ENT /econd state of risk management 41

*ssess the importance of risk sing 2 criteriaC P%*-a-&(&#) 1likelihood that the risk arises2 Se3e%&#) 1impact on the organisation if the risk does arise2 I RIS! 6AP

<69 PRO4A4I5ITY @RA A):A <69 -

Sa&"+-,%)F+ +#*$ '*"#%a'# Fa'#*%) ?*%0e% (ea3e+ Re'e++&*" SEVERITY @JA

C*"#a:&"a#e 1000 '1*' -a%+

A):A

The map identifies #hether a risk #ill have a significant impact on the organisation and links that into the likelihood of the risk occ rring0 This provides a frame#ork for prioritising risks in the ' siness "isks #ith a significant impact and a high likelihood of occ rrence need more rgent attention than risks #ith a lo# impact and lo# likelihood of occ rrence0 The significance and impact of each risk #ill vary depending on the organisationC e0g0 an increase in the price of oil #ill 'e significant for airline company ' t #ill have almost no impact on a financial services company offering investment advice over the internet0

The severity of the risk can also 'e disc ssed in terms of 3haMard0 The higher the haMard or impact of the risk, the more severe it is0

Ne?Q;;&+1 -&#+ *. +)((a-,+ @2 A%#&'(e+A 10 ENVIRON6ENT: the ind stry, the company, employees0 ,0g0 Baked 'eans S#a#&' E"3&%*":e"# 1Theres no change ever in the ind stry2

*ll companies are on spectr m

,0g0 mo'ile phones

D)"a:&' E"3&%*":e"# 1theres constant change in the ind stry2

- "isks constantly change, hence companies need reg lar risk assessment, and need to invest more in risk management0 20 RIS! CORRE5ATION: these are risks that are related0 E;g; 6a%+ '1*'*(a#e /* "*# %e')'(e: - increase in rep tation risk - increase in environmental risk These risks a'ove are $*+&#&3e() '*%%e(a#e/ i0e0 the risks are related and they may move together in the SA6E DIRECTION; *s the environmental risk increases, so does the rep tational risk0 E;g; 6a%+ &"3e+#+ &" %e')'(&"g $(a"#: - red ction in rep tation risk and environmental risk - increase in liF idity risk These risks are "ega#&3e() '*%%e(a#e/0 The risks are related ' t move in OPPOSITE DIRECTION; *s more money is spent on red cing the environmental damage, therefore red cing the risk, there is an increase in the financial risk, as the company is depleting its cash reserves s 'stantially0 !0 RIS! PERCEPTION: This is ho# risks are perceived0 42

S84=ECTIVE DATA Data is hard to F antifyDmeas re #ith certainty

O4=ECTIVE DATA Data is easy to F antifyDmeas re %reates more RO48ST risk management

HY INC8R RIS!N T* ga&" '*:$e#&#&3e a/3a"#age: to generate higher ret rns, ' sinesses may have to take more risk in order to 'e competitive0 8ot accepting risk tends to make a ' siness less dynamic, and implies a 3follo# the leader strategy0 T* &"'%ea+e .&"a"'&a( %e#,%": inc rring risk also implies that the ret rns from different activities #ill 'e higher 3'enefit 'eing the ret rn for accepting risk0 Benefits can 'e financial decreased costs, or intangi'le 'etter F ality information

I" -*#1 'a+e+H #1e+e ?&(( (ea/ #* #1e -,+&"e++ -e&"g a-(e #* ga&" '*:$e#&#&3e a/3a"#age7 HY 6ANAGE RIS!N To identify ne# risks that may affect the company so an appropriate risk management strategy can 'e determined To identify changes to e5isting or kno#n risks so amendments to the risk mgt strategy can 'e made0 Bor e0g0 #here there is an increased likelihood of occ rrence of a kno#n risk, strategy may 'e amended from ignoring the risk to possi'ly ins ring against it0 To ens re that the 'est se is made of opport nitiesC organisations are identifying risks associated #ith ne# opport nities to increase the pro'a'ility of positive o tcomes and to ma5imise ret rns To enhance shareholder val e 'y improving performance To 'enefit from higher re#ards associated #ith higher risks

48SINESS RIS!S: can either 'eC GENERIC: that is, the risk affects all ' sinesses0 ,0g0 changes in the interest rate, non-compliance #ith company la#, or poor se of derivative instr ments0 :eneric risks can also affect different ' sinesses in different #ays, a company #ith s 'stantial 'orro#ing #ill 'e affected more 'y an increase in interest rates than a company #ith little or no 'orro#ings0 SPECIFIC: the risk is specific to individ al ' siness sectors0 Banks and 7ining companies 'oth face rep tational risk0 Banks high profits and overcharging c stomer, 7ining companies poor #orking conditions and prolonged ill health res lting from #orking in mines0 The overall point is that the risk profile is different for each sector even tho gh the risk areas can remain the same0

TOO5S AND TECHNIG8ES FOR G8ANTIFYING RIS!S * n m'er of tools can 'e sed to F antify the impact f risks on the organisation, some of #hich are descri'ed 'elo#C S'e"a%&* $(a""&"g: in #hich different possi'le vie#s of the f t re are developed, s ally thro gh a process of disc ssion #ithin the organisation Se"+&#&3&#) a"a()+&+: in #hich the val es of different factors #hich co ld affect an o tcome are changed to assess ho# sensitive the o tcome is to changes in those varia'le De'&+&*" #%ee+: often sed in the management of pro4ects to demonstrate the ncertainties at each stage and eval ate the e5pected val e for the pro4ect 'ased on the likelihood and cash flo# of each possi'le o tcome 4!

C*:$,#e% +&:,(a#&*"+: s ch as the 7onte %arlo sim lation #hich ses pro'a'ility distri' tions and can 'e r n repeatedly to identify many possi'le scenarios and o tcomes for a pro4ect /oft#are packagesC designed to assist in the risk identification and analysis processes A"a()+&+ *. e9&+#&"g /a#a: concerning the impact of risks in the past0

CHAPTER 11: CONTRO55ING RIS!

