CIMA BA4 Notes 2018 PDF

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BA4
Fundamentals of
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Ethics, Corporate
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2018 Examinations Watch free CIMA BA4 lectures 1
Contents
1. Ethics 3
2. CIMA’s Code of Ethics 13
3. Corporate governance 23
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4. Corporate governance – directors and the board 31
5. Internal and external audit 37
6. Error and fraud 45
7. Corporate social responsibility 51
8. Contract law 57
9. Employment law 69
10. Business organisations 81
Answers to Tests 87
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Chapter 1
ETHICS
1 Introduction
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Ethics is a branch of philosophy that involves examining, categorising, justifying and

recommending concepts of right and wrong behaviour. Ethics also deals with the moral
principles that govern a person's decisions and behaviour.
Ethical standards within business have become very important and poor ethics often leads to
fines, loss of trust and falls in shareholder value.
Ethical standards for accountants are vital and represent professional accountants’ “unique
selling proposition”. What’s the point in paying an accountant unless their work is competent,
honest and impartial? It is vitally important that accountants are trusted and believed: that
implies high ethical standards.
2 Absolute v relative
There is a clear distinction between ethical theories based on absolute values and those
based on relative values
Absolute value theorists

๏ Assume that there is only one set of moral rules that are unchanging and always true.
๏ But truth in one culture must be different from the truth in another. Consider the
different truths behind Christianity and Islam.
๏ So most of the “absolute school” now accepts that each separate culture has its own
truths.
๏ But, even then, some truths are international and intercultural – for example,
unprovoked murder by one person of another must surely be a basic unacceptable
anti–social act, whatever the culture, religion, geographical location.
Relative value theorists

๏ Accept that there are many moral/ethical codes each of which evolves over time and
each could be different from every other.
๏ As a result of this more open acceptance of differing codes of ethics. The relative
theorists do not believe in the “one moral truth”.
๏ They accept the need for evolution of moral codes.
๏ They accept also the idea of different races, religions, sects… having their own codes of
ethics.
๏ Auditors in one country may well accept as normal an activity by a client which would
be seen as abnormal by auditors in other countries.
3 Schools of ethics
Those who study ethics attempt to classify the ways in which ethics lead to decisions. The
classifications are known as “ethical schools”. Summaries of the main schools are:
Teleology/utilitarianism/consequentialism holds that any action must be viewed in terms
of the consequences that the action produces: do the consequences serve some intrinsic
good? Utilitarianism proposes that one should act in such a way to produce the greatest
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good for the greatest number.

Deontology, or duty bound ethics, suggests that ethics arise from the rightness or
wrongness of actions themselves, as opposed to the rightness or wrongness of the
consequences of those actions. It argues that decisions should be made considering the
factors of one's duties and other's rights
Virtue ethics, emphasises the virtues, or moral character, in contrast to the approaches that
emphasises duties or rules (deontology) or that emphasises the consequences of actions
(consequentialism). Moral character can allow a person to flourish through a life well-lived
and this state is achieved by practising the virtues. Suppose it is obvious that someone needs
help. A utilitarian will point to the fact that the consequences of doing so will maximise well-
being. A deontologist will point to the fact that in providing help the agent will be acting in
accordance with a moral rule such as “Do unto others as you would be done by”. A virtue
ethicist will claim that helping the person would be charitable and benevolent – virtues that
are necessary for a live well-lived.
Ethics in accountancy primarily uses the virtue ethics approach.
4 The consequences of poor ethics in business

Irrespective of which school of ethics you adopt, or whether you are an absolutist or relativist,
being ‘ethical’ is good for profits, particularly because most unethical behaviour will be
discovered and then the consequences are serious.
๏ An ethical organisation will suffer less from legal penalties and damages. For example,
paying employees below legal minimums is likely to give rise to fines. Under-declaring
profits for tax will lead to large penalties. Concealing the harmful side effects of a
product can lead to huge damages.
๏ An ethical approach reduces risk for investors and this will reduce the return they
require. Cheaper finance means higher profits.
๏ Better people are likely to be attracted to become employees of ethical companies.
๏ Customers might boycott and abandon unethical companies.
๏ Ethical companies will find other companies more eager to cooperate (eg a joint
venture). No one wants to be tainted by a company with a poor reputation.
๏ Ethical companies will be trusted to deliver what they promised in the way they
promised.
5 Business and professional ethics

Carrying on a business or being part of the accountancy professions means that you will be
continually faced with decisions that have ethical consequences. For example:
๏ You are a pharmaceutical company developing new drugs. How much testing should
be carried out before the drugs can be marketed? More testing might identify
unwanted side-effects, but more testing will delay treatment for people who are very ill.
๏ Your factory is old and inefficient and you are thinking of moving to new one with more
efficient use of energy, in another area of the country with better transport connections.
The factory’d carbon footprint will be reduced, but existing employees will lose their
jobs.
๏
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You run an airline. You transport passengers for business and leisure and to visit
overseas family members. However, airlines also cause noise and air pollution.
๏ House builders create accommodation for families, but they might build over attractive
land and displace wild-life.
๏ You are an accountant reporting to a lender on the prospects of a client. A poor report
will lead to business closure and redundancies but an optimistic report might lead to
the lender losing their investment.
6 Accountants and the public interest

The CIMA Code of Ethics states that a distinguishing mark of the accountancy profession is its
acceptance of the responsibility to act in the public interest. Therefore, a professional
accountant’s responsibility is not exclusively to satisfy the needs of an individual client or
employer.
The “public” includes all users of financial information and decisions: corporate boards,
shareholders, auditors, suppliers, consumers, governments, and financial industries (e.g.,
banking, insurance, legal, and investment services). It also includes citizens and taxpayers,
who are affected by the fiscal decisions of governments for public expenditure and the
distribution of public resources.
“Interest” describe the responsibilities that professional accountants have to society.
Examples of these responsibilities include:
๏ Providing sound financial and business reporting to investors and all stakeholders
affected by that reporting.
๏ Promoting the comparability of financial reporting and auditing across different
countries.
๏ Reducing economic uncertainty throughout the economy.
๏ Requiring that accounting professionals apply high standards of ethical behaviour and
professional judgment.
๏ Specifying appropriate educational requirements (including continuing professional
development) and qualifications for professional accountants.
๏ Specifying regulatory and disciplinary procedures for the accountancy profession.
๏ Encouraging governments and public sector organisations to provide sound fiscal
information and decision-making.
7 Sources of professional rules and ethics

๏ The law: Local laws must be complied with, and take precedence over other sources
shown below. However, most legal frameworks give little guidance about how
accountants should approach ethical problems.
๏ IFAC: The International Federation of Accountants develops accounting and auditing
standards that it hopes will be adopted across all countries.
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๏ IESBA: The International Ethical Standards Board for Accountants (part of IFAC)
develops ethical codes and guidance.
๏ FRC: The Financial Reporting Council is the UK regulatory body which promotes good
corporate governance and reporting. It is responsible for implementing IFAC financial
reporting and auditing standards in the UK.
๏ The Conduct Committee: (previously the Professional Oversight Board) is responsible
for overseeing the FRC’s Conduct Division in its work promoting high quality corporate
reporting. Its responsibilities include overseeing:
‣ Monitoring of Recognised Supervisory and Recognised Qualifying Bodies
[required if members of accountancy bodies are to be able to carry out audits]
‣ Audit Quality Reviews
‣ Corporate reporting reviews
‣ Professional discipline
‣ Oversight of the regulation of accountants and actuaries
๏ Auditing Practices Board: The Auditing Practices Board Limited, which is part of the
Financial Reporting Council, prepares for use within the United Kingdom and the
Republic of Ireland:
‣ standards and guidance for auditing;
‣ standards and guidance for the work of reporting accountants in connection with
investment circulars; and
‣ standards and guidance for auditors’ and reporting accountants’ integrity,
objectivity and independence, with the objective of enhancing public confidence
in the audit process and the quality and relevance of audit services in the public
interest
[Note CIMA members cannot audit unless they are also a member of another
appropriate body].
๏ CIMA: CIMA members must comply with local laws, local financial reporting and
auditing standards and with the CIMA Code of Ethics (based on the IESBA Code of
Ethics).
The CIMA Code of Ethics is covered in detail in Chapter 2
8 Ethical codes
Many organisations and companies are developing their own ethical codes. Areas covered
can include:
๏ Equal opportunity/discrimination
๏ Bullying
๏
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Use of the internet

๏ Reporting wrong-doing
๏ Bribery
๏ Money-laundering
๏ Response to conflicts of interest
Here are extracts from Amazon’s code of ethics:
I. Compliance with Laws, Rules and Regulations

Employees must follow applicable laws, rules and regulations at all times.
II. Conflicts of Interest
…employees are expected .. to act … in the best interests of Amazon.com. A "conflict of interest" exists
when an employee's personal interest interferes with the best interests of Amazon.com. For example, a
conflict of interest may occur when an employee or a family member receives a personal benefit as a
result of the employee's position with Amazon.com. … the Legal Department will consider the facts and
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circumstances of the situation to decide whether corrective or mitigating action is appropriate.
III. Insider Trading Policy

Employees of the Company may not a) trade in stock or other securities while in possession of material
non-public information or b) pass on material non-public information to … or recommend to others
that they trade in stock or other securities based on material non-public information.
IV. Discrimination and Harassment

Amazon.com provides equal opportunity in all aspects of employment and will not tolerate any illegal
discrimination or harassment of any kind…
V. Health and Safety

Amazon.com provides a clean, safe and healthy work environment. Each employee has responsibility for
maintaining a safe and healthy workplace by following safety and health rules and practices and
reporting accidents…Violence and threatening behaviour are not permitted. …
VI. Price Fixing

Employees may not discuss prices or make any formal or informal agreement with any competitor
regarding prices …
VII. Bribery; Payments to Government Personnel

Employees may not bribe anyone for any reason, whether in dealings with governments or the private
sector. ….
VIII. Record keeping, Reporting, and Financial Integrity
Amazon.com's books, records, accounts and financial statements must be maintained in appropriate
detail..
IX. Questions; Reporting Violations

Employees should speak with anyone in their management chain or the Legal Department when they
have a question about the application of the Code of Conduct …The Amazon.com Legal Department
has developed … reporting guidelines for employees who wish to report violations of the Code of
Conduct. … Amazon.com will not allow retaliation against an employee for reporting misconduct by
others in good faith…Employees who violate the Code of Conduct will be subject to disciplinary action
up to and including discharge.
X. Periodic Certification
The Legal Department will designate certain employees who, based on their level of responsibility or the
nature of their work, will be required to certify periodically that they have read, understand and
complied with the Code of Conduct.
XI. Board of Directors

With respect to their service on behalf of the Company, Amazon.com's Board of Directors must comply
with the relevant provisions of this Code of Conduct…
There are two approaches to formulating and applying ethical codes:

๏ Rules based
๏ Framework based
Rules based: The rules based, or compliance based, approach is based on specific checks and
punishments or sanctions. Controls are implemented by establishing checklists that
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employees are required to sign-off to provide evidence that they have complied with the
rules.
Framework based: The framework based, or integrity based, approach sets out guiding
principles, and creates a culture that promotes ethical sound behaviour. There are few if
checklists and compliance is based on trusting employees to ‘do the right thing’. Checklists
will be high-level and ask if the principles have been followed.
An analogy can be seen from driving a car. If a driver sees a speed camera (a control) then he
or she will slow down to ensure compliance with the speed limit and to avoid a fine. This is
the rules or compliance approach. The danger is that the driver then breaks the limit when
there are no speed cameras around.
The framework or integrity-based approach would have instilled into the driver that breaking
the speed limit is morally wrong and is dangerous. That driver will drive ethically even in the
absence of speed camera.
The rules-based approach allows organisations to design the checks it thinks are needed and
can provide evidence that employees have complied with the rules. However, it is unlikely
that the organisation can check compliance for every decision, both because of the enormous
bureaucracy that would be needed and because it is difficult to foresee every ethical
dilemma. The integrity-based approach is much more flexible but does require the
organisation to extend more trust to its employees that they have the moral discernment to
act ethically.
9 Organisational and personal values

There is no reason that an organisation’s values and the personal values of its employees will
be the same:
Organisational Personal
values values
However, unless there is some overlap there are going to be difficulties: the ethics and virtues
as perceived by employees will be at odds with what the organisation perceives and needs.
Successful organisations must get as much overlap as possible:
Organisational Personal
values values
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The two sets of values can be brought towards each other by:
๏ Recruitment: try to ensure that new employees share at least some of the organisation’s
values.
๏ Training: for example courses, group discussions and role play that examine ethical
dilemmas.
๏ Ethical codes: these explain how employees should act and will also set out sanctions if
the code is breached.
๏ Corporate culture: a strong emphasis from the top on how things should be done in the
organisation
The virtues and values that organisations will, in general, like to see in their employees are:
๏ Reliability: employees should do what they say they will do, both in terms of quality and
in meeting deadlines.
๏ Responsibility: employees should be willing to be accountable for their actions and
decisions.
๏ Timeliness: meet deadlines. Do not have undue delays in carrying out tasks or
communicating with others.
๏ Courtesy: it is important to be courteous to others both inside and outside your
organisation. Discourtesy will generate neither friends, concessions nor more work.
๏ Respect: towards other people and their views – even if you think they are wrong.
10 Lifelong learning
This can be defined as:
“The provision or use of learning opportunities, both formal and informal, throughout people's
lives in order to promote continuous development and improvement of the knowledge and skills
needed for employment and personal fulfilment”
It is often described as being:

๏ ongoing
๏ voluntary
๏ self-motivated.
The concept recognises that in many businesses and organisations the pace of change is now
often very fast. You only have to think about the impact of information technology and the
Internet on most businesses. Unless employees and management keep up-to-date, their
organisations will probably fail.
Within the accountancy profession is important to keep up to date when preparing reports or
giving advice. For example, developments in costing, such as activity based costing, might be
more effective in producing information on which to base reliable decisions. Obviously it is
important to keep up-to-date with tax and accounting standards. In fact, it would be
unethical not to keep up to date.
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Note that is not only technical matters that change. Ethical matters also change and indeed
the changes in ethics might be backed up by changes in the law. For example, attitudes
towards bullying, discrimination, corporate social responsibility, bribery and corporate
governance have all changed markedly over the last 20 years or so. Not to keep up do date is
liable to lead towards expensive legal action.
You will see later in Chapter 2 that one of the specific ethical principles in the CIMA Code of
Ethics is that members must show professional competence and due care. That implies
keeping up to date and making use of life-long learning opportunities.
Tests
Question 1
Which TWO of the following statements are correct?
A Teleology looks at the consequences of an actions to determine whether the action is
ethical
B Deontology looks at the motives for an action to determine whether the action is
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ethical
C Teleology looks at the motives for an action to determine whether the action is ethical
D Deontology looks at the consequences of an action to determine whether the action is
ethical
Question 2
Which of the following are likely long-term consequences of poor ethics in an
organisation? (Choose all that apply)
A Lower finance costs
B A better reputation
C Greater risk
D More customers
E Problems with regulators
F Fewer opportunities for collaboration
Question 3
A CIMA member finds that a local law requires accountants to report suspicious transactions
to the authorities. This means that the accountant has to divulge confidential information in
contravention to a general ethical duty of confidentiality.
Which duty takes precedence?
A The law takes precedence
B The accountant’s ethical code takes precedence
Question 4
What do the initials IFAC and IESBA stand for?
Question 5
What are the two approaches to establishing and administering ethical codes?
Chapter 2
CIMA’S CODE OF ETHICS
1 Introduction
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The CIMA Code of Ethisc sets out certain fundamental principles about how its members
should behave.
It also recognizes how members could be subject to certain threats that would compromise
their behaviour and suggests ways in which members can be safeguarded against the
operation of those therats.
So, the ethical framework recognises that there are:

๏ Ethical principles to be followed
๏ These are subject to risks
๏ Accountants should use safeguards to avoid or to respond to risks.
The guide applies to all members of CIMA and also to all CIMA students. It is based on IFAC’s
Ethical Code as developed and issued by IESBA, the International Ethics Standards Board for
Accountants.
The code CIMA can be found here: http://www.cimaglobal.com/Professionalism/Ethics/CIMA-
code-of-ethics-for-professional-accountants/
2 Fundamental principles
The CIMA fundamental principles are as follows:
๏ First, integrity, basically this means that members should be honest, straightforward. If
they see something is amiss, they should say so; they shouldn’t try to conceal it; they
shouldn’t ‘turn a blind eye’; they shouldn’t try to be ambiguous, they should state
things plainly. They should stand up for their beliefs.
๏ Secondly, objectivity, members should be influenced by the facts and the facts only.
They must avoid bias, conflict of interest and undue influence.
๏ Third, members should exercise professional competence and due care. They must
keep themselves up-to-date with legislation and recent developments. They shouldn’t
take on work which they are not qualified for or for which they have no skills. They must
be diligent, they must be careful. This is why it is essential that accountants, once
qualified, undertake Continued Professional Development and life-long learning.
๏ Fourth, confidentiality. Members have privileged accessed to information that is
highly confidential and which might be price sensitive. That information must be held
confidentially. For example, accounting staff will see profit figures before these are
released to investors. Members should not disclose confidential information unless they
have a legal or professional duty to do so. An example of a legal duty to disclose
information can arise if a member thinks that a client or the person they are working for
is involved in money laundering. Many countries now have very strong regulations that
require accountants to report suspicions of money laundering to the authorities.
Occasionally there might be a duty to breach confidentiality if it is in the public interest.

