Professional Accountant

ACCA Paper P1
2
Format of the Paper
Section A: 50 marks
A number of questions relating to a single
scenario
Section B: 50 marks
Two out of three 25 mark questions
3
Core Areas of Syllabus
Governance and responsibility 35%
Internal control and review 20%
Identifying, assessing & controlling risk 25%
Professional values and ethics 20%
4
Syllabus Summary
Governance & responsibility
Professional values & ethics
Risk management
Internal control &
review
5
1
Chapter
Theory of governance
6
Session Content
7
Company ownership and
control
8
the system by which companies are
directed and controlled
Definition of corporate
governance
the system by which companies are
directed and controlled in the interests
of shareholders and other stakeholders
9
Key concepts
Fairness
Openness / transparency
Independence
Probity / honesty
Responsibility
Accountability
Reputation
Judgement
Integrity
10
Operational areas affected by
corporate governance
11
Agency theory
12
Agency theory and corporate
governance
13
Key concepts of agency theory
Agent employed by principal
Agency = relationship
Agency costs
Accountability
Fiduciary responsibility
Stakeholders
Objectives
14
Cost of agency relationships
Examples include:
Incentive schemes for directors
Providing and reviewing data
Meetings
Accepting higher risks
Monitoring behaviour
Residual loss
15
Agency problem resolution
measures
Meeting Principal/key investors
Voting at AGM
Resolutions at AGM
Accepting takeovers
Divestment of shares
16
Agency accountability
Act in shareholders interests
Provide good information
Operate within legal structure
17
Transaction cost theory
external transactions
18
Transaction costs can be
further impacted
19
Stakeholder theory
20
2
Chapter
Development of corporate governance
21
Session Content
22
Development of corporate
governance codes
23
UK Combined Code
Directors
Directors remuneration
Relations with shareholders
Accountability and audit
Institutional investors
24
UK Combined Code cont.
25
Reasons for developing a
governance code
Reduce fraud / corruption
Poor governance = poor performance
Investors will pay a premium
Decision factor for institutional investors
Reduces risk
26
Practical problems with a
governance code
Reactionary process
Impact varies
Restricts individual decision-making
power
Bureaucracy
Harms competitiveness
Cannot stop fraud
27
3
Chapter
The board of directors
28
Session Content
Essential text: p52
29
Development of governance
regarding board of directors
Cadbury Report (1992)
Higgs Report (2003)
Tyson Report (2003)
30
Board structures
31
Advantages of two-tier board
Clear separation
Implicit shareholder involvement
Wider stakeholder involvement
Independence of thought, discussion &
decision
Direct power over management
32
Problems with two-tier board
Dilution of power
Isolation of supervisory board
Agency problems between boards
Bureaucracy
Reliant upon relationship between
chairman & CEO
33
Roles of NEDS
34
Threats to independence
35
NEDs on the board
Advantages:
Monitoring
Expertise
Perception
Communication
Discipline
Disadvantages:
Unity
Quality
Liability
36
Chairman & CEO
37
Splitting role of Chairman &
CEO
Reasons for:
Representation
Accountability
Temptation
Reasons against:
Unity
Ability
Human nature
38
Induction and CPD
39
Legal and regulatory framework
40
Conflict of interest
41
Performance evaluation
42
Board committees
43
4
Chapter
Directors remuneration
44
Session Content
45
Components of directors
remuneration package
46
Directors remuneration other
issues
47
5
Chapter
Relations with
shareholders and
disclosure
48
Session Content
49
Institutional investors
Types
Importance
Potential problems
50
Potential problems
51
Institutional investors
Types
Importance
Potential problems
Solution: shareholder activism
Institutional shareholder intervention
52
Institutional shareholder
intervention conditions
Strategy
Operational performance
Acquisitions and disposals
Remuneration policy
Internal controls
Succession planning
Social responsibility
Failure to comply with relevant codes
53
Disclosure general principles
54
Disclosure: best practice
55
Mandatory vs voluntary
disclosure
56
Voluntary disclosure
57
6
Chapter
Corporate governance
approaches
58
Session Content
59
Approaches to corporate
governance
60
In favour of rules-based
approach
Organisations perspective:
Clarity of requirements
Standardisation for all companies
Binding requirements
Wider stakeholder perspective:
Standardisation across all companies
Sanction
Greater confidence in compliance
61
Against a rules-based approach
Organisations perspective:
Exploitation of loopholes
Underlying belief
Flexibility is lost
Checklist approach
Wider stakeholder perspective:
Regulation overload
Legal costs
Limits
Box-ticking
62
SOX / Sarbox
63
Family structure(vs joint stock)
Benefits:
Fewer agency costs
Ethics
Fewer short-term decisions
Problems:
Gene pool
Feuds
Separation
64
Insider-dominated structure(vs
outsider-dominated)
Benefits:
Fewer agency problems & costs
Lower cost of capital
Greater access to capital
Less short-termism
Greater input to decisions
Problems:
Lack of minority shareholder protection
Opaque operations
Misuse of power
Market does not decide or govern
65
International convergence
66
7
Chapter
Corporate social
responsibility and
corporate governance
67
Session Content
68
Corporate social responsibility
(CSR)
69
Nature of CSR
Carroll defined CSR as including 4 points:
Economic responsibility
Legal responsibility
Ethical responsibility
Philanthropic responsibility
70
Social responsiveness
Reaction
Defence
Accommodation
Proaction
71
Stakeholder classifications
Internal & external
Narrow & wide
Primary & secondary
Active & passive
Voluntary & involuntary
Legitimate & illegitimate
72
Stakeholder mapping:
Mendelow
Minimal effort Keep informed
Keep satisfied Key players