RIS! STRATEGYEP5ANNING T A 7ethods of managing risk R A STRATEGY TRANSFE R AVOID

<69 ACCEPT PRO4A4I5ITY @RA RED8CE A):A <69 SEVERITY A):A @JA

T > TRANSFER RIS! > Transfer risk to a !rd party0 )n some circ mstances, risk can 'e transferred #holly r in part to a !rd party, so that if an adverse event occ rs, the !rd party s ffers all or most of the loss0 I"+,%a"'e > ' sinesses arrange a #ide range of ins rance policies for protection against possi'le losses0 O,#+*,%'&"g Fa'#*%&"g =*&"# 3e"#,%e @+1a%eAE .%a"'1&+&"g

A > AVOID RIS! stop activity that creates the risk0 i0e0 *n organisation might choose to avoid a risk altogether0 Ao#ever, since risks are navoida'le in ' siness vent res, they can 'e avoided only 'y not investing, or not ndertaking the activity that gives rise to the risk in the first place 1or #ithdra#ing from the ' siness area completely2 NNN 7ay not al#ays 'e possi'le R > RED8CE RIS! red ce the possi'ility that the risk arises or the financial impact if it does0 %ontrols "isk diversification 1spread yo r risk2 C <ots of prod cts <ots of location

A > ACCEPT RIS! > Take no action and incorporate the risk into the ' siness0 /imply accept that the risk may occ r and decide to deal #ith the conseF ences in that partic larly sit ation0 The strategy is appropriate normally #here the adverse effect is minimal0 Bor e5ample, there is nearly al#ays a risk of rainP nless the ' siness activity cannot take place #hen it rains then the risk of rain occ rring is not normally ins red against0

Ne?;;;;&+1 "isks cant al#ays 'e eliminated d e to cost or 'eca se the prod ct is very profita'le /o companies sho ld A 5 A R P 44

i0e0 They sho ld ens re the risk is As 5o# As Reasona'ly Possi'le

)f the organisation cant avoid it, transfer it to red ce it as lo# as possi'le, ho#ever the costly nat re of risk red ction sho ld 'e taken into acco nt0 The *<*"- principle e5presses a point at #hich the cost of additional risk red ction #o ld 'e grossly disproportionate to the 'enefits achieved0 The *<*"- principle is s ally applied to safety critical, high integrity systems #here health and safety risks cannot 'e eliminated e0g0 6il rigs0 ,0g0 a company spends T1million to prevent a mem'er of staff s ffering from a 'r ised knee is o'vio sly grossly disproportionate0 9hereas a company spending T1million to prevent a ma4or e5plosion capa'le of killing 1$+ people is o'vio sly proportionate0

RIS! 6ONITORING This is an independent revie# of risk mgt to ens re it is effective0 )t is done 'y the )nternal or e5ternal a ditor J RIS! A8DIT "isk a dit is a systematic #ay of nderstanding the risks that an organisation faces0 )t is not mandatory for all organisations ' t, in some highly reg lated ind stries, a form of ongoing risk assessment and a dit is comp lsory in most governance 4 risdictions0 Re.e% #* #1e E9a:&"e%F+ a%#&'(e $,-(&+1e/ &" S#,/e"# A''*,"#a"# &" 6a%'1 2009 PR&+0 a"/ E"3&%*":e"#a( A,/&#&"gA

STAGES OF RIS! A8DIT IDENTIFY RIS!S ASSESS RIS!S REVIE This is #here the a ditor re - performs the 1st stages of risk management and then se their independent res lts as a 'enchmark0 "evie#ing the controls that are in place to prevent andDor detect the risk and assessing if they are appropriate0 - *ny identified risksQ - -oorly assessed risksQ - -oorly managed risksQ "eporting findings to the risk committee0 )nforming the 'oard 1or risk committee #here one e5ists2 a'o t risks #hich are o tside accepta'le levels or #here controls over specific risks are ineffective0 PROCESS OF ELTERNA5 REPORTING OF INTERNA5 CONTRO5S AND RIS!S 1; I/e"#&.) %e$*%#&"g +&#,a#&*" )nternal control fail reDdirectors making inappropriate decisions 1as in ,nron2 2; C1e'0 '*:$(&a"'e ?&#1 (eg&+(a#&*"Ee#1&'a( g,&/a"'e %ompanies *ctD/tock e5change reF irementDprofessional ethical g idelines may reF ire disclos re 3; 6a0e %e$*%# &. %eK,&%e/ Doc ment reason for report 1e0g0 F alified a ditDreport #histle'lo#ing2 and make report to appropriate third party0 INTERNA5 OR ELTERNA5 RIS! A8DITORSN S$ee/ *. ?*%0 a"/ .a:&(&a%&#)

REPORT

4$

)nternal a dit teams have the advantage of familiarity #ith the organisations c lt re, systems, proced res and policies0 :iven their familiarity #ith the nat re of the ' siness and ho# things are s pposed to #ork, internal a dit sho ld 'e a'le to perform a highly specific and foc ssed risk assessment0 )t can 'e arg ed that an e5ternal team #o ld take a long time to develop the same nderstanding and co ld never, in practice, maintain the same kno#ledge of a companys n ances as it evolves as an internal team0 F(e9&-&(&#)

Internal teams are fle5i'le in terms of the #ay they are deployed0 *s they are controlled 'y management, they can 'e directed to perform a variety of engagements that can 'e changed at a moments notice0 *ll engagements #ith e5ternal a ditors are s '4ect to the restrictions of engagement letters, availa'ility of reso rces and the fees they charge G,a(&#) *. ?*%0

)nternal a dit sho ld prod ce #ork that is #ritten and str ct red according to the e5pectations and norms of the organisation, #hich is therefore relevant for the intended se0 ,5ternal teams co ld 'e criticised for pitching their reports at too high a technical level for the intended g idance or perhaps in an area the a dience #as not specifically concerned #ith0 O-2e'#&3&#)

,5ternal teams sho ld comply #ith )B*%s 1and *%%*s2 code of ethics0 They sho ld therefore 'e more o'4ective than an internal team, #ho #ill s ffer from over familiarity #ith the company0 )t is likely that e5ternal a ditors #ill have no link to any'ody inside the organisation 'eing a dited and so there #ill 'e fe#er prior friendships and personal relationships to consider S1a%e1*(/e% '*".&/e"'e

The fact that these threats are avoided or red ced #ill create a higher degree of confidence for investors and, #here applica'le, reg lators I""*3a#&*"

*n e5ternal a ditor 'rings a fresh pair of eyes to the task, identifying iss es that internal a ditors may have overlooked 'eca se of familiarity0 9hen internal employees a dit a system or department, they may 'e so familiar #ith the organisations ro tines, proced res, c lt re, and norms that a key risk might 'e overlooked or #rongly assessed0 C,%%e"# +0&((+ a"/ 0"*?(e/ge