However, the concept of public interest is not closely defined in law and legal and
professional advice should be sought. For example, it is probably not in the public
interest to disclose if a company that is paying below minimum wages, but it probably
is in the public interest if the company were misreporting safety checks and customers
were likely to be injured as a result.
๏ Finally, members should show professional behavior. They should comply with the
law and they should avoid any actions which discredit the profession. So, for example,
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when they are trying to advertise their services they shouldn’t say that other members
are bad or poor. They should confine themselves to promoting what they are good at;
they shouldn’t rubbish other professionals.
3 Threats to professional ethics

3.1 The threats
Threats to professional ethics arise from

๏ Self-interest
๏ Self review
๏ Advocacy
๏ Familiarity
๏ Intimidation.
Where such threats exist, the members must put in place safeguards that eliminate them or
reduce them to clearly insignificant levels. Safeguards apply at three levels: safeguards in the
work environment, safeguards that increase the risk of detection, and specific safeguards to
deal with particular cases. If he is unable to implement fully adequate safeguards, the
accountant must not carry out the work.
3.2 Self-interest threats
Self-interest threats are the following:

๏ Financial: For example, being promised a bonus if you sign off a dubious sales forecast.
๏ Close family, personal and business relationships are also threats. For example, if your
brother was the owner of a major supplier.
๏ Loans and guarantees from your employer or a client at unusually favourable rates.
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๏ Contingent fees are obviously dangerous. A contingent fee, for example, would be
where a consulltant is paid a small fee for an optimistic cash forecast, but a small fee for
a pessimistic one.
Care should be taken to ensure that you are not exposed to these threats.
3.3 Self review threats
Self review threats arise when you attempt top check your own work. It is very difficult to be
sufficiently sceptical about having made a mistake. Furthermore any error of principle is likely
to be repeated, so reviews should be carried out by an independent person.
3.4 Advocacy threats
Advocacy threats arise where a CIMA member or student promotes a point of view or
opinion to the extent that objectivity is compromised. An example would be where an
accountant promotes the shares in a listed company or supports the company in some sort of
dispute. CIMA members and students should take care no to overstate the case for any
decision of recommendation. You can give the facts but you mustn’t cross into giving
unwarranted support.
3.5 Familiarity threats
Familiarity threats arise because of the close relationship between the accountant and client
or employer. The close relationship can arise by friendship, family or through business
connections. There is no general definition of what’s meant by ‘close relationships’, but if you
were an auditor and your brother was the Finance Director of a client firm then there
probably is a close relationship! If however the finance director was a remote cousin of yours,
there might not be a close relationship. Note that there does not have to be any family or
legal relationship: friendship can threaten independence and integrity.
If there appears to be a close relationship that would put independence at risk (or be
suspected of introducing bias), the accountant should not carry out the work.
3.6 Intimidation
The final groups of threats are intimidation threats. These can deter an accontant from acting
properly. Examples could be threatened litigation, blackmail, or there might even be physical
intimidation, though it is to be hoped that that is rare. Blackmail could be more subtly applied
and might relate back, for example, to a period where the auditor was not acting in
accordance with the required ethical standards
4 Independence and professional scepticism

4.1 Independence
‘Independence’ is not mentioned as an ethical principle but it is a combination of integrity

and objectivity. The accountant should stick up for what’s right, be honest and be objective.
However, it becomes difficult to be independent if, fir example, your job depends on
producing a report with favourable conclusions.
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4.2 Professional scepticism
This means approaching your work with a questioning mind. It does not mean that you
expect that every piece of information you are supplied with has been deliberately falsified.
On the other hand it does not mean that you automatically believe everything you are told.
You must walk a tight-rope between belief and disbelief, being aware that we are all human
and can all be prone to:
๏ Unwarranted optimism or pessimism
๏ Making errors
๏ Misunderstanding
๏ Answering questions in a rush without really thinking about them
๏ Avoiding trouble for ourselves and colleagues
All of these frailties mean that accounting information and estimates will be, from time-to-
time, incorrect. Therefore, information needs to be checked. Certainly any information or
explanations which look odd or unfeasible needs to followed up.
Accountants should also be aware of another human frailty: dishonesty. Dishonesty also
exists and that sometimes you might be given information that deliberately misleads or
covers up problems.
5 Responses to threats to ethical principles and ethical

conflicts
Sometimes, despite attempting to avoid or reduce threats to ethical principles, CIMA
members and students can feel themselves under pressure to behave in a non-ethical
manner or can be subject to ethical conflicts.
An ethical conflict arises when a member encounters one or both of the following:
(a) Obstacles to following an appropriate course of action due to internal or external
pressures.
(b) Conflicts in applying relevant professional and legal standards.
For example, a member suspects a fraud may have occurred, but reporting the suspected
fraud would violate the member’s responsibility to maintain the confidentiality of his or her
employer’s confidential information. Another example could arise when if a deposit from a
client should, by law, be placed in a separate client’s account, but is paid into the company’s
ordinary account.
Once an ethical conflict is encountered, a member may be required to take steps to best
achieve compliance with the rules, fundamental principles and the law. In weighing
alternative courses of action, the member should consider factors such as the following:
๏ Relevant facts and circumstances, including applicable rules, laws, or regulations, must
be investigated.
๏ Determine the ethical issues involved.
๏ Investigate the established internal procedures.
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The member should also be prepared to justify any departures from internal procedures that
the member believes were appropriate in applying the relevant rules, fundamental principles
and law.
Before pursuing a course of action, the member should consider consulting with appropriate
persons within their employer.
If a conflict remains unresolved after pursuing the selected course of action, the member
should consider either consulting with other individuals for help in reaching a resolution or
obtaining advice from an appropriate professional body or legal counsel. The member also
should consider documenting the substance of the issue, the parties with whom the issue
was discussed, details of any discussions held, and any decisions made concerning the issue.
If the ethical conflict remains unresolved, the member will in all likelihood be in violation of
one or more rules or fundamental principles if he or she remains associated with the matter
creating the conflict. Accordingly, the member should consider his or her continuing
relationship with the specific assignment or employer.
CIMA has produced an ethical checklist that can help you to navigate through these
difficulties.
http://www.cimaglobal.com/Professionalism/Ethics/Responsible-business/Ethics-checklist/
CHECK ALL
POSSIBLE COURSE
YOUR FACTS
OF ACTION
and documents
– internal and
where possible
external escalation
SEEK
professional or
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legal advice
IS IT ETHICAL
– have you IDENTIFY
considered the the affected
ethical issues parties
involved?
IDENTIFY REFUSE
which to remain
fundamental associated with
principles are the conflict
IS IT LEGAL?
affected
๏ Seek advice from his or her manager.

๏ If that manager is the problem, then the matter can be escalated to higher
management and the audit committee if there is one.
๏ A complaint can be made under the employer’s grievance procedures.
๏ Advice can be sought from your mentor (if there is a mentoring arrangement).
๏ Seek advice from CIMA.
๏ There might be a statutory duty to report on problems (eg money laundering).
๏ Whistle-blowing, as a last resort (See chapter 9).
5.1 Check all your facts – and document where possible
(a) Identify all relevant facts.

(b) Do not rely on word of mouth, or assumptions. Is it really your problem?
(c) Can anybody else help?
5.2 Is it ethical – have you considered the ethical issues involved?
(a) Does it feel right?

(b) How would you feel if you saw it in a newspaper?
(c) How would you feel about your peers, friends, family knowing about it?
(d) Have you referred to the CIMA Code of Ethics?
(e) Have you referred to your internal Code of Ethics/Conduct and other internal policies?
5.3. Is it legal?
(a) Is the issue in question regulated by the law – national and international?
(b) does it comply with rules, policies, standards and contracts imposed by relevant
regulators/bodies and by your employer?
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5.4. Identify which fundamental principles are affected
(a) Integrity
(b) Objectivity
(c) Professional competence and due care
(d) Confidentiality
(e) Professional behaviour
5.5 Identify the affected parties
(a) Who are the individuals, organisations and key stakeholders affected?
(b) In what way are they affected?
(c) Are there conflicts between different stakeholders?
(d) Understand the effects of non-action to the organisation, to yourself and to society.
5.6. Possible course of action – internal and external escalation
(a) Escalate internally; consider grievance procedures.

(b) Document every action you take to resolve the conflict.
(c) Escalate externally to auditor, legal advisors, professional body.
5.7. Seek professional or legal advice

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(a) Your internal whistle-blowing or speak-up helpline.

(b) Legal advisors.
(c) CIMA ethics helpline: free to members and students.
5.8. Refuse to remain associated with the conflict
(a) If resolution seems unlikely, disassociate yourself from the issue – in writing if necessary.
(b) Legal advice may be needed if this affects your employment status or if you are
implicated in any way with the issue.
As a very last resort, there is external whistle-blowing (see chapter 9)
6 CIMA’s Ethical Code and the law

By and large the law is silent on accountants’ professional ethics. There might be occasional
overlaps such as being able to sue an accontant for damage caused if work was carried out
negligently, but it has been left up to CIMA and other accounting bodies to devise and to
police the ethical code.
Note, as mentioned in Chapter 1, that if national law and ethical guides conflict, CIMA states
that the law should be followed. For example, you will see below that a CIMA ethical principle
is confidentiality. However, if tax legislation requires you to provide information to the
government about your employer’s business practices, then you must comply with the law.
Tests
Question 1
Which of the following is/are not one of the five fundamental ethical principles of
CIMA?
(Choose all that apply.)
A Honesty
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B Objectivity
C Professional behaviour
D Prudence
E Confidentiality
F Professional scepticism
Question 2
Which of the following are attributes of ‘professional scepticism’?
(Choose all that apply)
A Assume everyone is trying to deceive you.
B Assume everyone tells the truth.
C Be aware that incorrect information might be given inadvertently.
D Follow up inconsistencies in information.
Question 3
CIMA has published a checklist, or pathway to guide members if they are faced with ethical
conflicts.
Place the following (incomplete) steps in the correct order.
(a) Is it ethical?
(b) Seek professional or legal advice
(c) Check your facts
(d) Identify the affected parties
Question 4
What is the ultimate step that a professional accountant should take if they cannot
resolve an ethical conflict?
Question 5
A CIMA member has been asked to prepare and check a cash-flow forecast for his/her
employer. The forecast will be sent to the company’s bank as the basis for extending the
company’s overdraft.
What ethical threats might be created here?
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Chapter 3
CORPORATE GOVERNANCE
1 Why corporate governance is needed

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Corporate governance is the system by which companies are directed and controlled.
The problem is that although the shareholders own companies and are known as the
‘principals’, the day-to-day management and direction of companies is given to the Board of
Directors. The directors are the ‘agents’ of the shareholders and should act in the best
interests of the shareholders. In large companies many shareholders are relatively passive and
the Board of Directors is given more or less free rein to make whatever decisions they wish.
Auditing was instituted so that at least once a year, when the financial statements were
presented to the members of the company, the auditors would examine the financial
statements and give their opinion to the members of the company as to whether the financial
statements were true and fair. Without that assurance the members of the company really
would have a little idea as to whether or not the financial statements were worth relying on.
The auditors therefore examine the financial statements and this adds credibility to those
statements so that the shareholders have a much better idea of the performance of the
directors and the company.
Appoint independent
Auditor
Measure
performance Adds credibility
Financial Statements
Prepare FS
Appoint
Shareholders Directors
Own Manage
Company
Note that shareholders appoint the independent auditors, they also appoint the directors.
The problem is, however, that once directors were appointed, shareholders often didn’t take
much further interest in what the directors were doing. Scandals such as Enron, Worldcom in
the early 2000’s, and perhaps banking problems in 2008, showed that this hands-off
approach was entirely inadequate and therefore additional safeguards have been instituted
to try to ensure that directors act in the best interests of the members of the company.
2 Corporate Governance, ethics and the law

Ethical directors should always seek to act in the best interests of thir shareholders, but often
did not. Sometimes this was deliberate so that directors could enrich themselves at the
expense of the shareholders. Somtimes it was accidental such as not understanding the risks
and returns that shareholders were happy with. Therefore, to encourage better (and more
ethical) corporate governance, most advanced economies have introduced corporate
governance rules, laws and guidelines. Some countries have taken a rules- or procedural-
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based approach and some a principles- or framework-based approach (these concepts were
discussed in the previous chapter). Some countries have enshrined corporate governance in
their laws whilst other rely on their stock exchange enforcing the rules. For example:
๏ USA: The Sarbanes-Oxley Act is part of US law. A rules-based approach with the risk of
crininal prosecution if not complied with.
๏ UK: The UK Corporate Governance Code. This is not law but is a code that companies
listed on the London Stock Exchange are expected to follow. If there are serious
departures from the code, the Stock Exchange can suspend a company’s listing (ie their
shares cannot be bought or sold on the stock exchange). The stock exchange requires a
‘comply or explain’ approach: companies have to comply with the corporate
governance code or explain why they haven’t. Explanations might not always be
accepted as reasonable or acceptable.
3 OECD Principles of corporate governance

The Organization of Economic Cooperation Development (OECD) has put forward some
principles of corporate governance. It is then up to countries to implement detailed laws or
codes to implement these principles.
๏ The corporate governance framework should promote transparent and fair markets,
and the efficient allocation of resources. It should be consistent with the rule of law and
support effective supervision and enforcement.
๏ The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights and ensure the equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights. [For example, all shareholders
should have access to the same information at the same time.]
๏ The corporate governance framework should provide sound incentives throughout the
investment chain and provide for stock markets to function in a way that contributes to
good corporate governance. [This recognises that many private investors now invest in
companies indirectly, through institutional investors such as investment trusts. So, for
example, the principles state that institutional investors acting in a fiduciary capacity
should disclose their corporate governance and voting policies with respect to their
investments, including the procedures that they have in place for deciding on the use of
their voting rights.]
๏ The corporate governance framework should also recognize the rights of all
stakeholders, not just shareholders, and should encourage active cooperation between
the entities and stakeholders in creating wealth, jobs and sustainability of financially
sound entities.
๏ The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.
๏ The corporate the corporate governance framework should ensure the strategic
guidance of the entity, effective monitoring of management by the board and the
board’s accountability to the entity and their shareholders. [This covers requirements
relating to the appointment of board members, ethical behaviour by board members
and the application of care and due diligence]
4 IFACs main drivers for sustainable corporate success