Level of interest
Power
High
High
Low
Low
73
Organisational motivations
regarding stakeholders
Instrumental view:
To not do so would have an impact on
primary objectives of organisation
Devoid of any moral obligation
Normative view:
Moral duty towards others
Act in general sense of what is right
74
8
Chapter
Internal control systems
75
Session Content
76
Objectives of an internal control
system
To ensure as far as practicable:
- Orderly and efficient conduct, including
adherence to internal policies
- Safeguarding assets
- Prevention / detection of fraud & error
- Accuracy and completeness of records
- Timely preparation of financial information
77
Sound control systems
78
Roles
79
Elements of an effective internal
control system
Control environment
Risk assessment
Control activities
Information and communication
Monitoring
80
Management levels
81
9
Chapter
Audit and compliance
82
Session Content
83
Internal audit
84
Factors affecting need for
internal audit
Scale, diversity and complexity of
companys activities
Number of employees
Cost / benefit
Changes in organisational structures
Changes in key risks
Problems with existing internal control
systems
Recent events
85
Risks if auditors are not
independent
86
Threats to independence
87
Audit committee roles
88
Audit committee: internal
control
Review the companys internal financial
controls
Review all the companys internal control
and risk management systems
Give approval to internal control and risk
management statements in annual report
Receive reports from management about
effectiveness of control systems
Receive reports on tests carried out on
controls by internal auditors
89
Audit committee: internal audit
90
Audit committee duties: external
audit
Recommendation on appointment, re-
appointment and removal of auditors
Oversee selection process
Approve terms of engagement and
remuneration
Ensure independence and objectivity
Review scope of audit
Ensure appropriate plans at start of audit
Carry out post-completion audit review
91
10
Chapter
Risk and the risk
management process
92
Session content
93
Why incur risk ?
94
Risk management process
95
Enterprise risk management
96
Strategic and operational risk
97
Risks facing a business (ACCAs)

Risks
Market Credit Liquidity
Health &
Safety /
Environmental
Technological
Legal Derivatives Reputation
Business
probity
98
Sector-specific risks
99
Impact on stakeholders
100
Analysing risks
101
Risk mapping
104
Role of the board
105
Risk attitudes
106
Risk committee
107
The risk manager
108
Risk awareness
109
Embedding risk in systems
110
Embedding risk in culture
111
Risk management strategies -
TARA
112
Risk avoidance and retention
113
Diversifying / spreading risk
114
Types of diversification
115
Risk auditing
116
Stages of a risk audit
117
External reporting
118
12
Chapter
Ethical theories
119
Session content
120
Approaches to ethics
Absolutism vs relativism
Dogmatic vs pragmatic
121
Approaches to ethics
122
Kohlbergs CMD
3. Post-conventional
3.2 Universal ethical principles
3.1 Social contract and individual rights
2. Conventional
2.2 Social accord and system maintenance
2.1 Interpersonal accord and conformity
1. Pre-conventional
1.2 Instrumental purpose and exchange
1.1 Obedience and punishment
123
Gray, Owen and Adams: Seven
positions on social responsibility
124
Variables determining cultural
context
125
Ethical stances
126
13
Chapter
Professional and
corporate ethics
127
Session content
128
Profession vs professionalism
129
Profession
130
Accountants role and influence
131
Limits on influence of
accounting
Extent of organisational reporting
Conflicts of interest in selling services
Long-term relationship with clients
Overall size of accountancy firms
Focus on growth and profit
132
Influence
133
Corporate ethics
134
Professional practice and codes
of ethics
135
ACCA professional code of
ethics
Integrity
Objectivity
Professional competence
Confidentiality
Professional behaviour
136
Conflicts of interest and ethical
threats
137
Approaches to conflict
resolution
138
Ethical conflict resolution
1. Gather facts
2. Establish ethical issues
3. Refer to fundamental principles
4. Flow internal procedures
5. Investigate alternative courses of action
6. Consult within firm
7. Obtain advice from institute
8. Withdraw from role
139
14
Chapter
Ethical decision making
140
Session content
141
Applying ethical decision
making
142
American Accounting
Association Model
7 questions in the model:
1. What are the facts of the case ?
2. What are the ethical issues of the case ?
3. What are the norms, principles and values related to
the case?
4. What are the alternative courses of action ?
5. What is the best course of action that is consistent
with the norms, principles and values identified in
step 3 ?
6. What are the consequences of each possible course
of action ?
7. What is the decision ?
143
Tuckers 5 question model
The decision should be:
Profitable
Legal
Fair
Right
Sustainable or environmentally sound
144
Ethical decision making
145
Ethical behaviour
146
Factors affecting moral intensity
Concentration of effort
Proximity
Temporal immediacy
Magnitude of consequence
Social consensus
Probability of effect
147
15
Chapter
Social and environmental
issues
148
Session content
149
Sustainability
150
Definitions
Sustainable development is
development that meets the needs of
the present without compromising the
ability of future generations to meet their
own needs
Sustainability is an attempt to provide
the best outcomes for the human and
natural environments both now and into
the indefinite future
151
Accounting for sustainability
152
Footprints
Environmental footprint:
Resource consumption
Pollution emissions
Measurement
Social footprint:
Social capital
Human capital
Constructed capital
153
Management systems
154
Social and environmental audit
155
Elements of a social audit