Best practice and c rrent developments can 'e introd ced if e5ternal cons ltants are a#are of these0 :iven that cons ltants typically promote themselves on the c rrency of their skills, it is often more likely that their kno#ledge #ill 'e more p to date than that of internal staff #hose skills may 'e geared specifically to their organisations needs and e5pectations0 P8RPOSE OF RIS! A8DITING "isk a diting assists the overall risk monitoring activity 1last step in the risk management process2 'y providing an independent vie# of risks and controls in an organisation - *s #ith any a dit sit ation, a fresh pair of eyes may identify errors or omissions in the original risk monitoring process - )n many sit ations, a dit #ork is o'ligatory 1e0g0 /6= reF irements20 - Bollo#ing revie#, internal and e5ternal a dit can make recommendations to amend risk management system or controls as necessary0 RIS! RESPONSI4I5ITIES -

46

INTERNA5 4OARD: /&+'(*+e +&g"&.&'a"# %&+0+ recognise overall responsi'ility for maintain controls systems in the company %a&+e %&+0 a?a%e"e++ consider the %&+0 a$$e#&#e of the company devise effective strategies to control risk

ELTERNA5 SHAREHO5DER - /hareholder *ctivism &;e; G* #* AG6 A+0 K,e+#&*"+ a-*,# %&+0

RIS! CO66ITTEE mi5 of e5ec tives and ma4ority 8,Ds DANGER #here no risk committee is formed, the a dit committee #ill s ally perform similar d ties R*(e+ &"'(,/e: ?pdate company risk profile and appetite and report these to the 'oard Ra&+e %&+0 a?a%e"e++ and ens ring appropriate risk mgt #ithin the organisation ,sta'lish policies for risk management and contin o sly revie# it and make recommendations for amendment to the 'oard #hen necessary )mplement processes to monitor and report risk RIS! 6ANAGER - )s a mem'er of the risk committee, reporting directly to that committee and the 'oard0 - The role is more operational than strategic - -olicy is set 'y the 'oard and the risk committee and implemented 'y the risk manager R*(e+ &"'(,/e: - -rimarily to implement risk management policies - )mplement changes #hen reF ired - )dentify and eval ate risks affecting the org0 - -rovision of overall leadership for risk mgt team - %arry o t training on risk management - :ive advice - 7onitoring the stat s of risk mitigation strategies and internal a dits, and ens ring that all recommendations are acted pon - 7aintain good relationships #ith the 'oard and the risk committee - ,ns re compliance #ith any la#s and reg lations affecting the ' siness - /eeking opport nities to improve risk mgt methodologies and practices #ithin the org0 - -rod cing reports on risk mgt, incl ding any stat tory reports 1e0g0 /6= reports in the ?/2 INTERNA5 A8DITOR - )ndependent monitoring of risks - %arry o t risk a dit

ELTERNA5 A8DITOR - /ometimes, they carry o t the risk a dits0 1e0g0 if the company is carrying o t /6= or is a 'ank, this #ill 'e a very good practice2 - )dentify and doc ment internal controls in the company - Test those controls report on material control deficiencies in the a ditors report RIS! A ARENESS - "isk m st 'e em'edded into the companys c lt re and systems - * lack of risk a#areness means that an organisation has an inappropriate risk management strategyC - "isks affecting the organisation may not have 'een identified meaning there #ill 'e a lack of control over that risk - "isks may occ r and the control over the risk is not active d e to lack of monitoring and a#areness STRATEGIC: Aigh level monitoring of risk TACTICA5: 7onitoring of risk at divisional level OPERATIONA5: 7onitoring of risk in day-day operations0 H*? #* e:-e/ %&+0+: - Training - %omm nication 1from top do#n2 - )ncl de in 4o' descriptions - -enalties for 'ad practice - * tomatic proced res - "e#ard systems #hich recognise that risks have to 'e taken in practice0 1e0g0 not having a 3'lame c lt re2 - PA55 68ST 4E ON 4OARDF 5&:&#&"g .a'#*%+: - 6verall commitment to risk mgt policies at all levels in the organisation - The attit de to internal controls - :overnance, i0e0 the need to incl de - 9hether risk mgt is a normal part of the orgs c lt re, i0e0 #hether it is taken for granted or not0

4.

RO5E OF 4OARD 6verall responsi'ility for risk management lies #ith the 'oard of directors They m st generate RIS! A ARENESS To ens re all the employees are a#are of risks as they arise of capa'le of identifyingDrecognising risks as they arise0

%onsider the companys RIS! APPETITE Ao# m ch risks the company is #illing to take Depends on 2 factors

RIS! ATTIT8DE risk seeking - risk averse

RIS! CAPACITY - companys limit to risk 1S2 - siMe Dstr ct reDdevelopment

,ns re effective STRATEGIES are in place @TARAA

Disclose significant risks to shareholders

CHAPTER 12: ETHICA5 THEORIES

ST8DY OF 6ORA5 4EAHAVIO8R A4SO58TIS6 Believe in clear r les ?nchanging moral rights RE5ATIVIS6 Believe rightD#rong depends on the '*"/&#&*"+ at the time ,thics is sit ational PRAG6ATIC APPROACH - 4e+# %*,#e CONDITIONS 2 T)$e+ - Eg*&+: PERSON C85T8RE E6A<B,": %*""6<< CO6PANY :"*; 69,8/ - 8#&(&#a%&a(&+: !ANT D $1&(*+*$1e% ! 7a5ims *n action can only 'e right ifC - 9e co ld all do it - )t respects life - 6thers #o ld agree #ith it0 HAS TO 6EET A55 THREE OF THE R85ES7 TE5EO5OGICA5 VIE - K dge *,#'*:e of an action as right or #rong CONSEG8ENTIA5I ST APPROACH DEONTO5OGICA5 VIE - K dge :*#&3a#&*" for the actions as right or #rong NOND CONSEG8ENTIA5I ST APPROACH

DOG6ATIC APPR OACH - 7eans that there is only ONE TR8TH

*D*7/ - -re-conventional . positions - %onventional - -ost-conventional ,very co ntry vie#s responsi'ilities differently0 DOG6ATIC VS PRAG6ATIC APPROACH

4G

The idea of a'sol tism and relativism can 'e ill strated #ith t#o similar concepts * /*g:a#&' approach takes the vie# that there is one tr th and this tr th is to 'e imposed in all sit ations0 This vie#point corresponds to a-+*(,#&+:;