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IFAC has published an International Good Practice Guidance (IGPG) Evaluating and Improving
Governance in Organizations (IFAC, 2009) (https://www.ifac.org/publications-resources/
integrating-governance-sustainable-success). The report analyses, with the use of illustrative
case studies, how professional accountants in business support their organisations in
integrating governance into the key drivers of organisational success.
It identifies eight drivers of sustainable organisational success:
4.1 Customer and shareholder focus

๏ Understanding and satisfying customer or service-user needs.
๏ Aligning all parts of an organisation to these needs.
A customer and stakeholder focus involves ensuring that the organisation as a whole, not
merely the front-line staff, puts an understanding of customers and key stakeholder groups
first. Similarly, in the public and not-for-profit sectors, sustainable performance is strongly
linked to meeting stakeholder expectations and the quality of service delivery to their
customers, clients, and society.
Irrespective of an organisation’s size, structure, or sector, a customer and stakeholder focus
can be aided by:
(a) practising good customer and stakeholder relationship management;
(b) maintaining a customer and stakeholder relations or engagement program;
(c) ensuring that all functions, including finance and accounting, are geared to supporting
customer- and stakeholder focused decisions.
Accountants can help to identify, understand and monitor groups of customers and
stakeholders to provide appropriate decision-oriented information.
4.2 Effective leadership and strategy

๏ Providing ethical and strategic leadership focused on sustainable value creation.
๏ Facilitating key performance drivers, including strong corporate values, ethical culture,
organisational structures and processes.
Professional accountants in business often participate in the key areas of strategic leadership:
strategy (what do we want to achieve?); values and attitudes (what do we stand for?); and the
business model (how do we organise to create, deliver, and capture sustainable
organisational success?).
This involves:
(a) participating in strategy and planning, providing information and analysis for strategic
decision making and maintaining strategic control and financial navigation to ensure
execution of strategy and
(b) evaluating strategic options that align with the organisation’s risk management strategy
and policies on internal control and recommending optimal strategies. It also requires
setting the right tone at the top in the organisation.
4.3 Integrated governance, risk and control

๏ Deploying effective government structures and processes with integrated risk
management and internal control.
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๏ Balancing performance and conformance in government.

Professional accountants in business can create awareness among their colleagues regarding
the importance of integrating governance, risk management, and internal control. Effective
risk management enables an organisation to exploit opportunities and take on additional risk
while staying in control and, therefore, increasing its sustainable success. With an integrated,
enterprise-wide approach to risk management and internal control, professional accountants
in business also encourage the idea that risks are viewed and managed in a more holistic way
so that individual risks are not assessed and dealt with in isolation.
Professional accountants in business are also frequently engaged in the improvement of
documentation and communication of governance, risk management, and internal control
systems.
4.4 Innovation and adaptability

๏ Innovating processes and products to improve reputation and performance.
๏ Adapting the organisation to changing circumstances.
Professional accountants can be involved in supporting each of the key stages of innovation
development, including innovation and opportunity selection, concept and design
definitions, product and service realisation, and required production and service support.
4.5 Financial management

๏ Ensuring financial leadership and strategy support sustainable value creation.
๏ Implementing good practices in areas such as tax and treasury, cost and profitability
improvement, and working capital management.
Financial management is at the core of what many professional accountants do in
organisations, such as: provision, analysis, and interpretation of financial and non-financial
information to the governing body and managers, supporting them in understanding the
financial health of the organisation and progress in delivering financial objectives, and
providing the information and analysis needed for organisational objective setting, strategy
formulation, execution, and control.
4.6 People and talent management

๏ Enabling people and talent management as a strategic function.
๏ Applying talent management to the finance function so it better serves the needs of the
whole organisation.
Professional accountants should serve as promoters of integrity, transparency, and expertise.
They also deploy people and talent management strategies and policies that are focused on
determining core competencies, engaging new employees, and retaining critical staff
through robust career development—both for the finance function and the wider
organisation. This enables the organisation to continuously meet its changing needs
4.7 Operational excellence

๏ Aligning resource allocation with strategic objectives and the drivers of shareholder and
stakeholder value
๏ Supporting decision making with timely and insightful performance analysis.
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Professional accountants in in business also often use and advise on management

approaches such as the application of advanced management accounting tools, such as
process analysis, strategic and operational cost management, and throughput accounting, to
make their organisations more successful and more adaptive to changing circumstances.
4.8 Effective and transparent communication

๏ Engaging shareholders effectively to ensure that they receive relevant communications.
๏ Preparing high quality business reporting to support stakeholder understanding and
decision-making.
5 CIMA’s proposals for better reporting of corporate

governance
CIMA take the view that good corporate governance is essential to create trust and
engagement between companies and their investors, so contributing to the long-term
success of the business. However, even where a company has good corporate governance,
reporting is often formulaic and relies on standard, ‘boiler plated’ paragraphs brought
together for the sake of claiming that communication of governance issues has taken place –
even though it might be very poor. CIMA has therefore come up with practical proposals to
bring corporate governance reporting ‘to life’.
http://www.cimaglobal.com/Pages-that-we-will-need-to-bring-back/Old-site-pages1/Old-
site-pages/Thought-leadership/Research-topics/Governance/Simple-practical-proposals-for-
better-reporting-of-corporate-governance/
The proposals are:
5.1 Tone from the top
The chairman’s view on what good governance means to him [or her] and his [or her]
company.
๏ How the chairman has met the challenge of leading the board and ensuring its
effectiveness.
๏ The culture of the board and whether it is open and welcoming to effective debate and
contribution from all members, including non-executive directors.
๏ Whether the governance culture is aligned with the company’s policies and procedures,
and reinforced by a measurement and incentive system.
๏ A quick reference guide to governance activities during the year and where more
information may be found.
5.2 How the board works as a team

๏ Showing how the company’s board is properly composed and balanced, with skill sets
that complement one another.
๏ That a range of views will be expressed in the spirit of constructive challenge, and that
the boardroom environment allows for this.
5.3 The key actions of the board and its committees

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๏ What issues the board has focused its attention on.

๏ Whether the board has been focusing on the right things.
๏ How the company’s governance processes interact with the year’s key corporate events
and significant governance changes since the previous year.
5.4 Board effectiveness

๏ That there is a rigorous process in place to assess how effectively the board and its
committees are working.
๏ A balanced assessment of the effectiveness of the board and an understanding of the
actions being taken to address any underperformance.
๏ That the right issues are being discussed and that issues are kept on the agenda until
resolved.
๏ That the assessment of board and committee effectiveness is part of the linkage
through from strategy and risk to performance and reward.
๏ That matters are being addressed in a forward-looking way, so that effectiveness will
improve in the future.
5.5 Communication and engagement with shareholders
The company’s story needs to be told consistently to a broad audience. It must meet the
needs of:
• Fund managers, who need to understand the business model and its shorter term
returns.
• Ultimate owners such as pension funds and insurance companies, who need
confidence in management, and a longer term perspective.
• Those responsible for voting, in-house or outsourced, who need compliance data.
Tests
Question 1
What is the name of the main act which deals with corporate governance in the USA?
Question 2
What are the five elements of CIMA’s proposals for the better reporting of corporate
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governance?
Question 3
Which of the following statements are correct? (Choose all that apply.)
A Rules-based systems of corporate governance use a ‘comply or explain’ approach

B A framework-based approach and a rules-based approach are the same things.
C The UK has adopted a principles-based approach to corporate governance but the USA
has adopted a rules-based approach.
D Directors are principals, shareholders are agents
E Corporate governance can be defined as the system by which companies are directed
and controlled
Question 4
Fill in the two blanks in the sentence below:
The OECD principles of corporate governance mentions that ”… the equitable treatment of
all shareholders, including _________________ and _________________ shareholders.”
Question 5
Which organisation published an International Good Practice Guidance (IGPG) called
‘Evaluating and Improving Governance in Organisations’?
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Chapter 4
CORPORATE GOVERNANCE –
DIRECTORS AND THE BOARD
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1 Introduction
You should remember from the last chapter that corporate governance is the system by
which companies are directed and controlled. Once a company grows, and certainly for listed
companies, it is the directors who are in day-to-day control. Therefore, it should not be
surprising that corporate governance codes pay great attention to the composition and
activities of a company’s board of directors.
2 Unitary and two-tier boards

Most corporate governance problems arose because of the way boards were structured and
run. There were particular dangers where a company was headed by a charismatic CEO. The
word ‘charismatic’ was often used instead of more accurate descriptions such as
‘domineering’ or ‘bullying’. Often the CEO would ensure that the board was filled with
directors who would offer little resistance to the CEO’s wishes and the CEO was then able to
get away with outrageous decisions and, occastionally, robbery.
Two approaches have been taken to try to introduce some supervision to the board’s
activities: unitary boards and two-tier boards. In the European Union, the corporate
governance codes in eight countries recommend a unitary-board system and in ten countries
the codes recommend a dual-board system. In the remaining nine countries, a hybrid system
applies and companies can choose between a one or two-tier approach.
2.1 Two-tier boards
The boards are:

๏ A supervisory board: This is elected by the shareholders and is usually composed of
more experienced senior members, and employee representatives. The supervisory
board is led by a chairman and it supervises and advises the management board. The
supervisory board is particularly involved in the long-term decision making and
strategic planning of the business. It is also in charge of hiring and dismissing members
of the management board.
๏ A management board: The management board will meet regularly and is in charge of
the day-to-day management of the business. It is led by a CEO (chief executive officer).
Its responsibilities are tactical issues (short term decisions), the everyday management
of the business’s transactions.
Supervisory board: supervises the

management board and long-term
strategic decisions.
Information, Information, approval,

reports, results advice, warnings, control
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Management board: tactical

decisions, day-to-day management
and organisation.
Advantages of two-tier boards Disadvantages of two-tier boards

๏ Clear separation of roles ๏ Poor information flows
๏ The supervisory board can include a ๏ Confusion ovver power and roles
wide range of stakeholders eg workers’
representatives
๏ Greater independence of discussion ๏ Slower decisions and potential
and decision making stalemates
Unitary boards
There is only one board and it appoints a mix of executive and non-executive directors. The
executive directors look after the day-to-day management of the company (like the
management board in the two-tier system); the non-executive directors warn and advise (like
the supervisory board in the two-tier system). However, all votes are taken by the single
board with each executive and non-executive director having a vote.
Advantages of unitary boards Disadvantages of unitary boards

๏ All major decision taken in one forum ๏ Less independence and separation of
duties
๏ Faster decisions as only one vote ๏ Can lacks a clear division of
needed responsibilities
๏ Close Executive/non-executive ๏ More difficult to incorporate
relations representatives of other stakeholders
๏ Effective communication and

information flow as there is only one
board
3 The UK Corporate Governance Code

The OECD principles are put into effect in a variety of ways in different countries, but the UK
Corporate Governance Code canb be taken as an example of best practice for corporate
governance using a unitary board approach.
The full code can be accessed at:
https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Corporate-
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Governance-Code.aspx
The code states that the purpose of corporate governance is to facilitate:

“effective entrepreneurial and prudent management that can deliver long-term success of
the company”.
It then goes on to list the main principles of the code:
Main principles
๏ Leadership
๏ Effectiveness
๏ Accountability
๏ Remuneration
๏ Relations with shareholders
Comply or explain
The code has no force in law and is enforced on listed companies through the Stock
Exchange. Listed companies are expected ‘‘comply or explain’’ and this approach is the
trademark of corporate governance in the UK. Listed companies have to state that they have
complied with the code or else explain to shareholders why they haven’t. This allows some
flexibility and non-compliance might be acceptable in some circumstances.
Leadership
๏ Every company should be headed by an effective board which is collectively
responsible for the long- term success of the company.
๏ There should be a clear division … between the running of the board and the executive
responsibility for the running of the company’s business. No one individual should
have unfettered powers of decision. This means that the roles of CEO and Chairman
should not be performed by one person as that concentrates too much power in that
person.
๏ The chairman is responsible for leadership of the board
๏ Non-executive directors (NEDs) must be appointed to the board and they should
constructively challenge and help develop proposals on strategy. NEDs sit in at board
meeting and have full voting rights but do not have day-to day executive or managerial
responsibility. Their function is to monitor, advise and warn the executive directors.
Effectiveness
๏ The board should have an appropriate balance of skills, experience, independence and
knowledge. In large companies NEDs should be at least 50% of the board; in small
companies there should be at least 2 NEDs.
๏ New directors should be appointed by a Nomination Committee to ensure a formal,
rigorous and transparent procedure for their appointment. The Nomination Committee
consists of NEDs. This provision is to prevent directors appointing their friends and
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colleagues to the board and ensures that the best people for the job are considered and
appointed.
๏ All directors should be able to allocate sufficient time to company business.
๏ There should be induction on joining the board and a programme to update and
refresh directors’ skills and knowledge.
๏ The board should be supplied in a timely manner with necessary information.
๏ The board should undertake a formal and rigorous annual evaluation of its own
performance and that of its committees and individual directors.
๏ All directors should be submitted for re-election at regular intervals
Accountability
๏ The board should present a balanced and understandable assessment of the company’s
position and prospects.
๏ The board is responsible for determining the … significant risks …and should maintain
sound risk management and internal control systems.
๏ The board should establish formal and transparent arrangements for applying the
corporate reporting, risk management and internal control principles, and for
maintaining an appropriate relationship with the company’s auditor. This means that an
Audit Committee (NEDs again) should be established to liaise with both internal and
external auditors. Before audit committees, the finance director liaised with auditors,
but this was not satisfactory because the finance director was often the person respon-
sible for accounting problems. Therefore auditors were often reporting problems to the
person who caused them. The directors are responsible for establishing an internal
control system and must review the need for internal audit.
Remuneration
๏ Levels of remuneration should be sufficient to attract, retain and motivate directors of
sufficient quality… but avoid paying more than is necessary.
๏ A significant proportion of executive directors’remuneration should be structured so as
to link rewards to corporate and individual performance. In other words, profit related
pay is encouraged. Directors should not receive high pay irrespective of company
performance.
๏ There should be a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors. No
director should be involved in deciding his or her own remuneration. This means that a
Remuneration Committee (NEDs) should be formed to fix directors’ remuneration.
Relations with shareholders

One of the problems with achieving good corporate was encouraging shareholders to take an
active interest in the company. Too often they did not fully participate at AGMs and would
wave through motions. This passive attitude might well have been encouraged by directors
to move power towards them and away from members.
The code therefore specifies:
๏ There should be a dialogue with shareholders based on the mutual understanding of
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objectives. The board as a whole has responsibility for ensuring that a satisfactory
dialogue with shareholders takes place.
๏ The board should use the AGM to communicate with investors and to encourage their
participation.
Tests
Question 1
What are the two approaches to board structure that can be used and how does each
approach corporate governance?
Question 2
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The UK Corporate Governance Code specifies three committees, mostly consisting of non-
executive directors.
What are the three committees?
Question 3
What are the five principles/sections of the UK Corporate Governance Code?
Question 4
Is the following statement true or false in relation to corporate governance?
The Chairman of the Board and the Chief Executive Officer should be different people.
Question 5
Is the following statement true or false in relation to directors?
Non-executive directors attend board meetings but are not entitled to vote.
Chapter 5
INTERNAL AND EXTERNAL AUDIT
1 Introduction
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An audit is a form of assurance, which means that:

๏ an independent expert examines
๏ specified subject matter to
๏ agreed standards
๏ that is the responsibility of one party
๏ and produces a report
๏ for a second party.
For example, in the UK once a car reaches a certain age it has to have an annual safety test to
provide assurance that the vehicle is safe to drive. That assurance is carried out as follows:
๏ An independent test centre with qualified mechanics
๏ Inspects the car
๏ Following an agreed checklist and performance criteria
๏ The car’s condition is the responsibility of the owner
๏ The car’s condition and whether it has passed or failed is communicated
๏ To the Government
In an external audit:
๏ An independent auditor
๏ Examines the financial statements
๏ Following agreed auditing standards and agrees accounting standards.
๏ The financial statements are the responsibility of the directors
๏ The condition of the financial statements (are they ‘true and fair’) is reported
๏ To shareholders (members of the company).
There are two types of audit:

๏ External: where the report goes to the members (shareholders)
๏ Internal (where the report goes to the board)
The objectives of the two types of audit are different, but many of the techniques used are
similar.
2 The need for external audit

2.1 Principal-agent relationship between shareholders and directors
As was mentioned in an earlier chapter, shareholders are the legal owners of companies. In
very small businesses, such as family businesses, the shareholders will also take part in the
day to day management of the company. However, once businesses grow, shareholders
appoint directors and managers to run their company.
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Shareholders (also known as members) are the principals and directors are the agents of the
shareholders. Agents should act in the best interests of the principals so therefore, directors
should act in the best interest of shareholders. However, this can introduce conflicts of
interest between the two parties. Shareholders want large profits but the directors might
want large salaries, generous pensions and bonuses, first class travel and expensive cars.
Companies are required to produce annual financial statements (accounts) for presentation
to their shareholders. These should show how their company has got on during the year. The
directors are responsible for producing the financial accounts and there is obviously a
temptation for them not to report results accurately or fairly. For example, directors might try
to overstate profits so as to keep their jobs or to qualify for bonuses.
Therefore, independent, external auditors are appointed by the members of the company to
scrutinise objectively the financial statements and to report to the members on whether no
the financial statements show a ‘true and fair’ view of the company’s affairs and its results.
Auditors’ conclusions are published as part of the financial statements in the audit report. The
auditors are therefore carrying out an assurance engagement.
In addition to the terms ‘agent’ and ‘principal’, ‘stewardship’ is sometimes used to describe
the duty that directors have to look after the interests of the shareholders.
3 What the external auditors do

3.1 Financial statements
The auditors are required to produce an audit report on a company’s financial statements.
These will have been produced from the financial records. Financial statements consist of:
๏ A statement of financial position
๏ A statement of profit or loss
๏ A statement of cash flows
๏ Notes to the financial statements
๏ A statement of movement in reserves
The audit report covers only the financial statements, not the other documents that might be
included. For example, companies also produce directors’ reports, chairman’s statements and
often graphs, forecasts and public relations material and combine these with the financial
statements and audit report into their annual report. For large companies this is often a
glossy booklet designed to impress shareholders and potential investors.
However, the audit report covers only the financial statements, not the other documents that
might be included.
3.2 The audit report
The prime purpose of the audit report is to state whether or not the financial statements give
a true and fair view of the financial position of the company at its year end and of its
performance during the year. Sometimes a phrase such as ‘present fairly’ is used instead of
‘true and fair’
True: implies that the financial statements are factually correct, have been prepared
according to an applicable reporting framework (such as the International Financial
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Reporting Standards) and that they do not contain any material misstatements that may
mislead the users. Misstatements may result from material errors or omissions in the financial
statements. True also implies that the financial statements are materially accurate.
Fair: implies that the financial statements present the information faithfully without any
element of bias and they reflect the economic substance of transactions rather than just their
legal form. Presentation is an important element of fairness.
For example:
The statement of financial position should show current assets and current liabilities
separately and in detail. Thus, the current assets and current liabilities figures might show:
Current assets
Inventory 10,000
Receivables 4,000
Cash 2,000
16,000
Current liabilities
Trade payables 12,000
This shows that the liquidity of the company is poor as suppliers expect $12,000 within the
next few weeks but, although inventory is high, there is not much coming from customers or
in cash with which to pay suppliers. Inventory can take a long time to be sold and to turn into
cash.
If the presentation were as follows:
Current assets 16,000
Current liabilities 12,000
Then users might have a very wrong impression about liquidity. The current ratio is 16/12 =
1.3 and usually anything >1 is regarded as probably satisfactory. The amounts are true
(correct), but concealing the large amount of inventory that contributes to the current assets
is likely to mislead ie not a fair presentation.
3.3 Modified audit opinions
If the auditors cannot say that the financial statements show a true and fair view, then they
will issue a modified audit opinion explaining what the problem is.
Problems with the financial statements can arise for two reasons:
๏ There is a material misstatement in the financial statements. This means that a figure is
materially wrong or has been incorrectly presented or disclosed.
๏ The auditors have been unable to obtain sufficient appropriate audit evidence to
support a conclusion that the financial statements show a true and fair view.
These problems give rise to three types of modified opinion:
๏ Qualified: where the misstatement or lack of evidence is material, but can be isolated.
These reports usually include the phrase ‘except for [...details of the problem...] the
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financial statements show a true and fair view’.

๏ Adverse: where the audit report would say that because the misstatements are so
severe (pervasive) the financial statements do NOT show a true and fair view.
๏ Disclaimer: where the auditor would say that because the lack of evidence so severe
(pervasive) they can form no opinion on the financial statements.
4 What auditors don’t do

Auditors do not:
๏ Prepare the financial statements: that is the job of the directors and their staff.
๏ Double check every transaction in the company: that would take too long and be very
expensive. Auditing is carried out on a test basis, often testing internal control system
that has been set up in the company to assess if that system should prevent or detect
fraud or error. (Internal control is further explained in Chapter 8)
๏ Manage the company.
๏ Warn shareholders that the company has made a loss: that will be shown in the financial
statements.
๏ Undertake to discover every fraud or error that might have taken place in the company:
auditors look only for material misstatements.
๏ Auditors do not provide guarantees that the financial statement are free of material
fraud and error: transactions are examined on a test basis and so there is always the risk
that, even in a properly conducted audit, an error or fraud is undiscovered.
5 Advantages and disadvantages of an external audit

5.1 Advantages
๏ Independent scrutiny and a report on the financial statements.
๏ Greater credibility (believability) of the financial statements. This could help in raising
finance.
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๏ Professional expertise applied to the financial statements. Especially important when

directors and shareholders might not have financial experience.
๏ Review of the company’s internal control system (the accounting system used by the
company) and recommendations for improvement
5.2 Disadvantages
๏ Cost: auditors charge for their work
๏ Time and disruption. Auditors have to ask employees questions and have to find
documents. This distracts employees form their day-to-day tasks.
๏ A feeling of not being trusted. Auditors are always looking for independent evidence
and are reluctant to take employees’ word for anything. This can make staff feel that
they are not trusted.
6 Internal audit
6.1 Definition
An internal audit is:

‘An independent appraisal activity established within an organisation as a service to it. It is a
control which functions by examining and evaluating the adequacy and effectiveness of
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other controls; a management tool which analyses the effectiveness of all parts of an entity’s
operations and management.’
(CIMA’s Management Accounting Official Terminology)
6.2 Who are the internal auditors.

๏ Usually the internal auditors are employees of the company, through it is possible to
sub-contract the function to an outside company.
๏ Ultimately, they report to the board, but often through the audit committee.
๏ Their main functions are to ensure that the company’s system of internal control
adequate and is working correctly.
๏ Although often concentrating on the operation of financial controls and the accuracy of
accounting records, they can also be given the task at looking at other areas of the
business, such as how staff are recruited to ensure that the procedures represent best
practice and comply with the law.
6.3 Internal audit – types of assignment

๏ Transactions audit: tracing transactions through the system, often from start to finish, to
see if they are treated correctly. The ability to trace transactions backwards and
forwards means that there has to be a complete audit trail.
๏ Systems audit: an information technology or information systems audit is an
examination of the management controls within an information technology (IT)
infrastructure.
๏ Risk-based audits: an internal audit which is primarily focused on the inherent risk
involved in the activities or system and provides assurance that risk is being managed
by the organisation to the defined risk appetite level.
๏ Accounting systems audit: ensuring, for example, that the proper accounting controls
are being applied consistently.
๏ Operational audits: a systematic review of effectiveness, efficiency and economy of
operation. For example, examining how customer complaints are dealt with.
๏ Value for money and best value. Usually associated with public or non-profit
organisations. Its purpose is to assess the effectiveness and efficiency of its use of public
funds. For a given amount of expenditure, what services are delivered? Are these above
or below what might be reasonably expected.?
๏ Management audits: analysis and assessment of competencies, abilities and capabilities
of a company's management in order to evaluate their effectiveness, especially with
regard to the strategic objectives and the implementation of the policies of the
business.
๏ Social and environmental audits: A social and environmental audit looks at factors such
as a company's record of charitable giving, volunteer activity, energy use, recycling
waste, diversity in recruitment, non-discrimination in appointments, the standard of the
work environment, workers’ remuneration to evaluate the social and environmental
impact the company is having.
๏ Special assignments such as investigating a case of fraud
๏ Assisting the external auditors.
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7 Comparison of internal and external audit

Internal audit External audit
Reports to Management – must have a Shareholders

clear route to the board though
day-to-day reporting to the
audit committee.
Appointed by Management Shareholders
Power from Management Statute – allows external

auditors to insist on seeing all
documents and to be given full
explanations.
Employed by Company (unless outsourced) External firm
Coverage All categories of risk and Financial statements: true and

investigation fair view
Responsibility for A major function of internal Will report to management on

improving the audit internal control weaknesses
organisation
Tests
Question 1
Which of the following are NOT part of a company’s financial statements that are
audited? (Select at that are relevant)
A Statement of financial position
B Director’s report
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C Notes to the financial statements

D A statement of cash flows
E Chairman’s statement
Question 2
What phrase is used in the audit report to describe the financial statements if the
auditors find they are ‘OK’?
Question 3
What are the three types of modified audit opinion?
Question 4
Complete the following table by choosing whether the description related to external
or internal auditors
Reports to shareholders
Appointed by management
Power from statute

Covers all categories of risk
and investigation
Question 5
Which of the following statement are true in relation to external audits and external
auditors? (Choose all that all apply).
A An unmodified audit opinion means that the company is a safe investment
B Auditors should find all errors and frauds
C Auditors check transactions on a test basis
D Prepare the financial statements
E The auditors often rely on testing the internal control system
Chapter 6
ERROR AND FRAUD
1 Introduction
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All organisations keep financial records for both control, planning and performance
measurement.
If errors occur in recording, using or presenting information, the organisation is likely to be
harmed and it is therefore important to try to prevent, detect and correct errors.
Fraud implies the deliberate theft of assets, under-statement of liabilities or over-statement of
results. It can cause harm to the organisation and can mislead shareholders and other
stakeholders
2 Errors
Errors can be categorised as follows:
Type of error Examples
Error of 1. An invoice arrives from a supplier, but gets mislaid. There is no

omission entry of any sort into the records.
2. A receipt of cash is debited to the cash book, but not credited to
sales.
3. An employee does not submit a time sheet, so no wages are paid
and no record is made of how time should be charged to projects
or clients.
Errors of 1. An invoice for rent is debited to the repairs account.

commission 2. An invoice is entered twice.
3. A receipt from a customer is credited against the wrong
receivables account.
4. An account is added up and balanced off at $100 too much.
Errors of original 1. A receipt of $341 from a customer is both debited to cash and
entry credited to the customer as $431.
[Right accounts, wrong amounts.]
Errors of 1. An invoice for rent is debited to non-current assets.

principle 2. A receipt from a customer for a credit sale is debited to cash and
credited to sales.
[Principle = a posting to the completely wrong type of account.]
Compensating 1. The rent account is added up as $1,000 too much and the wages
errors account is added up as $1,000 too little.
[Two errors cancel each other out.]
Some errors will not cause the trial balance not to balance. For example, errors 1, 3, 4, 5, 6, 8,
9, 10 and 11 will NOT cause a trial balance to be out because the double entry is complete
even if wrong.
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Errors that cause a trial balance to be out of balance are:

๏ One-sided errors (as in 2 and 7)
๏ Incorrect extraction of the trial balance (eg failing to include an account)
3 Fraud
Fraud can be defined as:
an intentional act involving deception to gain unjust or illegal advantage.
Fraud can happen at two levels:
๏ Fraudulent financial reporting. For example, deliberate incorrect accounting by
management to boost profits. This might be done to raise the value of the company,
perhaps with the aim of getting a high buy-out offer. Or it might be that directors’
bonuses are linked to profits and they report fraudulently high profits to obtain higher
bonuses.
๏ Misappropriation of assets. For example, the theft of cash, inventory or non-current
assets.
4 Pre-requisites for fraud

Fraud requires: incentive, opportunity and attitude:
Risk factors Fraudulent financial Misappropriation of assets

reporting
Incentive/motive • Profitability threatened, • Personal financial pressure
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so directors ‘boost’ results • Dislike of employer

• Pressure to perform • Greed
• Incentives eg bonus
linked to profit
Opportunity • Many estimates • Cash
• Complex transactions • High value portable stock
• Dominant chief executive • Poor IT systems
who bullies staff to • Poor internal controls
change amounts
• Poor internal controls
Attitude/ • Poor ethical guidance • Other people’s behaviour eg
dishonesty • Dishonesty ‘everyone over-claims
• Aggressive targets expenses’
• Poor morale • Dislike of employer
• Dishonesty
We have probably all been under financial pressure and have had the opportunity to steal
goods or money from our employer. But most of us don’t because we do not possess the final
condition necessary to go through with it because we are not dishonest.
5 Internal control and its role in preventing and detecting

fraud end errors
A good internal control system is essential to preventing and detecting fraud and error.
Internal control can be defined as:
‘The management system of controls, financial and otherwise, established in order to

provide reasonable assurance of:
(a) effective and efficient operation
(b) internal financial control
(c) compliance with laws and regulations.
Good internal control systems should make accounting records more reliable and
the occurrence of fraud and error more difficult.’
CIMA Official Terminology, 2005
The elements of an internal control system are:
๏ Control environment: The culture of the organisation as determined by top

management. Are they concerned about internal control or do they find it a nuisance?
Are they proud of the company’s records or are they sloppy?
๏ Risk assessment: What could go wrong? Where are we vulnerable? High risk implies
more controls are needed.
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๏ Control procedures/activities: Detailed controls that are put in place (see later).
๏ Information and communication: Keeping an eye on results and reports to spot when
something looks wrong.
๏ Monitoring: Is the system still effective? Are people operating it as they should?
The internal control system will be fully documented so that employees know how to handle
transactions, receive authorisation, safeguard assets etc. New employees should be trained in
areas of the internal control system that are relevant to them.
6 Control procedures and activities

These are the procedures and measures that make up the internal control system.
๏ Segregation of duties: split up transactions so that no one person controls all of it.
Having several people involved (eg one to order goods, one to count them when
received, one to post the invoice and finally one to pay the supplier) increases the
chance of errors being found and also make fraud more difficult because employees
would need to collude – and that increases their risk of being found out.
๏ Physical: lock-up valuable assets. Keep valuable inventory in secure stores; bank cash
every night. Carry out spot checks on cash and inventory levels. Ensure all non-current
assets can be accounted for.
๏ Authorisation and approval: For example, all overtime should be authorised by an
employee’s manager; all purchasing over, say, $500 needs two authorisations. It is
common to have different authorisation limits for different management levels.
๏ Management and supervision: Managers and supervisors should manage and
supervise what employees are doing. Are they coming into work late? Do they seem to
be taking shortcuts when carrying out internal control procedures?
๏ Organisation: Ensure that duties and reporting lines are clearly defined and that
everyone knows their function and responsibilities.
๏ Arithmetic and accounting: Calculations should be independently checked.
Reconciliations (eg between balances on suppliers’ account and suppliers’ statements)
should be regularly carried out.
๏ Personnel: Recruit people of the right quality and provide training as needed.
7 Protection against fraud