* $%ag:a#&' approach attempts to find the 'est ro te thro gh a specific moral sit ation #itho t reference to any a'sol tist 'elief0 The approach is similar to %e(a#&3&+: in attempting to find a sol tion 'ased on the given 'elief system of the individ als involved0

TE5EO5OGICA5 C DEONTO5OGICA5 VIE S - Boy 'reaks 1$ c ps helping m m #ash p :irl 'reaks 1 c p trying to steal a 'isc it 1* &+ ?*%+eN

4OY K dging the *,#'*:e of the action I THEO5OGICA5 VIE

GIR5 - 4 dging the :*#&3a#&*" for her action I DEONTO5OGICA5 VIE

T?* #)$e+ - EGOIS6 %onsider the o tcome from the individ al can only 'e perspective principles -

I66AN8E5 !ANT > philosopher @3 6ALI6SA *n action can only 'e right ifC 10 CONSISTENCY: 9e co ld all do it0 The action right if everyone can follo# the same nderlying

8TI5ITARIANIS6 20 H86AN DIGNITY: )t respects life 1h man ( animals20 *ct %onsider the o tcome from society so that yo treat h manity, #hether in yo r o#n person or perspective0 1)s it for the greater goodQ2 in that of another, al#ays as an end and never as a means only0 3; 8NIVERSA5ITY: 6thers #o ld agree #ith it0 III )t has to meet all three of the r les0 )f it fails any of them, then doesnt apply 1#rong2

Re.e% #* 1a"/D*,# .*% !*1(-e%gF+ #1e*%) *" C*g"&#&3e 6*%a( De3e(*$:e"# @C6DA $g; 219 7 1; PRISTINE CAPITA5IST POSITIONS OF SOCIA5 RESPONSI4I5ITY %ompanys only legal d ty is to shareholder i0e0 to ma5imise profit *nything that red ces shareholder #ealth 1s ch as acting in a socially responsi'le #ay2 is theft from shareholders0 1%/" is shareholder theft2 Believes in ma5imising profit ' t have EN5IGHTENED SE5F INTEREST0 "esponsi'le companies have 'etter rep tation, hence more c stomers, more sales and higher profits0 4&

GRAYH O ENS C ADA6S

2; ELPEDIENT

"ecognise some social responsi'ility e5pendit re may 'e necessary to strategically position an organisation so as to ma5imise profit Believes society granted the company the %&g1# to trade and so the companys %e+$*"+&-&(&#) is to act in societys 'est interest B sinesses en4oy a licence to operate granted 'y society so long as the ' siness acts in an appropriate #ay "ecognise that companies damage the environment and tries to red ce the companys impact0 1environmental footprint2 "ecognises that a ' siness has a social and environmental footprint and therefore 'ears responsi'ility for minimising that footprint 6rganisation that 'elieves companies 1capitalism2 oppresses people e0g0 racism, se5ism 6rganisation seeks change Believe companies sho ld have feminine F alities 1love, care, compassion2 Believes capitalism is #rongN Beca seC 10 it damages the environment 20 it damages society 1oppresses people2 %ompany m st change A mans have no more right to the planet than any other species

3; PROPONENT OF SOCIA5 CONTRACT

4; SOCIA5 ECO5OGIST -

5; SOCIA5IST e;g; A:"e+#) I"#e%"a#&*"a( 6; RADICA5 FE6INIST e;g; C1a%&#) *%ga"&+a#&*"+ 7; DEEP ECO5OGISTEGR EEN

<<< Re.e% #* #1e E9a:&"e%F+ a%#&'(e &" Fe-%,a%) 2008 PA(( a-*,# +#a0e1*(/e%+ > $a%# 2F !OH54ERGFS COGNITIVE 6ORA5 DEVE5OP6ENT @C6DA THEORY - *ttempts to e5plain the reasoning process 'ehind moral 4 dgements and ho# those processes changed as the individ al mat red from a child to an ad lt0 - )n other #ords, %7D relates to the different levels of reasoning that an individ al can apply to ethical iss es and pro'lems0 - )t vie#s ethical decisions from an &"/&3&/,a(F+ perspective !*1(-e%g &/e"#&.&e/ #1%ee (e3e(+ *. :*%a( /e3e(*$:e"#H ?&#1 #?* +,-D+#a#e+ ?&#1&" ea'1 (e3e( > g&3&"g 6 +#age+ &" #*#a( - 5e3e( *"e: the individ al is foc sed on self-interest, e5ternal re#ards and p nishment - 5e3e( #?*: the individ al tends to do #hat is e5pected of them 'y others0 )n a ' siness conte5t, managers are normally on <evel 2 - 5e3e( #1%ee: the individ al starts to develop a tonomo s decision making #hich is 'ased on internal perspectives of rightD#rong ethics, etc0, rather than 'ased on any e5ternal infl ences0 CRITICIS6S OF THE THEORY - )t has gender 'ias the field#ork for the theory #as dra#n from intervie#s #ith yo ng *merican males - There is too great an emphasis on rights and 4 stice compared #ith other 'ases of morality - -eople tend to se different moral reasoning strategies in different sit ations implying that there is no seF ence of stages0 Re.e% #* 1a"/D*,# g&3e" &" '(a++ .*% .,%#1e% e9$(a"a#&*"

$+

CHAPTER 13: PROFESSIONA5 AND CORPORATE ETHICS

3 PF+ 1; P845IC INTEREST defined as that #hich s pports the good of society as a #hole0 ,0g0 role of professions o *cco ntancyC as a profession that reports in the interest of shareholders S,$$*%# 'a$&#a(&+: o 7edicine o la#

Re(a#&*"+1&$ %e+$*"+&-&(&#) *ct in the p 'lics )nterest granted a title 2; PROFESSION 3; PROFESSIONA5IS6 P845IC PROFESSION %&g1#+ D to trade and make profits - respectC -

Body of kno#ledge and skills that s pports the - action taken to s pport the p 'lic interest0 p 'lic interest H*?N *dherence to common code of val es and cond ct - O P P I C Bive f ndamental principles *cceptance of d ty to societyC in ret rn, mem'ers - 'e socially responsi'le *re granted a F alification and sage of a title e0g0 - professional e5perience - practical e5perience - acco nting standards - codes e0g0 *%%* code of ethics