The approach to the risk of fraud should include:
๏ Prevention
๏ Detection
๏ Response
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Internal control systems as set out above should go a long way towards the prevention and
detection of fraud. Internal audit also has an important part to pay as much of their time is
spent evaluating and testing the operation of internal control, carrying out spot checks and
so on.
However, there is a third weapon that is available: the response of the company to fraud
when it is discovered.
The response will include establishing:
๏ How much has the fraud amounted to?
๏ Over what period was it perpetrated?
๏ How was it perpetrated?
๏ Who were the perpetrators?
๏ Who suffered losses?
๏ How can it be prevented in the future?
In addition, the company has to decide what do to with the perpetrators. Presumably they
will be dismissed. But often companies will not report the fraud to the police because this can
bring unwelcome publicity and is an admission of failings in the company’s systems.
However, a declaration that all incidents of fraud will initiate a criminal investigation by the
police can be a powerful method of preventing fraud. If potential fraudsters know that they
might face a jail sentence they will be substantially deterred from committing the fraud in the
first place.
Tests
Question 1
What are the two levels at which fraud can occur?
Question 2
What are the three requisites for fraud?
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Question 3
What are the three approaches to fraud management?
Question 4
Complete the following table by choosing the category that best describes the error
and indicate if the error will cause the trial balance not to balance:
Error of Error of Error of Trial balance

omission commission principal out of balance
An invoice from a
customer gets lost in
the post
An invoice from a
customer for $541 is
entered into the
bookkeeping system
as $451
Repairs of $1,200 are

debited to the cost of
non-current assets
instead of the repairs
account
A purchase of $240 is
entered as:
Dr Purchases 240
Dr VAT 40
CR Supplier 240
Question 5
What are the seven categories of internal control procedure that were described?
Chapter 7
CORPORATE SOCIAL RESPONSIBILITY
1 Introduction
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The function of businesses is to yield adequate returns to owners and providers of capital by
identifying and investing in promising projects. In addition to rewarding the suppliers of
capital, the projects will provide jobs and produce goods (or deliver services) that customers
want. Successful businesses will therefore cause economic prosperity – itself a virtue.
When carrying out their activities businesses, of course, must comply with the law (eg the
laws to restrict and manage pollution, or laws relating to health and safety in factories) but
corporate social responsibility (CSR) refers to going beyond what is required by the law.
Increasingly, society expects companies to assess and take responsibility for the company’s
effect on the environment and society, even if not defined by law and regulation.
CSR involves acting as a good corporate citizen, satisfying the needs of many stakeholders,
and reducing adverse effects caused by the organisation’s activities.
One definition of CSR is
‘the continuing commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as well as
of the local community and society at large’.
Some companies might perceive CSR as an ethical virtue; others might see it as simply being
good for business.
2 OECD general policies

The Organisation of Economic Cooperation and Development (OECD) has issues general
policies with respect to CSR:
Enterprises should:
1. Contribute to economic, environmental and social progress with a view to achieving
sustainable development.
2. Respect the internationally recognised human rights of those affected by their activities.
3. Encourage local capacity building through close co-operation with the local community
… consistent with the need for sound commercial practice.
4. Encourage human capital formation, in particular by creating employment

opportunities and facilitating training opportunities for employees.
5. Refrain from seeking or accepting exemptions not contemplated in the statutory or
regulatory framework related to human rights, environmental, health, safety, labour,
taxation, financial incentives, or other issues.
6. Support and uphold good corporate governance principles …
7. Develop and apply effective self-regulatory practices and management systems that
foster a relationship of confidence and mutual trust between enterprises and the
societies in which they operate.
8. Promote awareness of and compliance by workers employed by multinational
enterprises with respect to company policies …
9 Refrain from discriminatory or disciplinary action against workers who make bona fide
reports to management or, as appropriate, to the competent public authorities, on
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practices that contravene the law, the Guidelines or the enterprise’s policies.
10. Carry out risk-based due diligence…to identify, prevent and mitigate actual and
potential adverse impacts …
11. Avoid causing or contributing to adverse impacts …and address such impacts when
they occur.
12. Seek to prevent or mitigate an adverse impact where they have not contributed to that
impact, when the impact is nevertheless directly linked to their operations, products or
services by a business relationship.
13. Encourage, where practicable, business partners, including suppliers and sub-
contractors, to apply principles of responsible business conduct…
14. Engage with relevant stakeholders in order to provide meaningful opportunities for
their views to be taken into account in relation to planning and decision making for
projects or other activities that may significantly impact local communities.
15. Abstain from any improper involvement in local political activities.
The OECD policies, above, can be applied to the following areas:
๏ Human rights
๏ Employment and industrial relations
๏ Environment
๏ Combating bribery, bribe solicitation and extortion
๏ Consumer interests
๏ Science and technology
๏ Competition
๏ Taxation
3 The demands of multiple stakeholders

One of the major problems that arises from trying to implement CSR in an organisation is how
to balance the competing demands of stakeholders. In most countries, as a matter of law, it is
a responsibility of the directors to maximise shareholder wealth. However, if the company
decides to go further than required by the law in reducing pollution of increasing workers’
pay, then profits and shareholder wealth will be adversely affected. How should the
requirements of these stakeholders (employees, the local people and shareholders) be
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reconciled? The following matters have to be addressed

๏ What legal right have directors to decide that a company should suddenly start
spending shareholders’ money lavishly on CSR projects picked by the directors?
๏ How do directors decide on which CSR projects money should be spent? Are they
simply spending money on areas that are of interest to them (and their spouses)?
๏ Companies spending generously on CSR reduce their profits and reduce the
government’s tax income. Perhaps the government is better placed to legislate and to
spend money on society. Governments are elected by all the people and can allocate
money more logically across many requirements.
๏ If shareholders really want to contribute more, they can make personal charitable
donations to wherever they please out of their dividends.
4 CSR and the supply chain

As corporate social responsibility become more important to investors and other
stakeholders, businesses have realised that their supply chain and its management are areas
where they are vulnerable. Many companies are now multi-national and may off-shore
production or import materials and components from abroad. The public is becoming
increasingly concerned with the policies and ethics being applied by overseas manufacturers
and suppliers as they believe that the final product they buy might be tainted by poor
practices further down the supply chain.
Examples include:
๏ Rana Plaza, Bangladesh: known structural faults caused a garment manufacturing
factory to collapse killing around 1130 workers. The factory supplied garments to retail
chains such as Primark, Benetton and Walmart.
๏ Foxconn: This company, based in China, assembles iPhones for Apple and has been the
subject of fierce criticism over working conditions.
๏ Nike: In the 1990s Nike insisted that labour conditions in its overseas contractors’
factories were not its responsibility and that Nike could not be held responsible for the
action of sub-contractors. Nike’s sub-contractors came under attack for their workplace
practices, including the use of child labourers. Nike’s reputation was damaged, the
company suffered a backlash from incensed students, and the company saw its profits
fall. The CEO of Nike took action and began to monitor local factories and to help them
to implement workplace and human resource best practices.
Examples of areas where CSR is relevant to supply chains are:

๏ Environmental Responsibility
Companies need to monitor the environmental impact of suppliers (such as pollution,
biodiversity, use of energy, and develop a purchasing policy that aims to reduce the
environmental impact of their suppliers’ activities, goods and services (‘green buying’).
๏ Human Rights
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Human rights in the supply chain, includes issues, such as: slavery, bonded, labour, child
labour, freedom of association, working conditions and wages, exploitation and non-
discrimination.
๏ Sustainability
Sustainability in a supply chain means operating now in ways that will not put at risk the
well-being of future generations. A good example can be seen in the manufacture of
wooden furniture where it is often stated that the wood has been obtained from
sustainable sources Suppliers are not simply chopping down hardwood trees in the
jungle. Trees are replaced and the supply of wood is (allegedly) managed so as not to
cause irreparable damage to ecosystems.
๏ Diversity
Supplier diversity actually refers to initiatives that aim to increase the number of
suppliers under diverse control (eg. ethnic-minority owned or women-owned). By
increasing the diversity of suppliers, buyers obtain access to a wide range of people
with talent which enables them to create valued products and services.
5 Reporting corporate social responsibility

5.1 The triple bottom line (Elkington, 1994)
A commitment to corporate social responsibility implies a commitment to reporting about a

business' impact for good on the environment and people, as well as its financial results. The
triple bottom line is one framework for reports which include CSR impacts.
It has three sections:
๏ Financial: traditional accounting measures, such as profit.
๏ Social: the effect of business practices relating to labour and the community.
๏ Environmental: the effect of business practices on sustainability and the beneficial or
harmful effects on the environment.
(These are sometimes referred to as profit, people, planet).
Triple bottom line reporting should encourage businesses to think beyond narrow measures
of performance, such as profit. Stakeholders might support a reduction in profits if these were
balanced by improvements in environmental and social measures.
However, there are some potential problems with the approach:
๏ It is not very useful as an overall measure of business performance: quite how to you
balance or compare the results from the three parts?
๏ How should environmental and people elements be measured?
๏ There is no legal requirement to report in this format nor any standardisation that
allows companies to be compared.
5.2 The Global Reporting Initiative
https://www.globalreporting.org/information/about-gri/Pages/default.aspx
GRI is an international independent organisation that helps businesses, governments and
other organisations understand and communicate the impact of business on critical
sustainability issues such as climate change, human rights, corruption and many others.
GRI issues reporting standards grouped like the triple bottom line approach, into
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environmental, social and economic standards. For example:

๏ Environmental standards: includes standards for materials, energy, water, biodiversity,
emissions.
The water standard, for example requires disclosures about:
‣ Water withdrawal by source.
‣ Water sources significantly affected by withdrawal of water.
‣ Water recycled and reused.
๏ Social standards: include standards for employment, occupational health and safety,
rights of indigenous people.
The occupational health and safety standard, for example, requires disclosures about:
‣ Workers representation in formal joint management–worker health and safety
committees.
‣ Types of injury and rates of injury, occupational diseases, lost days, and
absenteeism, and number of work-related fatalities.
‣ Workers with high incidence or high risk of diseases related to their occupation.
‣ Health and safety topics covered in formal agreements with trade unions.
๏ Economic standards: includes standards on anti-corruption, anti-competitive
behaviour
The anti-corruption standard, for example, requires disclosures about:
‣ Operations assessed for risks related to corruption.
‣ Communication and training about anti-corruption policies and procedures.
‣ Confirmed incidents of corruption and actions taken.
6 CSR and brand management

There are obvious dangers to brand strengths that can arise from poor CSR policies and
management, whether within the organisation itself or in the wider supply chain (as seen in
the Nike example above). However, there can also be marketing opportunities arising from
successful CSR policies and many companies now advertise their ambition to become carbon
neutral or to recycle a high percentage of materials.
See:
http://www.benjerry.com/whats-new/2014/corporate-social-responsibility-history
http://corporate.marksandspencer.com/blog/stories/the-business-of-reducing-emissions
http://cr.hiltonworldwide.com/environments/
Tests
Question 1
Is the following statement true or false?
If a company buys from an independent supplier, then the company has no responsibility for
how the supplier operates.
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Question 2
What are the three elements of the ‘triple bottom line’?
Question 3
What does the global reporting initiative attempt to do?
Question 4
“CSR simply means being a good corporate citizen by obeying the laws with respect to the
environment, consumers, and employees.”
Question 5
“Directors have a legal duty to support CSR”
Chapter 8
CONTRACT LAW
1 What is a contract?
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Definition:
A contract is an agreement, supported by consideration, made with intention to create legal
relations.
The essential elements within this definition are:
๏ Agreement. This requires:
‣ An offer
‣ Acceptance of the offer
๏ Consideration (something of value exchanged or promised)
๏ Intention to create legal relations (not just an informal arrangement)
Capacity is also needed, meaning that the parties to the contract must have the mental
capacity to enter into a legal agreement. This means that the parties must be:
๏ Over 18 (in the UK), unless the contract is for necessities.
๏ Of sound mind (including not being under the influence of alcohol or drugs).
2 Offers
2.1 What is an offer?
An offer is made by the offeror, who will be bound by that offer if it accepted by the offeree.
Offers can be:
๏ Expressed, such as if you said to someone “I will sell you this car for $6,000.”
or
๏ Implied, such as bidding at an auction, or taking an item to a shop check-out and
allowing it to be scanned and charged to your account.
๏ Made to specific individuals (and only they can accept it)

or
๏ Made to the world at large (such as offering a reward for finding a lost item).
Note: English law, which is used as the basis for law in this paper, is often based on legal cases
which form precedents ie legal examples that are followed by judges in subsequent cases. We
illustrate the cases here to give examples of the rules, and to add some interest, but you do not
have to remember the details of the cases.
Case: Carlill v Carbolic Smoke Ball Co (1893)
The company advertised a flu remedy, the Carbolic Smoke Ball, and said that they would give
compensation if any customer caught flu despite using it.
Miss Carlill bought the product, caught flu and claimed her compensation. The manufacturers
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claimed that there was no contract because the offer had been made to the world.
Held: there was an offer that Miss Carlill had accepted by using the ball. The compensation
was payable.
2.2 Invitations to treat
An offer must be distinguished from an invitation to treat. This is where one party makes it
known that they are ready to receive an offer. For example, products on supermarket shelves
with prices attached do not constitute offers: these are invitations to you to offer to buy the
articles by placing them in your basket and proceeding to the checkout. Similarly, sales
adverts in catalogues, newspapers and on the Internet are not offers: they are invitations to
treat.
Case: Partridge v Crittenden (1968)
Partridge advertised the sale of wild birds. He was charged with offering birds for sale
contrary to a law protecting certain species.
Held: It was held that he was not offering birds for sale but had made an invitation to treat:
buyers would offer to buy them. He was not guilty of the alleged offence.
2.3 Termination of offers
Offers can be terminated by:

๏ Acceptance. Once an offer has been accepted by one person it is not then available to
be accepted by another. Acceptance means that agreement has been reached.
๏ Rejection. Express rejection will terminate the offer but also any attempt to negotiate or
making a counter offer is also rejection. Note that simply asking for more information
does not count as rejection.
๏ Revocation (withdrawal) of the offer before it is accepted.
๏ Lapse. For example, the offeror had stipulated that the offer will lapse in five days if
acceptance has not been received.
๏ Death of the offeror where the offer was for personal services ie only the offeror could
carry out the contract.
๏ Failure of a condition that attached to the offer. For example, an offer to sell an item on
credit subject to satisfactory credit references.
Case: Hyde v Wrench (1840)
Hyde offered to sell his farm for £1,000. Wrench made a counter offer for £950, which Hyde
refused. Wrench then said that he would accept the £1,000 offer after all, but Hyde then
refused to sell.
Held: Hyde was entitled to refuse to sell because his offer had been terminated by the
counter-offer.
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Case: Byrne v Van Tienhoven & Co (1880)
On 1 October Van Tienhoven & Co posted a letter to Byrne & Co offering to sell a product.
Byrne and Co got the letter on 11 October and telegraphed acceptance immediately.
However, on 8 October Van Tienhoven & Co had sent another letter withdrawing their offer,
and so they refused to go through with the sale.
Held: It was held that the withdrawal of an offer is not effective until it had been successfully
communicated to the offeree. Acceptance by the offeree before they receive notice of the
revocation will be considered a valid acceptance
Note that is can be difficult to revoke an offer if it had been made to the whole world. Such
contracts are called unilateral contracts. The difficulty is in ensuring that everyone who saw
the offer also sees the revocation and also that they have not begun to carry out what was
required – which would imply acceptance of the offer. For example, someone offers a reward
for finding a lost pet, but a week later decides to withdraw that offer. In the meantime,
someone has begun looking for the pet and finds it (after the attempted withdrawal) then
claims the reward. The offer of the reward cannot be revoked with respect to the person who
finds the pet.
3 Acceptance
3.1 What is acceptance?
Acceptance must be unqualified and unconditional, otherwise it will constitute a counter-

offer that will terminate the original offer.
Acceptance can be given in writing or orally or be construed by conduct, but silence cannot
constitute acceptance. The offeree has to do something to indicate acceptance. So, if you are
sent an unsolicited item through the post you cannot be forced to pay for it if you ignore it
even if you are told that, unless the seller hears otherwise, you are deemed to have accepted
it.
3.2 Communication of acceptance
The offeree must communicate acceptance to the offeror either personally or by an

authorised third party. There can be complications as to when acceptance is actually received.
๏ The postal rule: if acceptance is posted, acceptance occurs when the acceptance letter
is posted. Note that if an offer is posted, it ‘occurs’ when the letter is received by the
offeree. When a revocation is posted it ‘occurs’ when received by the offeree, provided
that is before acceptance has taken place.
๏ Telephone/fax: In general, instantaneous communication mechanisms mean that
acceptance is made when the message is received. However, if a fax had been received
or telephone message recorded outside business hours then acceptance would not be
effective until the business opened.
๏ Emails: Probably still developing, but it seems that acceptance is communicated when
received by the offeror’s email system
Case: Household Fire Insurance Co v Grant (1879)
Grant applied for shares and the letter accepting his application was posted. However, the
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letter was lost in the post. Later Grant was required to pay for the shares.
Held: It was held that the contract to buy shares was formed when the acceptance letter had
been posted.
Case: Felthouse v Bindley (1862)
A man offered to buy a horse, saying to the seller that if he heard nothing by the weekend he
would consider the horse his. The horse was, however, sold instead at an auction and the
auctioneer was accused of selling a horse that had been already sold to someone else.
Held: There was no contract as the contract had not been accepted. Silence is not
acceptance.
4 Consideration
4.1 What is consideration?
Offer and acceptance are not enough to form a contract: consideration is also needed. This
means that both sides of the contract must give or do something for the other side (or
promise to do so). The exchange of considerations could be:
๏ Money for goods
๏ Goods for goods
๏ Money for a service
๏ Money to escape an obligation etc
If the consideration is given at the time the contract is made (eg buying goods in a shop) it is
known as executed consideration. If the consideration is the promise to do something in the
future (eg agreeing to work for someone for a salary, starting in a month) it is known
executory consideration. For consideration to be valid it has to comply with a number of rules
set out below.
4.2 Consideration must not be in the past
Past consideration refers to value that was promised before the contract was negotiated. So,
if you tidy an elderly neighbour’s garden and she then promises that she will then pay you
$20, the payment cannot be enforced because tidying the garden was not dependent on
receiving $20. The tidying is on the past.
Case: Re McArdle (1951)
A man moved into his deceased father’s house temporarily and repairs costing £488 were
carried out. The man and his brothers and sisters were to inherit the house equally, so the
brothers and sisters signed a document promising to reimburse £488 when the house was
sold. However, no payment was made.
Held: The repairs had been done before any agreement to share costs so there was no
enforceable contract.
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4.3 Consideration must move between the parties to the contract
An action to enforce a contract or to claim damages can only be enforced by someone who
has given consideration.
Case: Tweddle v Atkinson (1861)
A couple were getting married. The two fathers each pay the couple a sum of money. Both
fathers died and the bride’s father had not paid the amount promised. The groom claimed
against the estate of the bride’s father.
Held: The claim failed because the groom was not party to the agreement and had given no
consideration: the agreement had been between the two fathers.
4.4 Consideration must be sufficient but need not be adequate
This means that the consideration given must have some value (sufficient) but does not need
to match or be even close to the value being received (does no need to be adequate).
Case: Chappell and Co Ltd v Nestle and Co Ltd (1859)
Nestle ran a promotion in which customers could send in three chocolate bar wrappers and a
small amount of money and receive a vinyl record in exchange. For complicated copyright
reasons it had to be decided whether or not the wrappers formed part of the consideration –
even though thrown away by Nestle.
Held: It was held by the court that the wrappers were part of the consideration The wrappers
had some value to Nestle because insisting that customers enclosed them would mean that
sales would be boosted.
4.5 Carrying out a contractual or statutory duty is not consideration
Case: Collins v Godefroy (1831)
Collins was required by law to appear in court as an expert witness in a case involving
Godefroy who promised to pay Collins a sum of money for his time.
Godefroy then failed to pay.
Held: Collins had no claim. He had a legal duty to attend court so had done nothing else for
the payment promised.
4.6 Consideration cannot be illegal
Illegal consideration is an act or a promise which is considered to be against the public

interest or contrary to law.
Case: Foster v Driscoll (1929)
Foster agreed to smuggle whisky into the USA during prohibition. Payment was not made.
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Held: Court the court would not enforce the contract because the consideration (ie arranging
to smuggle) was illegal.
4.7 Speciality contracts
Sometimes consideration is not needed in the formation of a valid contract. These contracts
are known as ‘speciality’ or ‘deed’ contracts, and they are made under seal. Promises under
seal are called ‘covenants’ and are enforceable even though consideration was not given.
For example, a grandparent could promise to fund a grandchild at university. This would be
unenforceable unless the promise is given in a deed, which is a formal document that
requires signatures and witnesses.
5 Intention to enter into legal relations

For a contract to be valid there must have been an intention to enter into legal relations.
Not every agreement leads to a contract which can be enforced through the courts. For
example, you might have an agreement to meet a friend at a in a restaurant. It would be good
manners to do so but your agreement would not create a legal duty to do so. This is much
more in the nature of a social and domestic agreement and that is understood on both sides.
Contract law is primarily to do with commerce and business.
Also, if the parties can enter into an agreement marked as ‘subject to contract’ this will not be
enforceable until a formal contract is executed.
Case: Simpkins v Pays (1955)
Three women lived in the same house and regularly entered a newspaper competition,
which required the listing of eight items in order of merit. Each woman made a list, and the
three entries were submitted on one form. There was no fixed arrangement about paying
the entry fee and posting the form but the form was submitted in the defendant’s name.
One of the lines won £750, which was paid to the defendant and the plaintiff sued to
recover a third share of this.
Held: The judge held that there was evidence of an agreement to share the winnings, and
that this was intended to be legally binding.
6 Terms, warranties and conditions

6.1 What is a term?
A term is any provision that is part of a contract. Terms specify the details about what each
party has promised to do. Most terms are expressly agreed between the parties but there can
also be implied terms.
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Terms divide into:

๏ Conditions
๏ Warranties
6.2 Conditions compared to warranties
A condition is vital to a contract and if breached will give the innocent party the right to
repudiate (terminate) the contract and to claim damages.
A warranty is less fundamental than a term. The breach of a warranty will not cause the
contract to end, but can give rise to damages.
The distinction can be a fine one as these two cases show (same year, both opera related!):
Case: Poussard v Spiers (1876)
Mme Poussard was an opera singer who contracted to perform for three months. Because
of illness she missed the opening night and the next three. Spiers replaced her with another
singer and claimed that the contract with Poussard had ended.
Held: Madame Poussard was in breach of condition because she missed the opening night
which was the most important performance because reviews of the production would be
based on this night. Spiers were entitled to end to contract.
Case: Bettini v Gye (1876)
Bettini was an opera singer who contracted to perform for three months. Because of illness
he missed a number of days of rehearsals and Gye replaced him.
Held: Missing several days of rehearsals was not vital to the contract so Bettini was in
breach of a warranty only. Gye was not entitled to end the contract.
6.3 Implied terms
As mentioned above most terms will be expressly negotiated by the parties to the contract,
but some terms are implied by custom, fact or law.
๏ Custom. For example:
Case: Hutton v Warren (1836)

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The claimant, a tenant farmer had planted seeds, but before the harvest the tenancy was
terminated. The tenant billed the landlord for the costs of seeds and the value of the labour.
The landlord refused to pay claiming that there were no terms in the contract that covered
this payment.
Held: The tenant was entitled to payment because that was the customary procedure in
tenancy terminations.
๏ Fact.
Terms implied as fact are based on the assumed intention of the parties and it is
assumed that these terms would have been included had the parties thought about it
at the time.
Case: The Moorcock (1889)
A ship was moored at the defendant's wharf. When the tide went out the ship became
damaged by rocks. The claimant claimed damages from the defendant but the defendant
argued that there was no term in the contract about the condition of the river bed.
Held: The court implied a term in fact, that the river bed would be safe for mooring: it made
no sense to have the contract without such a term.
๏ Law.
For example, the law gives protection to consumers against retailers and tenants
against landlords.
7 Misrepresentation
7.1 What is a misrepresentation?
A misrepresentation is a false statement of fact or law which induces one party to enter into a
contract.
Note the requirements. The statement must be:
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๏ False.
๏ Relating to fact or law.
๏ Induces one party to enter a contract.
There are three types of misrepresentation:
๏ Innocent.
๏ Negligent.
๏ Fraudulent.
Contracts based on misrepresentations are voidable, if wished, by the innocent party –
meaning that the parties are returned to their original positions.
7.2 Fact or law
There has to be a false statement about a fact or law; a statement about future intentions is
no a misrepresentation unless there had been no intention of carrying out the action. A
statement of opinion will not be a misrepresentation unless the utterer knew the facts and
‘opinion’ was an attempt at cover-up. Silence will not generally amount to a
misrepresentation but smiles and gestures can do.
However, there are some contracts where there is a duty of ‘utmost good faith’ (“uberrimae
fidei”) or there is a duty of good faith (fiduciary duty) where all material facts have to be
disclosed. For example, if you were taking out life insurance you have to disclose all previous
health problems even if the insurance company does not specifically ask about them.
Half-truths can be misrepresentations. Also if a statement becomes false later the change in
circumstances must be disclosed.
Case: Bissett v Wilkinson (1927)
A man buying land to use as a sheep farm asked the seller how many sheep the land would
hold. The seller had not kept sheep on the land but estimated that 2,000 sheep could be
supported. Based on this statement the land was purchased. However, the estimate turned
out to be too high and an action was brought for misrepresentation.
Held: The statement was a statement of opinion and not a statement of fact and therefore
not an actionable misrepresentation.
Case: Edgington v Fitzmaurice (1885)
A company issued shares stating in the prospectus that the capital raised was going to be
used to expand the company. In fact, the company had cash flow problems and the money
was going to be used to pay the company’s creditors.
Held: Although the prospectus contained a statement of future intent, because the
company had no intention of using the money in this way it had made a misrepresentation.
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7.3 Induces a one party to enter a contract
After establishing that a false statement of fact or law has been made, it is then necessary to
show that the statement induced one party to enter the contract. There is no
misrepresentation if the statement had been ignored, disregarded or was unknown to the
party affected.
Case: Attwood v Small (1838)
A preliminary agreement was made for the purchase of an estate that generated income.
The accounts supplied by the defendant were checked by the claimant’s own accountants,
who were satisfied they were accurate, and so the claimant completed the purchase. In fact,
the accounts had exaggerated the income generated by the estate and the claimant
brought an action for misrepresentations.
Held: The claimant was unsuccessful. By getting his own experts to check the reports he
had relied on his own judgement and the work of his own experts rather than on what was
said by the defendant.
7.4 Innocent, negligent and fraudulent misrepresentations

๏ Innocent: the person making the misrepresentation believed the statement to be true.
Damages or rescission (reversal of the contract) are the remedies.
๏ Negligent: a negligent misrepresentation is a statement made without reasonable

grounds for belief in its truth.
Damages and rescission can be awarded.
๏ Fraudulent misrepresentation: where the statement is made
‣ knowing it to be false, or
‣ without belief in its truth, or
‣ recklessly, careless as to whether it be true or false
Damages and rescission are the remedies.
8 Companies and contracts

Companies are regarded as legal persons and are able to enter into contracts in their own
right. The company can be sued and can sue under the contract.
It will be the directors who cause the company to enter contracts and sometimes there can
be limits to their authority to commit the company. Major contracts should always be
authorised by board resolution.
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If a director exceeds his or her powers then that director can incur personal liability, but can
be relieved from this if the board subsequently ratifies (approves) his or her actions.
If a director’s conduct amounts to negligence, breach of duty or breach of trust, the
shareholders must ratify the director’s actions.
Tests
Question 1
What are the four essential elements of a valid contract?
Question 2
Which two of the following statements are true?
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A Consideration can be future

B Consideration can be past
C Consideration must be sufficient but need not be adequate
D Consideration must be adequate but need not be sufficient
Question 3
Which of the following is the more fundamental and vital to a contract?
A Warranty
B Condition
Question 4
Are the following statements likely to be a misrepresentation?
A “The car has been regularly serviced and has never been in an accident.” [In fact the car
was rarely serviced and had been repaired after a serious accident]
B “I think this model was one of the best made by Ford.”
[In fact, most motoring journalists though this model was poor and unreliable]
In both cases the buyers of the cars decided to buy because they were looking for a reliable
vehicle.
Question 5
Is there an enforceable contract in the following situation?
1/3/2018: Offer communicated to the buyer by telephone
5/3/2018: Buyer posts acceptance
5/3/2018: Seller revokes the offer by post
Chapter 9
EMPLOYMENT LAW
1 Employment
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An employer-employee relationship implies that there is a contract of service and the

employer controls how, when and where the work is done.
This has to be contrasted with a contract for services which is the relationship that exists
between a self-employed person and whoever is paying him or her.
There are mutual of obligations between employers and employees. For example, the
employee is obliged to work and the employer is obliged to pay wages or a salary. The
employee must perform the work personally and cannot sub-contract to someone else.
2 Employment contracts
2.1 Terms
Contract terms could be:

๏ In a written contract, or similar document like a written statement of employment.
๏ Verbally agreed.
๏ In an employee handbook.
๏ In an offer letter from the employer.
๏ Required by law (eg an employer must pay employees at least the National Minimum
Wage).
In the UK employment contracts do not have to be written, but an employer must give
employees a ‘written statement of employment particulars’ if their employment contract lasts
at least a month or more. This isn’t an employment contract but will include the main
conditions of employment.
2.2 Written statement of employment particulars
A written statement can be made up of more than one document but the principal statement
will include
๏ The employer’s name.
๏ The employee’s name, job title or a description of work and start date.
๏ How much and how often an employee will get paid.
๏ Hours of work (including weekend and shift work details).
๏ Holiday entitlement.
๏ Sick pay entitlements and arrangements.
๏ Where an employee will be working.
๏ How long a temporary job is expected to last.

๏ The end date of a fixed-term contract.
๏ Notice periods.
๏ Collective agreements ie agreements negotiated with trade unions.
๏ Pension contributions and entitlements.
๏
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To whom go to with a grievance.