THE ACCO8NTING PROFESSION 6ver time, the profession appears to 'e taking more of a proactive than a reactive, approach A REACTIVE APPROACH Taking responsi'ility for any negative conseF ences of acco nting practice and, #here appropriate, amending those practices to remove those conseF ences0 ,0g0 the incl sion of off 'alance sheet financing in the acco nts of companies after the do#nfall of ,nron0 )n this sense, the acco nting profession #as reacting to a sit ation0 A PROACTIVE APPROACH /eeking o t and positively contri' ting to the p 'lic interest0 ,0g0 the acco nting profession recognises that g idance on ho# to carry o t an environmental a dit is not availa'le0 Aence, g idance is provided 3in the p 'lic interest as a 'enefit to society rather than #aiting ntil society as a #hole reF ests the g idance0 VA58E 5ADEN RO5E OF ACCO8NTANTS $1

- i0e0 too m ch foc s on money :"*;C %apitalism is fla#edD#rong o capitalism is damaging the environment o oppresses people 1,0g0 8ile pays !p to people in third #orld co ntries 'eca se it is cheap, to make profits2 - need social and environmental change - acco ntants s pport capitalism J role is also fla#ed J social and environmental changes are needed Pa,( G&(/&"g: The ,arth is f ll 1video on T,D2 )ntrod ce /ocial ( ,nvironmental *cco nting )mplement / ( , controls * dit / ( , performance *dvice on ma5imising ta5 9rite ne# standards for / (, iss es COPPORATE ETHICS - "elates to the application of ethical val es to ' siness 'ehavio rs - )t encompasses many areas ranging from 'oard strategies to ho# companies negotiate #ith their s ppliers - )t goes 'eyond legal reF irements and is to some e5tent discretionary - 7any companies provide details of their ethical approach in a corporate and social responsi'ility 1%/"2 report - Eey areas of corporate ethics incl deC - rposes and val es of ' siness ,mployees % stomer relations / ppliers /hareholders /ociety implementation CODE OF ETHICS provides g idance on 'ehavio r

C*%$*%a#e '*/e %ode tailored to an individ al company0 ,0g0 7(/ C*"#e"#+: %omm nicate val es a principles ,thical 'ehavio r to key stakeholders /hareholders % stomers / ppliers ,mployees

P%*.e++&*"a( '*/e ,0g0 )B*% %ode of ,thics 10 F,"/a:e"#a( $%&"'&$(e+ OPPIC 20 C*"'e$#,a( F%a:e?*%0 <<< <ooks at theC - threats 1to o'4ectivity2 - safeg ards - conflict resol tion

P%*.e++&*"a( '*/e *. e#1&'+: are iss ed 'y most professional 'odiesP the *%%* code #as revised and iss ed in 2++60 - The main reason for professional codes of ethics is to ens re that mem'ersDst dents o'serve proper standards of professional cond ct0 - 7em'ers and st dents #ill therefore refrain from miscond ct and not make any serio s depart re from the ethical code - )d the standards are not o'served, then disciplinary action may 'e taken - 7aintenance of a professional code of ethics helps the acco ntancy profession to act in the p 'lic interest 'y providing appropriate reg lation of mem'ers A; F8NDA6ENTA5 PRINCIP5ES: are o'ligations 1or responsi'ilities2 placed on mem'ers of a professional instit te0 - The principles apply to all mem'ers, #hether or not they are in practice0 $2

Taken from the *%%* code of cond ct, they are listed 'elo#0 O P P I C

O > O-2e'#&3&#): :e:-e%+ /* "*# a((*? -&a+ *% '*".(&'# *. &"#e%e+# in ' siness 4 dgements0 *cco ntants need to ens re that their ' sinessDprofessional 4 dgement is not compromised 'eca se of 'ias or conflict of interest P%*.e++&*"a( '*:$e#e"'e a"/ /,e 'a%e: d ty to maintain $%*.e++&*"a( 0"*?(e/ge a"/ +0&(( at appropriate level0 *cco ntants are reF ired to have the necessary professional kno#ledge and skill to carry o t #ork for clients0 *lso, acco ntants m st follo# applica'le technical and professional standards #hen providing professional services0 P > P%*.e++&*"a( -e1a3&*,%: mem'er m st '*:$() ?&#1 %e(e3a"# (a?+ a"/ a3*&/ a'#&*"+ /&+'%e/&#&"g #1e $%*.e++&*"; *cco ntants m st comply #ith all relevant la#s and reg lations0 *n acco ntant is reF ired to treat all people contracted in a professional capacity #ith co rtesy and consideration0 /imilarly, any marketing activities sho ld not 'ring the profession into disrep te0 I > I"#eg%&#): mem'ers sho ld -e +#%a&g1#.*%?a%/ a"/ 1*"e+# in all professionalD' siness relationships0 )ntegrity implies fair dealing and tr thf lness0 7em'ers are also reF ired not to 'e associated #ith any form of comm nication or report #ere the information is considered to 'eC - 7aterially false or to contain misleading statements - -rovided recklessly - )ncomplete s ch that the report or comm nication 'ecomes misleading 'y this omission C > C*".&/e"#&a(&#): information on clients "*# /&+'(*+e/ #itho t appropriate specific a thority0 The principle of confidentiality implies 2 key considerations for acco ntantsC 10 )nformation o'tained in a ' siness relationship is not disclosed o tside the firm nless there is a proper and specific a thority or nless there is a professional right or d ty to disclose 20 %onfidential information acF ired d ring the provision of professional services is not sed to personal advantage0 The :a&" %ea+*"+ .*% /&+'(*+,%e are #hen it isC -ermitted 'y la# and a thorised 'y the client "eF ired 'y la#, e0g0 legal proceedings or disclosing information regarding infringements of la# There is professional d ty or right to disclose 1#hen not 'arred 'y la#2 e0g0 provision of information to the professional instit te or compliance #ith ethical reF irements0

4; CONCEPT8A5 FRA6E OR!: provides g idance on ho# the principles are applied0 )t also helps to identify threats to compliance #ith the principles and then applies safeg ards to eliminate or red ce those threats to accepta'le levels0 )t recognises that ethical iss es may have no 3correct ans#er and therefore provides the generalised g idelines and principles to apply to any sit ation0

THREAT #* OPPIC RESO58TION

SAFEG8ARD

CONF5ICT

$!

/elf-interest Bamiliarity )ntimidation /elf-revie# *dvocacy

,0g0 %ontrols - process for resolving the threat if - ,thical training safeg ard fails0 - ,thics managers - 9histle'lo#ing policy 1%onfidential method of comm nicating ?nethical practiceD'ehavio r2 - %orporate code of ethics

A #1%ea# #* &"/e$e"/e"'e is any matter, real or perceived, that implies that the acco ntant is not providing an independent vie# or report in a specific sit ation0 - A" e#1&'a( #1%ea# &+ a sit ation #here a person or corporation is tempted not to follo# their code of ethics - *n acco ntant needs to 'e independent so others can place reliance on hisDher #ork0 - <ack of independence implies 'ias, meaning less reliance #o ld 'e placed0 Sa.eg,a%/+ seek to red ce or eliminate threats0 They vary depending on the specific threat0 A" e#1&'a( +a.eg,a%/ provides g idance or a co rse of action #hich attempts to remove the ethical threat They #ill fall into three categories created 'y theC 1; P%*.e++&*" D these incl deC - ,d cation and training incl ding %D- reF irements - /etting of corporate governance reg lations and professional standards - 7onitoring of professional #ork incl ding disciplinary proceeding 2; 3; D D D D *%0 e"3&%*":e"# > e9a:$(e+ &"'(,/e: )nternal control systems "evie# proced res Disciplinary proced res 6rganisational codes of ethics /eparate revie# and reporting for key engagements I"/&3&/,al these incl deC %omplying #ith professional standards 7aintaining records of contentio s iss es 7entoring %ontacting professional 'odies #ith F eries DRA 4AC!S OF A CODE D )s a code only therefore may not fit the precise ethical iss e D *s a code, then it can 'e interpreted in a different #ays t#o different conflicting actions may appear to 'e ethically correct to t#o different people D 7ay 'e no clear or even ineffective p nishment for 'reaching the code

4ENEFITS OF A CODE D -rovides frame#ork for conflict resol tion D -rovides g idelines for similar ethical disp tes and methods of resol tion D -rovides the 3'o ndaries across #hich it is ethically incorrect to pass0

R85ES AND PRINCIP5ESD4ASED APPROACHES TO ETHICA5 DI5E66A R85ESD4ASED APPROACH: 10 ,sta'lish ethical r les that mem'ers m st PRINCIP5ES 4ASED APPROACH: 10 ,sta'lish f ndamental ethical principles that $4

follo# 20 ,ns re mem'ers are a#are of the r les !0 ,ns re mem'ers comply #ith the r les

4ENEFITS: D ,asy to check compliance as 'ased on fact D ,asy to amend r le set as reF ired

DISADVANTAGES: D The list of r les may not 'e complete D There is no room for individ al decision making

mem'ers m st follo# 20 ,ns re mem'ers are a#are of the principles !0 "eF ire mem'ers to identify and address threats to compliance #ith the principles and male an appropriate response to mitigate each threat 4ENEFITS: D "ecognises that every threat cannot simply 'e 3listed D *llo#s for s '4ective 4 dgement, so the mem'er can apply the principles in accordance #ith their specific sit ation and nat re of the threat DISADVANTAGES: D )n some sit ations it may 'e diffic lt to confirm that the compliance action #as appropriate as t#o people may make different and valid decisions 'ased on the same threat and circ mstances0

HAT IS CORR8PTIONN %orr ption is 'ri'ery and any other 'ehavio r in relation to persons entr sted #ith responsi'ilities in the p 'lic r private sector #hich violates their d ties and is aimed at o'taining nd e advantages of any kind for themselves or for others0 The main forms of corr ption areC D Bri'eryC e5ample, e5cessive 3hospitality0 Birms are allo#ed to provide hospitality, promotional or other ' siness e5pendit re like providing tickets to sporting events, take clients to dinner, and offer gifts to client as a reflection of good relations0 Ao#ever, these sho ld not 'e of material val e0 D ,m'eMMlement D Bra d D ,5tortion HY IS CORR8PTION RONG > #1e e#1&'a( a%g,:e"# %orr ption is inherently #rongC D )t has a mis se of po#er and position and has a disproportionate impact on the poor and disadvantaged D )t ndermines the integrity of all involved and damages the fa'ric of the organisations to #hich they 'elong0 HY IS CORR8PTION RONG > #1e -,+&"e++ a%g,:e"# There are many reasons #hy it is in any companys ' siness interest to ens re that it does not engage in corr pt practices0 - 5ega( %&+0+: it is increasingly 'ecoming illegal in a companys home co ntry to engage in corr pt practices in another co ntry Re$,#a#&*"a( %&+0+: 'ased on the e5perience of recent year, companies #hose policies and practices fail to meet high ethical standards, or that take a rela5ed attit de to compliance #ith la#, are e5posed to serio s rep tational risks0 )t is also not good eno gh to claim that other companies and competitors have engaged in similar practices0 F&"a"'&a( '*+#+: there is no# clear evidence that in many co ntries corr ption adds p#ards of 1+L to the cost of doing ' siness and that corr ption adds as m ch as 2$L to the cost of p 'lic proc rement0 This ndermines ' siness performance and diverts p 'lic reso rces from legitimate s staina'le development0 P%e++,%e #* %e$ea# *..e"/: there is gro#ing evidence that a company is less likely to 'e nder press re to pay 'ri'es if it has not done so in the past0 6nce a 'ri'e is paid, repeat demands are possi'le and the amo nts demanded are likely to rise0 Uero tolerance is the only practical sol tion $$

4(a'0:a&(: 'y engaging in corr pt practices, company managers e5pose themselves to 'lackmail0 %onseF ently the sec rity of staff, plant and other assets are p t at risk I:$a'# *" +#a..: if a company engages in or tolerates corr pt practice, it #ill soon 'e #idely kno#n, 'oth internally and e5ternally0 ?nethical 'ehavio r erodes staff loyalty to the company and it can 'e diffic lt for staff to see #hy high standards sho ld 'e applied #ithin a company #hen it does not apply in the companys e5ternal relations0 )nternal tr st and confidence is then eroded0 I:$a'# *" /e3e(*$:e"#: it is no# clear that corr ption has played a ma4or part in ndermining the #orlds social, economic and environmental development0 "eso rces have 'een diverted to improper se and the F ality of services and materials sed for development serio sly compromised0

CHAPTER 14: ETHICA5 DECISION 6A!ING $;g; 268

There are 2 models for ethical decision making A:e%&'a" A''*,"#&"g A++*'&a#&*" @AAAA :*/e( @7 K,e+#&*"+A T,'0e% 6*/e( @5 K,e+#&*"+A