๏ How to complain about how a grievance, disciplinary or dismissal decisions.
2.2 Implied terms

๏ The duty to maintain mutual trust and confidence
This implies a duty on the part of an employer not “conduct itself in a manner calculated
or likely to destroy or seriously damage the relationship of trust and confidence
between the parties”. It is a duty to act rationally and not so perversely that no
reasonable employer would act in such a way.
๏ Fidelity
This requires the employee to serve the employer faithfully. It is implied in all
employment contracts and means that an employee may not act against the interests
of the employer. It becomes particularly relevant if the employee is thinking about
leaving and working for a competitor (obviously the employee could take confidential
information with him or her), or setting up a competing business (where poaching
customers of the old employer might be attempted).
๏ Not to steal from the employer
Not a surprising implied term!
๏ Employees should obey their employees
Employees should obey their employees in respect of lawful and reasonable orders.
๏ Reasonable care and skill
Employees must exercise reasonable care and skill. The level required will depend on
the experience and qualifications of the employee.
๏ Safe working environment
Employers are required to provide a safe working environment for their employees.
๏ Something necessary to do the job
For example, a delivery van driver must have a driving licence.
๏ Duty to provide work
While there is generally no duty for an employer to provide work for its employees, such
an obligation does arise if the employee must be allowed to work to maintain his or her
skills or public profile.
๏ References
There is no duty to supply these but if they are supplied there is a requirement for them
to be accurate.
3 Workplace policies and procedures

3.1 Anti-discrimination legislation
There is now equal opportunity legislation in many European states aimed at anti-
discrimination with respect to employment, whether it’s engaging people, promoting them
or paying them.
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Anti-discrimination laws can relate to:

๏ race,
๏ sex,
๏ disability,
๏ religion,
๏ sexual orientation,
๏ age
Equal opportunities legislation identifies three types of illegal behaviour:
๏ Direct discrimination. An example of this would be if you advertised for a salesman.
That is direct discrimination because you are asking only for male applicants or male
employee.
๏ Indirect discrimination is more subtle and indeed often employers fall into this trap
inadvertently. An example of rather obvious indirect discrimination would be if you
advertised for a salesperson but then stipulated that that person had be two meters tall
with a large, black beard. Most courts would assume that this would favour male
applicants. Stipulating height minimums would probably be an example of indirect sex
discrimination because men are, on average, taller than women.
๏ Victimisation. This is where someone has complained about discrimination and then
later on within the workplace they are treated poorly or otherwise discriminated against
because they complained.
3.2 Diversity
Diversity of employment is ensuring that the composition of the workforce reflects the
population as a whole. There are sound reasons for diversity.
๏ You’re likely to attract a wider range of candidates if you are known as an employer who
embraces diversity. Diversity means more than diversity in race or sexual diversity; it can
also mean offering people part-time work or allowing them to work from home. If you
can offer part-time work or home working you may well get additional good candidates
worthy of consideration. So why reduce the field by putting unnecessary restrictions?
๏ A diverse workforce brings a variety of skills. If you employ people just like yourself,
you’ll probably get skills just like yours.
๏ The diverse workforce might better reflect customers and clients so your customers and
clients are likely to feel more comfortable.
๏ You may be able claim the moral high ground by having a diverse workforce and this of
itself may be attractive to customers, clients, and potential employees.
3.3 Bribery and corruption
Improper payments of cash or gifts to third parties can be described as:

๏ Bribery: payments to induce someone to do something they shouldn’t do. For example,
to induce the person to award you a contract when you were neither the cheapest or
best supplier. Note that small amounts of entertainment and low-value gifts are
allowed.
๏
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Facilitation payments: payments to induce someone to do something they should be

doing anyhow. For example, payments to customs officers to inspect goods quickly. In
the UK facilitation payments are regarded as bribes under the Bribery Act 2010
A company will not commit the offence of failing to prevent bribery if it can show that it had
‘adequate procedures’ in place to prevent bribery. What counts as ‘adequate procedures’ will
depend on the bribery risks faced. If, having assessed the position, a company believes that
there is a risk of bribery then, if it wants to rely on the defence, the procedures adopted
should be proportionate to that risk.
Conflicts of interest can also be included in this section. For example, if your brother is the
sales manager of a supplier to you company there is an obvious risk that you will place orders
with your brother’s company even if it is not the most suitable supplier.
It would be normal to include anti-bribery regulations as a term in an employment contract.
3.4 Whistle-blowing
Whistleblowing is defined as “making a disclosure that is in the public interest”.

Many frauds are known about or suspected by people who are not involved in the
dishonesty. The challenge for management is to encourage these ‘innocent’ people to speak
out and to demonstrate that it is very much in their own interest to do so. Reporting
mechanisms are a very important element of risk management and fraud deterrence.
There can be many conflicting emotions influencing the potential ‘whistle-blower’:
๏ working group/family loyalties
๏ intimidation
๏ fear of consequences
๏ suspicion rather than proof.
The organisation’s anti-fraud culture and reporting processes can be a major influence on the
whistle-blower, as it is often fear of the consequences that has the impact. To the whistle-
blower the impact of speaking out can be traumatic, ranging from being dismissed to being
shunned by other employees. Confidential reporting mechanism might help.
In the UK, whistle-blowers (employees, trainees, agency workers) are protected by law if they
report:
๏ a criminal offence, eg fraud
๏ someone’s health and safety is in danger
๏ risk or actual damage to the environment
๏ a miscarriage of justice
๏ the company is breaking the law, eg doesn’t have the right insurance
๏ you believe someone is covering up wrongdoing
Personal grievances (eg bullying, harassment, discrimination) aren’t covered by

whistleblowing law, unless your particular case is in the public interest.
To enjoy legal protection, disclosures by whistle-blowers must actually be in the public
interest. Therefore, in order to be protected by the law the whistle-blower must:
๏ Have made the disclosure in good faith – in other words you must be disclosing the
information because it is in the public interest and is clearly wrong.
๏ Reasonably believe that the information is substantially true.
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๏ Reasonably believe you are making the disclosure to the right prescribed person.
3.5 Money laundering

Definition:
A process whereby the proceeds of criminal activity are converted into assets appearing to
have a legitimate origin.
For example, the illegal funds could be the result of drug-dealing, prostitution or people-
trafficking.
There are three stages in money laundering:
๏ Placement of the illegal monies into a legitimate business activity. Businesses
generating cash are often used because the illegal money can be paid in and described
as sales. Tax will be paid on it, but that’s a small price to pay for making the cash appear
legitimate. However, there is a danger that this will be spotted so therefore the next
stage is also carried out.
๏ Layering – the transfer of money from place to place to conceal its source. This often
involves passing the money through several countries and many bank accounts.
๏ Integration to make it appear that the money, after its travels, is legitimate.
In the UK and many other countries there is a duty to report suspicions about money
laundering to the financial authorities or to the police. There can also be sanctions against
‘tipping off’ the perpetrators by, for example, telling them that you have reported them.
3.6 Social media

Social media such as Twitter and Facebook have become important marketing and
communication tools. Marketing is to outside entities but communication can both inside
and outside the organisation.
You will be aware of phenomena such as ‘trolling’ where offensive, rude or sarcastic remarks
are made - often under the cover of anonymity. Even email exchanges can become offensive
because there is a tendency to answer immediately without full thought or a period of time in
which to cool down.
One employee bullying another using social media can be very costly to the employer if the
bullied employee can show that bullying occurred and that the employer took no steps to
prevent it.
Offensive remarks made directly to customers are obviously bad news, but employees should
also be careful about remarks and pictures they post on their Facebook accounts as careless
privacy settings can let customers, suppliers, competitors and other employees have access.
Organisations must ensure that they have policies in place governing employees’ use of
social media – not only because of the damage it can cause but because employees might
spend too long on various applications rather than getting on with their work.
4 Data protection
4.1 Introduction
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Huge amounts of data about employees, customers and suppliers can now be easily stored
on IT systems. This has the following implications:
๏ Is the data correct and up-to-date?
๏ Is it held safely?
๏ What damage could be caused if the system was ‘hacked’ so that others could access it?
๏ Is the data relevant to the decisions being made using it?
Data and IT are now recognised and major strategic resources, and like all major assets must
be protected and used properly.
4.2 Viruses, hacking, backups and disaster plans
All machines and the network should use anti-virus software and firewalls to prevent hacking
or loss or corruption of data. Employees should be trained about the dangers of downloading
material (particularly unsolicited material) from the Internet and using USB sticks that can
pass viruses from machine to machine.
Data should be regularly backed up and the copies kept securely at a separate location. If the
company is very IT dependent it should have a disaster recovery plan that will allow
processing to resume quickly even if their IT system has been destroyed, eg by flood, fire or
act of terrorism.
4.3 Data Protection Act
Many countries now have data protection legislation to safeguard the use of personal data. In
the UK, it is the Data Protection Act 1998 and this implements an EU directive and lays down
the following principles (shared in the legislation of many countries):
๏ Data shall be processed fairly and lawfully.
๏ It can be obtained for only one or more specified and lawful purposes.
๏ It mustn’t be excessive to what’s required.
๏ It must be accurate and kept up-to-date.
๏ It mustn’t be kept for longer than necessary.
๏ Personal data shall be processed only in accordance with the rights of data subjects. The
data subject is a person about whom the data is held and that person has certain rights.
For example, they have a right to see the data and they have a right to insist that it’s
corrected. The people holding the data have to register with a government body and
there they have to say what data is held, why it is held and to whom it might be
supplied.
๏ Appropriate measures shall be taken against unauthorised and unlawful processing and
also care has to be taken over the accidental loss or damage to personal data.
๏ Personal data must not be transferred to a country or territory outside the European
Economic Area unless there is similar legislation giving similar protection in that area.
5 Health and safety

Health and safety legislation imposes duties on both employers and on employees.
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5.1 Health and safety – employer’s duties

๏ Work practices and the work environment must be safe and healthy.
๏ The plant and equipment should be maintained to the necessary standard.
๏ There should be information, instructions, training and supervision so people know how
to work the machinery and that safe working practices are adopted.
๏ People should know that there is a health and safety policy.
๏ People should be aware of the organisation’s safety policy.
๏ Employers must carry out risk assessments, thinking ahead, identifying risks, seeing to
what extent those risks need to be worried about, and providing training, guidance, and
protection as necessary.
๏ Note there is a requirement to share hazards and risk information with others.
๏ You have to identify employees who are particularly at risk.
๏ You must employ competent safety and health advisors.
๏ Within the organisation there will be a safety representative from the employee side,
and probably a safety committee which meets regularly to consider health and safety
matters.
5.2 Health and safety – employees’ duties

๏ They have to take reasonable care of themselves and others and for example these
duties could be breached by employees playing practical jokes with their colleagues.
๏ They must allow the employer to carry out the duties in relation to safety. They mustn’t
interfere intentionally or recklessly with machinery for example by taking off guards
from machine.
๏ They must inform the employer of any situation which they think is a danger. For
example, if an employee sees that a machine has deteriorated and is now perhaps
dangerous they have a duty to inform their employer.
๏ They have to use equipment properly, making use of all the safety features that it may
incorporate.
5.3 Health and safety policy
Some companies establish and publish a health and safety policy. This will usually have the
following sections:
๏ First, a statement of the principles.
๏ There will then be a section on certain procedures, perhaps relating to fire safety
procedures.
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๏ They may emphasise how important it is to comply with the law, and in some cases
state what is necessary to comply with the law.
๏ There may be a section on the detailed instructions about operating machinery.
๏ A section dealing with the training requirements, and perhaps the qualifications
needed to ensure that health and safety policies are properly implemented.
6 Disciplinary procedures, employment protection and

termination
6.1 Disciplinary procedures
These may be needed to address issues of both misconduct (such as poor time-keeping or
health and safety breaches) and poor performance. It is important for disciplinary procedures
to be handled properly because otherwise, if they lead to dismissal, it is likely that
employment tribunals will find the dismissal unfair.
Initially there will be an informal talk with the employee and that might be enough to correct
performance.
If that doesn’t product results, then there should be a verbal warning. This can be informal
(not entered on the employee’s record), or formal (entered on the employee’s record).
If improvements are still not made (and in some cases time must be given for this) then there
will be:
๏ First written warning
๏ Second (final) written warning
๏ Suspension/demotion/dismissal
Some acts, termed gross misconduct, are so serious that they may justify dismissal without
initial warnings. But a fair disciplinary process should always be followed, before dismissing
for gross misconduct. A fair disciplinary procedure will follow the following steps:
๏ Establish the facts. It is important to carry out investigations of potential disciplinary
matters promptly to establish the facts of the case. This might require an investigatory
meeting with the employee before proceeding to any disciplinary hearing. In others
cases the investigation stage will be the collection of evidence by the employer for use
at any disciplinary hearing.
๏ Inform the employee. If there is a disciplinary case to answer, the employee should be
notified of this in writing with enough information about the alleged misconduct or
poor performance allow the employee to prepare a response at a disciplinary meeting.
The notification should also give details of the time and venue for the meeting and
advise the employee of their right to be accompanied at the meeting.
๏ Hold the disciplinary meeting. This should be held without unreasonable delay whilst
allowing the employee reasonable time to prepare their case. The employer should
explain the problem and go through the evidence that has been gathered. The
employee should be allowed to answer any allegations that have been made and to ask
questions, present evidence and call relevant witnesses.
Workers have a statutory right to be accompanied by a companion where the disciplinary
meeting could result in:
๏
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a formal warning being issued; or

๏ the taking of some other disciplinary action; or
๏ the confirmation of a warning or some other disciplinary action (appeal hearings)
Decide on action. After the meeting decide whether or not disciplinary or any other action is
required and inform the employee in writing.
Appeals. If an employee feels that disciplinary action taken against them is unjust they
should appeal against the decision. Appeals should be heard without unreasonable delay and
should be dealt with impartially and wherever possible, by a manager who has not previously
been involved in the case. Workers have a statutory right to be accompanied at appeal
hearings.
6.2 Employment protection and the termination of employment
The law increasingly gives employees protection. Health and safety was one aspect of that, as
are the laws governing equal opportunities. Here we deal with the termination of
employment.
Employment can be ended in three ways:
๏ Retirement
๏ Resignation
๏ Dismissal.
There are three forms of dismissal:
๏ Termination by the employer (sacking)
๏ Ending a fixed term contract without renewal
๏ Constructive dismissal. This is where the employer’s behaviour entitles the employee to
presume he or she has been dismissed.
Wrongful dismissal is when the dismissal breaches the contract of employment, for
example, not giving the employee the agreed amount of notice. A more serious problem is
unfair dismissal, a part of the law that gives the employee some protection as it is assumed
that dismissal is unfair unless the employer can prove it to have been fair.
Dismissal is fair is:

๏ It is caused by redundancy (and selection of redundant employees is fair).
๏ Non-capability: the employee is incapable of doing the job despite training.
๏ Legal restrictions: such as a driver losing his or her driving licence.
๏ Misconduct: provided suitable warning have been given. Gross misconduct (eg hitting a
customer!) can be grounds for instant dismissal.
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๏ Other substantial reasons: for example, the sales director is married to the sales director
of a rival.
Dismissal is automatically unfair if it is because of:
๏ Pregnancy.
๏ Membership of a trade union.
๏ Carrying out health and safety procedures.
๏ Insisting on employment contracts and payslips.
Disputes about dismissal can be heard by an employment tribunal (effectively a court). If the
tribunal finds for the employee, then there are three possible remedies:
Reinstatement. The employer gives the employee the old job back. However, you’ll
understand that usually the old job won’t be available anymore because it will have been
given to somebody else.
Re-engagement. The employee is given a job comparable to the old one. Of course, there
might not be a suitable job and again you’ll realise by this stage of events the employee and
the employer probably aren’t on best terms anyhow.
Compensation. This is by far the most common remedy and sometimes the compensation
can be very high if it’s found that the employer has acted very badly.
Tests
Question 1
Which one of the following is true?
A Employment means a contract for service
B Employment means a contract for services
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Question 2
What does the implied term ‘fidelity’ mean?
Question 3
What are the three types of illegal behaviour identified in anti-discrimination
legislation?
Question 4
What is the distinction between ‘bribes’ and ‘facilitation’ payments?
Question 5
What are the three ways in which employment can end?
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Chapter 10
BUSINESS ORGANISATIONS
1 Types of business organisation

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1.1 Introduction
The common legal structures are:

๏ Sole traders
๏ Partnerships
๏ Limited companies (incorporated entities)
1.2 Sole traders
Most businesses start life with a sole trader structure. This means that a person simply begins
to trade with very little formality. There is no legal distinction between what the business
owns or owes and what its owner owns or owes. This means that the owner has unlimited
liability for the debts of the business. If the business fails, people owed money by it can
pursue the owner’s personal assets.
The owner puts capital into the business, the business trades and the owner can take out
profits as drawings. The owner pays income tax on the profits made by the business.
The business assets, including goodwill can be sold to a new owner but, strictly, this means
that the original business has ceased and a new on starts with the new owner. A sole trader
business automatically comes to an end if the sole trader dies. The business may still have a
value – stock, buildings, equipment and goodwill, but the business itself will legally cease.
The business assets will form part of the sole trader’s estate and pass on to beneficiaries
under the terms of the will.
1.3 Partnerships
If two or more people trade together with a view to profit, then a partnership is formed. Each
partner will contribute agreed amounts of capital and profits are shared according to
whatever agreement has been made between them. Each partner has unlimited liability for
the debts of the business.
As with sole traders, tax on partnership profits is paid by the business owners through their
income tax.
Unless provision is made in the partnership agreement, the partnership will cease on the
death of a partner and the deceased partner’s estate becomes entitled to their share of the
business. The remaining partners will have to pay the deceased partner’s estate the value of
the deceased’s share.
Many countries now allow the formation of limited liability partnerships which operate like
partnerships, but which also offer the partners limited liability for the business’s debts.
1.4 Limited companies
Limited companies require more formality to establish. They have to be registered with the
relevant government organisations (in the UK, The Registrar of Companies). The most
common type of company is one limited by shares. This means that shareholders’ liability is
limited to the value of their shares. Note that the liability of a limited company for its debts is
unlimited: it is the liability of the shareholders that is limited.
Limited companies (or incorporated bodies) are known as ‘legal persons’ (or ‘persona at law’).
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They have a legal existence that is separate from their owners. In particular they can:
๏ Own property in their own name
๏ Be liable for their own debts
๏ Sue and be sued
๏ Face criminal charges (eg if an employee were injured)
๏ Pay their own tax (corporation tax).
Many large limited companies are listed (or quoted) on stock exchanges where their shares
can be freely bought and sold by investors. A listed companies’ shares have a share price that
depends on supply and demand for those shares. Typically, these prices vary frequently and
the latest prices can be seen in the financial press or on the internet. This lets investors see
immediately what their shares are worth.
Shareholders can receive a share of the company’s profits if the company directors decide
that the company should pay a dividend. Dividends are defined as a payment per share
owned. The shareholders will also benefit if the value of their shares increase so that they
make a profit when the shares are sold.
Usually limited companies are profit-seeking, but don’t have to be. For example, a charity or
school could use this legal structure.
2 Advantages and disadvantages of the limited company

format
2.1 Advantages of the limited company
๏ Tax: From time to time there are tax benefits. The corporation tax rate is often lower
than income tax rates to attract businesses into the economy. Shareholders are taxed
only on dividends paid out. Many shareholder-directors pay themselves a small salary
and large dividends and this arrangement can save tax.
๏ Limited liability: the personal wealth of investors is protected because their liability is
limited.
๏ Succession: because companies have a separate legal existence they can continue in
perpetuity even as shareholders change or die.
๏ Easy transfer of shares: ownership is represented by shares and these can be bought
and sold in small quantities allowing very wide ownership.
๏ Professional: some people claim that limited companies project a more professional
impression than a sole traders can. It can look as though they have more substance.
๏ Raising finance: if a limited company does well it can be listed on a stock exchange
and it then has potential access to a huge amount of funding from a wide range of
investors.
2.2 Disadvantages of the limited company

๏ Formalities: there are initial formalities in setting up a company – though these can be
relatively minor. In the UK most people would buy an ‘off the shelf’ company (ie one
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already incorporated), install themselves as shareholders and directors, change its

name, pay in some capital and start trading. In the UK it can all be done within a day or
so. If the off-the-shelf route is not taken then considerable expertise is needed to ensure
that the company documentation is properly drafted and is all in order.
Thereafter, financial statements (accounts) and returns have to be filed annually with
the appropriate government department. Once a company becomes large enough it
will have to have an annual audit by an independent auditor who hope to be able to
state that the company’s financial statements show a ‘true and fair view’ ie that the
accounts are ‘OK’. Audits can be costly.
๏ Separate tax calculations: corporation tax has to be calculated according to
corporation tax legislation.
๏ Publicity: because the financial statements have to be filed with the appropriate
government department they can be inspected by the public, so profits and other
information cannot be kept confidential.
3 The company’s constitution

A company’s constitution (the rules governing its existence and governance) is set out in the
Memorandum of Association and in the Articles of Association.
3.1 The memorandum of association
Typically, this document will contain information such as:

๏ Company name.
๏ Date of incorporation.
๏ Type of company - eg limited by shares.
๏ The statute under which the company is registered.
๏ Names and signatures of all subscribers (the original shareholders).
๏ Limited liability of shareholders.
Any person or corporate body that adds their name to the memorandum during the
company formation process will immediately become a member (shareholder) of that
company. Details of all members are registered with Companies House and displayed on the
central public register, which is available to everyone online.
3.2 The articles of association
Most companies adopt model articles (ie standard articles) but the articles can vary from
company to company. The Articles are primarily to do with the internal matters of the
company: rights and duties of shareholders and directors.
The contents of the model articles include the following matters:
๏ Directors’ powers, responsibilities, decision making (eg how many have to be present at
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a meeting to make decisions), appointment and removal.

๏ Shares: types of share, transfer of shares, rights to dividends, procedures for declaring
dividends.
๏ Power to capitalise profits
๏ Decision making by shareholders: attendance, speaking and voting at general
meetings; proxy votes.
๏ Administrative matters: means of communication to be used, director’s indemnity and
insurance.
4 Public and private companies

A private company cannot offer shares to the public. It has no minimum capital requirement
and might have only one director. In the UK they are designated by having ‘Ltd’ (meaning
limited liability) after their names.
A public company can offer shares to the public. There are minimum capital requirements
and there must be at least two directors and a company secretary (who can be a director). In
the UK they are designated by having ‘Plc’ (Public Limited Company) after their names. If they
meet the stock exchange listing requirements, public limited companies can be listed
(quoted) on a stock exchange)
Note that the term ‘public’ is often, wrongly used to mean ‘listed’. Listed companies have to
be public companies, but public companies do not have to be listed.
5 The corporate veil

It was explained above that limited companies have a separate legal existence and that their
actions and liabilities are separate from those of the shareholders and directors. A company
might be sued if it causes damage, but the shareholders won’t be because the company is the
guilty party. The company might be pursued by creditors, but the creditors cannot chase the
shareholders or directors for amounts owed by the company.
Case: Salomon v Salomon (1897)
Salomon formed a limited company to take over his business. He was the majority
shareholder but also lent money to the company as a secured creditor. The company failed.
Salomon’s debt was safe because it was secured on company assets but there was nothing
left for the unsecured creditors who then attempted to claim their money from Salomon,
asserting that Salomon and the company were one.
Held: Salomon and his company were separate. The unsecured creditors could claim from the
company but not from Salomon personally.
Case: Macaura v Northern Life Assurance (1925)
Macaura owned a forestry company. He insured the timber against fire, but in his own name.
The forest was destroyed by fire and the insurance company refused to pay out.
Held: To insure an asset you must have an insurable interest in the asset (eg ownership).
Macaura owned shares in the forestry company; the forestry company owned the trees.
Macaura therefore did not have an insurable interest in the trees because he did not own
them, so the insurance company did not have to pay out.
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The distinction between the company and its owners is sometimes called the ‘veil of
incorporation’. However, the veil of incorporation can be lifted (or pierced) in some situations.
This means disregarding the separate personality of a company and occurs when the court
applies an exception to the rule in Salomon v. Salomon.
For example:
Case: Gilford Motor Co v Horne (1933)
Horne was an employee who, in his employment contract, had agreed not to compete with
his employer, Gilford Motor Co. Horne left and formed a company and caused his company to
compete. He claimed that he had not broken his agreement because it was the company (a
separate legal entity) not him who was competing.
Held: An injunction to stop the competition was granted because incorporation should not
be used to evade legal responsibilities.
The veil of incorporation is to be lifted only in circumstances where incorporation is being

used to give protection from improper behaviour and so the company is being used as a
front.
Under s.214 of the Insolvency Act 1986, where a company is being wound up, if at some point
before the winding up of the company began a director knew or ought to have concluded
that there was no reasonable prospect that the company would avoid failure, the liquidator
can apply to the court for the director to be made liable for company debts.
A prudent, responsible director will not generally be made liable simply because the
company has failed, but directors who ignore the company’s situation and continue to trade
once the situation was hopeless could find themselves liable under this section for the
company’s debts.
Tests
Question 1
Which TWO of the following are true in respect of a limited liability company?
A The company has unlimited liability for its debts
B The company has limited liability for its debts
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C The shareholders have unlimited liability for the company’s debts

D The shareholders have limited liability for the company’s debts
Question 2
What are the two documents that make up a company’s constitution?
Question 3
What is mean by the ‘veil of incorporation’ and in what circumstances can it be ‘lifted’?
Question 4
When a company makes profits, who is taxed on those profits: the company or the
shareholders?
Question 5
Which of a sole traders or a limited company’s affairs are more public?
ANSWERS TO TESTS
Chapter 1
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1 A, B
2 C, E, F
3 A
4 IFAC = International Federation of Accountants;
IESBA = International Ethics Standards Board for Accountants
5 (1) Rules/compliance/procedural based codes.
(2) Framework/integrity/principles based codes
Chapter 2
1 A: the principle is Integrity, not honesty
D: important but not an ethical principle
F: important but not an ethical principle
2 C, D
3 Check your facts – is it ethical – identify the affected parties – seek professional or legal
advice
4 Withdraw from the conflict.
5 Self-interest (the company might fail and the accountant’s job disappear if the forecast
is not optimistic).
Self-review – the accountant has to check his/her own work.
Possible intimidation depending on the pressure from management
Possibly familiarity as the accountant will be relying on estimates produced by
colleagues such as the sales team.
Chapter 3
1 The Sarbanes-Oxley Act
2 Tone from the top, how the board works as a team, key actions of the board and its
committees, board effectiveness, communication with shareholders.
3 C, E
4 Minority, foreign
5 IFAC
Chapter 4
1 Two-tier; unitary. Twe-tier has a supervisory and management board; unitary has non-
executive direstors on the single board.
2 Nomination committee, audit committee, remuneration committee.
3 Leadership, effectiveness, accountability, remuneration, relations with shareholders
4 True
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5 False
Chapter 5
1 B, E
2 True and fair (or fairly present)
3 Qualified, adverse and disclaimer
4

Reports to shareholders X
Appointed by management X
Power from statute X
Covers all categories of risk and investigation X
5 C, E
Chapter 6
1 Financial statement fraud; misapporpriation of assets
2 Motive/incentive, opportunity, attitude/dishonesty
3 Prevention, detection, response
Error of Error of Error of Trial

omission commission principal balance out
of balance
An invoice from a X
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customer gets lost in the

post
An invoice from a X
customer for $541 is
entered into the
bookkeeping system as
$451
Repairs of $1,200 are X

debited to the cost of
non-current assets instead
of the repairs account
A purchase of $240 is X X
entered as:
• Dr Purchases 240
• Dr VAT 40
• CR Supplier $240
5
๏ Segregation of duties
๏ Physical
๏ Authorisation and approval
๏ Management and supervision
๏ Organisation
๏ Arithmetic and accounting
๏ Personnel
Chapter 7
1 False. There might be no legal responsibility but the behaviour of suppliers can taint
companys buying from them and buyers can therefore bring pressure to bear on their
suppliers to behave better,
2 Profit, people, planet or profit, social, environmental.
3 GRI is an international independent organisation that helps businesses, governments
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and other organisations understand and communicate the impact of business on

critical sustainability issues such as climate change, human rights, corruption and many
others.
4 False. CSR means going further than the law prescribes.
5 False. Directors’ legal duty is to maximise shareholder wealth.
Chapter 8
1 Offer, acceptance, consideration, intention to create legal relations. (You could also
mention ‘capacity’)
2 A, C
3 B
4 A – Probably a misrepresentation because the statement is one of fact and is untrue.
B– Because the statement was an opinion of the seller it is probably not a
misrepresentation provided it was honestly held.
5 Yes. The offer has been communicated instantly by phone. Acceptance is on 5/3/2018
(date of posting). Revocation is not effective until received (presumed after 5/3/2018).
Chapter 9
1 A
2 Fidelity requires the employee to serve the employer faithfully. It is implied into all
employment contracts and means that an employee may not act against the interests
of the employer. It becomes particularly relevant if the employee is thinking about
leaving and working for a competitor, or setting up a competing business.
3 Direct discrimination, indirect discrimination and victimisation.
4 Bribery: payments to induce someone to do something they shouldn’t do.
Facilitation payments: payments to induce someone to do something they should be
doing anyhow.
5 Retirement, resignation and dismissal
Chapter 10
1 A, D
2 The Memorandum of Association; The Articles of Association.
3 The veil of incorporation is the distinction between the company and its owners. The
veil of incorporation is to be lifted only in circumstances where incorporation is being
used to give protection from improper behaviour so that the company is being used as
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a front.
4 The company is taxed on its profits through corporation tax.
5 Limited companies have to file their financial statements and other information with
the Registrar of Companies where the information can be inspected by the public. Sole
trader’s financial affairs can be kept much more private.
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IMPORTANT!!! PLEASE READ CAREFULLY

In addition question practice is vital!!

2. CIMA’s Code of Ethics 13

4. Corporate governance – directors and the board 31

5. Internal and external audit 37

6. Error and fraud 45

7. Corporate social responsibility 51

10. Business organisations 81

Ethics is a branch of philosophy that involves examining, categorising, justifying and

Absolute value theorists

Relative value theorists

good for the greatest number.

4 The consequences of poor ethics in business

5 Business and professional ethics

6 Accountants and the public interest

7 Sources of professional rules and ethics

Use of the internet

Here are extracts from Amazon’s code of ethics:

I. Compliance with Laws, Rules and Regulations

circumstances of the situation to decide whether corrective or mitigating action is appropriate.

III. Insider Trading Policy

IV. Discrimination and Harassment

V. Health and Safety

VI. Price Fixing

VII. Bribery; Payments to Government Personnel

VIII. Record keeping, Reporting, and Financial Integrity

IX. Questions; Reporting Violations

XI. Board of Directors

There are two approaches to formulating and applying ethical codes:

9 Organisational and personal values

It is often described as being:

So, the ethical framework recognises that there are:

Occasionally there might be a duty to breach confidentiality if it is in the public interest.

3 Threats to professional ethics

Threats to professional ethics arise from

3.2 Self-interest threats

Self-interest threats are the following:

3.3 Self review threats

3.4 Advocacy threats

3.5 Familiarity threats

4 Independence and professional scepticism

‘Independence’ is not mentioned as an ethical principle but it is a combination of integrity

4.2 Professional scepticism

5 Responses to threats to ethical principles and ethical

๏ Seek advice from his or her manager.

5.1 Check all your facts – and document where possible

(a) Identify all relevant facts.

5.2 Is it ethical – have you considered the ethical issues involved?

(a) Does it feel right?

5.4. Identify which fundamental principles are affected

5.5 Identify the affected parties

5.6. Possible course of action – internal and external escalation

(a) Escalate internally; consider grievance procedures.

5.7. Seek professional or legal advice

(a) Your internal whistle-blowing or speak-up helpline.

5.8. Refuse to remain associated with the conflict

6 CIMA’s Ethical Code and the law

1 Why corporate governance is needed

2 Corporate Governance, ethics and the law