1; AAA :*/e(: provides a frame#ork #ithin #hich an ethical decision can 'e made0 )t s ggests that if faced #ith a dilemma, . F estions m st 'e askedC The seven F estions in the model areC @F%eK,e"#() 10 20 !0 40 I P%a) A:e%&'a"+ 4a" C1*'*(a#e D*,g1",#+A

F%eK,e"#() > Fa'#+: consider the facts of the caseQ I > I++,e+: #hat are the ethical iss es that arise from the factsQ P%a) > P%&"'&$(e+: consider #hich principles and val es are affectedQ A:e%&'a"+ > A(#e%"a#&3e+: #hat are all alternative co rses of action availa'le 1in the e5ams, talk a'o t 22 $0 4a" 4e+#: select the 'est co rse of action in line #ith principles 60 C1*'*(a#e > C*"+eK,e"'e+: consider conseF ences .0 D*,g1",#+ > De'&+&*": #hat is the final decisionQ 2; T,'0e% :*/e(: provides a $-F estion model against #hich ethical decisions can 'e tested0 )t is therefore sed after the *** model sho#n a'ove to ens re that the decision reached is 3correct0 i0e0 )t is sed once decision is made to assess if it is ethical0 )s the decisionC @Pe*$(e 5*3e Fa##) R&'1 S#,..A

Pe*$(e > P%*.&#a-(eN > is it profita'le for shareholdersQ 5*3e > 5ega(N > is it in the 'est interest of the societyQ Fa##) > Fa&%N > is it fair to each stakeholder that is affectedQ R&'1 > R&g1#N > is the overall decision the right oneQ 1*lmost concl sion2 S#,.. > S,+#a&"a-(eN > is it the right thing for the environmentQ FACTORS AFFECTING ETHICA5 4EHAVIO8R $6

*cco ntants are normally e5pected to 'ehave ethically0 Ao#ever, that 'ehavio r also depends onC - The nat re of the ethical iss e iss e related factors, and - The conte5t in #hich the iss e takes place conte5t-related factors I++,eD%e(a#e/ .a'#*%+: - Ao# important the decision is to the decision maker - The higher the intensity, the more likely it is that the decision maker #ill make an ethical rather than an nethical decision C*"#e9#D%e(a#e/ .a'#*%+: - These factors relate to ho# a partic lar iss e #o ld 'e vie#ed #ithin a certain conte5t0 Bor e5ampleC - )f certain 'ehavio rs are seen to 'e re#arded, enco raged, or demanded 'y s periors despite 'eing ethically d 'io s, decision making may 'e affected - )f everyone in a #orkplace does something in a certain #ay, an individ al is more likely to conformC this can res lt in 'oth higher and lo#er standards of ethical 'ehavio r0 !e) '*"#e9#,a( .a'#*%+ a%e: - /ystem of re#ard - * thority - B rea cracy - 9ork roles - 6rganisational gro p norms and c lt re - 8ational and c lt ral conte5t

CHAPTER 15: SOCIA5 AND ENVIRON6ENTA5 ISS8ES

DEFINITIONS: GARY: - %apitalism is fla#ed - 8eed changes o %ompany m st 'ecome S8STAINA45E: ,ns ring #e meet the needs of present #itho t compromising the a'ility of f t re generations to meet their needs0 ,0g0 replant a tree for every tree sed in prod ction0 S8STAINA45E DEVE5OP6ENT: is development that meets the needs of the present #itho t compromising the a'ility of f t re generations to meet their o#n needs o %ompanies sho ld meas re SOCIA5 AND ENVIRON6ENTA5 FOOTPRINT 7eas re conseF ences of their operations 1inp ts and o tp ts2 on society and environment0 ,0g0 %ad' ry - Bootprint of 4&g 'ar of diary milk J 16&g %6 - 9ill red ce 'y $+L 'y year 2+2+

ENVIRON6ENTA5 FOOTPRINT )n the same #ay that h mans and animals leave physical footprints that sho# #here they have 'een, so do organisations leave evidence of their operations in the environment0 They operate at a net cost to the environment0 ,5amples of meas ring impact of environmental footprint on the environment incl deC - "ed ction in #aste e0g0 %62 emissions - -romotion of s staina'le activities e0g0 metrics to ens re that dairy farming is s staina'le The environmental footprint is an attempt to eval ate the siMe of a companys impact on the environment in three respectsC o The companys reso rce cons mption o *ny harm to the environment 'ro ght a'o t 'y poll tion emissions o * meas rement of reso rce cons mption and poll tion emission in terms of harm to the environment in their F alitative, F antitative or replacement terms 9here %e+*,%'e+ ,+e e9'ee/+ $%*3&+&*", then the activity can 'e termed as 8NS8STAINA45E 6EAS8RING FOOTPRINT 1i0e0 impact of economic activity2 $.

DIRECT %onsider conseF ences of prod ction process chain ,0g0 %ar - Bactory only

INDIRECT %onsider conseF ences of #hole s pply ,0g0 %ar - importing metal - factory - c stomer ses car - scrap car

ENVIRON6ENTA5 ACCO8NTING 2 6e#1*/+ a##e:$# #* a''*,"# .*% +,+#a&"a-&(&#) F855 COST ACCO8NTING *cco nts for the total financial and non-financial costs forC - ,conomic 1S2 Binancial statements - /ocial TB< - ,nvironmental *ims to internalise all costs, incl ding those #hich are inc rred o tside of the company0 ,0g0 6lympic 2+12 its ,conomicC - /tadi m - ,mploying people - Ticket sale - %ommercial for local - B siness ,nvironmentC - *ir poll tion %oncrete 1#ater se H gas emission2 )mpact on #ildfire the Bire#orks ca ses poll tion TRIP5E 4OTTO6 5INE ,5pand traditional reporting and acco nt - P%*.&# @JA: * TB< company #ill 'alance the profit o'4ective #ith the other 2 elements #hile a noncompany #ill seek to ma5imise this meas re to improve shareholder ret rn0 - Pe*$(e: * TB< company #o ld attempt to pay #orkers fair #ages, maintain a safe #orking envt and not se child la'o r, altho gh these practices #ill decrease the amo nt of profit availa'le for shareholders /imilarly, the company #o ld promote its s rro nding comm nity0 ,0g0 'y providing ed cational opport nities or a safe comm nity to live in0 1as in Bo rneville estate %ad' ry2 - P(a"e#: refers to the environmental practices of company to determine #hether they are s staina'le or not0 The TB< company attempts to red ce the 3ecological footprint 'y reso rce cons mption and energy sage0 ,0g0 prod ction processes to red ce reso rces and to5ic #aste eliminated 'eca se the company 'elieves it is inappropriate to prod ce to5ic #aste the envtal cost of disposal is normally 'orne 'y govt and society as a #hole0 $G

/ocialC - 8oise poll tion managing - Delays on transportation Better - To rist prices cons med - "ental increases - "edevelopment of /tratford as - Aappy spirit all over the - To rism #as 'oosted

They try to 'alance all three ENVIRON6ENTA5 CONTRO5 SYSTE6S : idance for assessing the organisations impact on the environment

E6AS S E CO N D @E'*D6a"age:e"# a"/ A,/&# S'1e:e+A ;,/ ;,/ 1Disclos re2 S)+#e: E9#e%"a( A,/&#

ISO 14000 ;,/ ;,/ 1%ontols2 III)nternal * ditor might do this D g idance on managing envtal 1like risk management T*"* etc2

%ompany sho ld set environmental targets C*"#e"#+ risk o )nvolve key stakeholders %omply #ith environmental la#s Disclose environmental performance to shareholders %ompany improves environmental performance @ol ntary ;,/ B ll environmental statement O-2e'#&3e

advice on environmental risk and control @ol ntary ;,/ %onfirm that standards have 'een follo#ed - )/6

Nee/ #* '*:$() D&+'(*+,%e

4ENEFITS OF CO6P5IANCE ITH EITHER STANDARD - "ed ced cost of #aste management - /avings in cons mption of energy and materials - <o#er distri' tion costs - )mproved corporate image among reg lators, c stomers and the p 'lic - Brame#ork for contin o s improvement of the companies environmental performance ENVIRON6ENTA5 A8DIT *ims to assess the impact of the organisation on the environment 8ormally involves the implementation of appropriate environmental standards s ch as )/6 14+++ and ,7*/ -rovides the ra# date for environmental acco nting @ol ntary )ndependent revie# of environmental performance %an 'e done 'y internal or e5ternal a ditor 8o r les *n environmental a dit typically contains 3 e(e:e"#+: STAGE 1; Ag%ee/ :a#%&9 @?1a# +1*,(/ -e :ea+,%e a"/ 1*?A - /et targets that can 'e meas red 6 CS P5AN A - /et 1++ targets $&

2; Pe%.*%:a"'e %e3&e? - 7eas re act al performance against those targets 3; Re$*%# - ?ser varies - %ompliance or @arianceQ

. point scale 9e are not a#are of any iss es 1means they complied2

ENVIRON6ENTA5 ACCO8NTING - This is the development of an environmental acco nting system to s pport the integration of environmental performance meas res and to track internal environmentally significant e5pendit re0 - )t ' ilds on social and environmental a diting 'y providing empirical evidence of the achievement of social and environmental o'4ectives - 9itho t social and environmental a diting, environmental acco nting #o ld not 'e possi'le0 E9a:$(e+ *. e"3&%*":e"#a( a''*,"#&"g :ea+,%e+ incl deC - 7onitoring #ater sage - 7onitoring energy 1incl ding se of rene#a'le and non-rene#a'le energy2 - ,ns ring inventory is derived from rene#a'le reso rces #here possi'le - 7eas ring #aste emissions and the companys car'on footprint 1amo nt of %62 generated2 The a&:+ *. e"3&%*":e"#a( a''*,"#&"g areC - To se the metrics prod ced from an environmental a dit and incorporate these into an environmental report, and - To integrate environmental performance meas res into core financial processes to generate cost savings and red ce environmental impact thro gh improved management reso rces 4e"e.&#+ *. e"3&%*":e"#a( a''*,"#&"g - C*+# +a3&"g+: to tilise reso rces efficiently and effectively, and in doing so generate cost savings - E"3&%*":e"#a( &:$%*3e:e"#+: to s pport the delivery of the environmental a dit #hich #ill 'enefit the company and the environment - C*%$*%a#e g*3e%"a"'e: to assist in the management of environmental risks and operational costs incl ding the p 'lication of environmental acco nting disclos res in corporate doc ments s ch as the ann al and %/" reports0 ENVIRON6ENTA5 REPORTING G*/%e)H H*/g+*" a"/ H*(:e+ have defined environmental reporting as the 3disclos re of information on environment related iss es and performance 'y an entity0 )t typically contains details of environmental performance in areas s ch asC - 7eas res of emissions 1e0g0 poll tion, #aste and greenho se gases2 - %ons mption 1e0g0 energy, #ater and non-rene#a'le mineral deposits2 The information is p 'lished in either the ann al report andDor as a self-standing report0 SOCIA5 REPORTING 6#en and /cherer e5plain that there is a significant concept nderlying corporate social responsi'ilityP this is that corporations sho ld 'e concerned a'o t society at large0 /ocial reporting is generally conte5t specific, and typical contents #ill vary #ith ind stry, ho#ever the flo#ing iss es sho ld 'e incl ded in a companys considerationsC - A man rights iss es - 9ork place, occ pational health and safety - Training and employee iss es - Bair pay for employees and s ppliers - Bair ' siness practices - 7inority and eF ity iss es - 7arketplace and cons mer iss es - %omm nity involvement - )ndigeno s peoples - /ocial development - %harita'le, political donations and sports sponsorship 6+

8SEF85NESS OF THIS INFOR6ATION TO STA!EHO5DERS /ocial and environmental reporting is 'ecoming increasingly important, as many investors and other stakeholders #ant to kno# a'o t the organisations social and environmental footprint in addition to its economic performance0 REASONS HY THE ADDITIONA5 INFOR6ATION IN 8SEF85 - By reporting on social and environmental iss es companies #ill 'ecome more a#are of the potential risk, and less likely to s ffer nforeseen lia'ilities d e to rep tational damage - The ethical performance of a ' siness is a factor in some investors decision to invest - ,mployees may se ethical performance as a criterion in their choice of potential employer - /ome cons mers #ill not ' y goods or services from nethical companies - @ol ntary disclos re of social and environmental iss es may pre-empt potential reg latory intervention - 7ore social and environmental reporting #ill provide an impet s for internal development and a higher level of %orporate :overnance - The 'enefits of 'rand strengthening #ill have a positive impact in share price - Binally, shareholders as o#ners of the company simply have a right to as m ch information as possi'le Ao#ever, the additional cost of s ch reporting, and the am'ig o s nat re of the meas re m st also 'e considered0

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