ACCA Passcards: Paper P1 Governance, Risk and Ethics

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Governance, Risk and Ethics
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Professional Paper P1
Governance, Risk and Ethics
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Preface Contents
Welcome to BPP Learning Media’s ACCA Passcards for Professional Paper P1 Governance, Risk and Ethics.
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media’s ACCA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.
Topics are self contained and can be grasped visually.
ACCA Passcards are just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try to
go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
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Preface Contents
Page
1 Scope of corporate governance 1
2 Approaches to corporate governance 11
3 Corporate governance practice and reporting 21
4 Internal control systems 31
5 Risk attitudes and internal environment 39
6 Risks 47
7 Risk assessment and response 53
8 Information, communication and monitoring 61
9 Personal ethics 69
10 Professional ethics 75
11 Corporate social responsibility 83
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1: Scope of corporate governance
This chapter sets out the foundations of good corporate

Topic List governance, defining what corporate governance is, the
key concepts, and the stakeholders whom good
Definition corporate governance serves.You may need to consider
the conflicting interests of stakeholders and how
Concepts stakeholders can control managers/directors. We also
Agency summarise major issues in corporate governance.
Stakeholders
Main issues
Definition Concepts Agency Stakeholders Main issues
Corporate governance is the system by which organisations are directed and controlled. It is a set of
relationships between directors, shareholders and other stakeholders.
Risk management Appropriate control Framework to

and reduction systems pursue strategy
Corporate governance
Guards against Spirit of codes Accountability to

misuse of resources stakeholders
Fairness Take into account all stakeholders with legitimate interests

Transparency Openness, disclosure in financial statements, press releases, websites
Independence Being free from constraints or influences that would prevent a correct course of
action being taken
Innovation Recognise that the needs of businesses and stakeholders can change over time
Scepticism NEDs, auditors and audit committees should adopt an air of scepticism and an
enquiring mind
Probity Truth-telling/not misleading
Responsibility Management responsible for organisation, means of corrective action and
penalising mismanagement
Accountability Directors and companies answerable for consequences of actions to shareholders,
professionals to values, public sector to stakeholders
Reputation Jeopardised by poor risk management/corporate governance ethical behaviour,
may impact commercially
Judgement Taking decisions that enhance organisation’s prosperity
Integrity Straightforward dealing, honesty and completeness, basis of trust
Page 3 1: Scope of corporate governance

Agency Agency in corporate governance

Agency is acting on behalf of another (principal) in Directors (agents) run company on behalf of
dealing with others. shareholders (principals).
Agency costs are the monies and resources Agency problem – how to prevent directors excessively
expended by principal in monitoring agent. rewarding themselves/
underperforming
Agent’s responsibilities
Main solution is to link reward with company
performance:
Accountability
Fiduciary duty (trust and care) Profit related pay
Personal performance Shares
Obedience Share option plans
Skill
No conflict of interest Transaction costs theory
Confidentiality
Companies seek to keep business dealings in-house,
Handing over benefits
managers act opportunistically in their own interests.
Stakeholders Stakeholder power mapping

Stakeholders are groups or individuals whose Level of interest
interests can affect or are directly affected by the Low High
activities of a firm or organisation.
Low A B
Power
Stakeholder theory High
C D
A broad range of stakeholders have claims on an
A: minimal effort
organisation. Stockholder/Shareholder view that B: keep informed, as can influence more powerful stakeholders
company just responsible to shareholders is C: keep satisfied
wrong as modern corporations are very large and D: strategy must be acceptable
social/political/legal impact is therefore great.
Results of mapping
Instrumental view – mainly economic
responsibilities with aim of maximising profits Corporate governance accommodates views
Repositioning of stakeholders
Normative view – ethical/philanthropic
responsibilities as well as economic/legal Identify change blockers/facilitators
Assess legitimacy/urgency

Proximity to organisation Primary and secondary stakeholders

Internal – employees/management Primary – need participation to continue as going
Connected – shareholders, customers, suppliers, concern (customers, suppliers, government)
lenders, trade unions, competitors Secondary – their ceasing to participate won’t affect
External – government, local government, public, continued existence (government, managers)
pressure groups, opinion leaders
Active and passive stakeholders

Narrow and wide stakeholders Active – seek to participate in organisation's
Narrow – most affected by organisation’s strategy activities (managers, shareholders, regulators,
(shareholders, employees, suppliers, major customers) pressure groups)
Wide – less affected by organisation’s strategy Passive – don’t seek to participate in policy-making
(government, less significant customers, community) (shareholders, local communities, government)
Voluntary and involuntary stakeholders Legitimacy of stakeholders

Voluntary – those who of their own choice have Legitimate – valid claims
involvement with the organisation – employees,
customers, suppliers, shareholders Illegitimate – invalid claims
Involuntary – engage with the organisation without Who decides legitimacy? Basis?
choosing to do so – neighbours, wider public
Knowledge of stakeholders
Known – Existence known to organisation
Recognition of stakeholders Unknown – Existence unknown to organisation
(wildlife, communities affected by suppliers)
Recognised – Managers consider interests and views
when deciding strategy Direct – stakeholders know effect/how affected by
Unrecognised – Managers don't consider claims when Indirect – unaware of claims or cannot express them
deciding strategy directly

Directors Executive full-time managers, non-executive monitoring

Arranges board meetings, plans agenda, deals with documents and registers, general
Secretary administration, reports to chairman
Concerned with impact of board upon position, supervise and co-ordinate
Sub-board management implementation of business strategy and risk management, provide data for board
Employees Commitment, interest in pay and conditions, need to implement control systems, adopt
culture and provide feedback
Pay and working conditions, concerned with poor board communication, lax risk and
Trade unions control environment, can be used to harness employee support
Co-operation needed for just-in-time supply, poor payment record leads to credit
Suppliers restriction and poor service
Customers Increased expectations, power to shop elsewhere, ability to make views known, ethical
requirements
External auditors Highlight governance and reporting issues, independence required to supply
confidence in information, need for audit committee to reinforce position
Regulators Establish rules and standards, carry out inspections. May be enforcement costs or
regulatory capture, domination of regulator by regulated
Government Establish overall climate, encourage private shareholdings, provide subsidies,

nationalise poorly performing industries, run public sector organisations
Stock exchanges Companies raise money, investors transfer shares, supply data about company
value and provide regulatory framework for governance
Institutional investors Can influence prices, avoid speculative shares, want short-term profits, can influence
companies through meetings and voting, able to take direct action if dissatisfied
Small investors Hold small numbers of shares in companies, trusts and funds. Likely to be
undiversified and concerned with information asymmetry
Recipients Services from public sector, aid from charities
Donors Provide funds to charities, want them well-spent

Duties of directors Directors' remuneration

Corporate governance guidelines reinforce legal and Directors being paid undeserved and excessive
fiduciary duties to act in company’s best interests, remuneration and bonuses. Allegations that directors
use powers for proper purpose, avoid conflicts of have been rewarded for making losses.
interest and exercise duty of care.
Board composition Board supervision

Need to avoid domination by single individual/small Need for board to meet regularly to consider effectively
group of executive directors. organisation’s activities, risks and control systems.
Accounting and auditing Corporate social responsibility

Greater transparency and reliability of accounts, Builds on stakeholders' debate, what responsibilities
decreasing investor risks. Tougher auditing standards should organisation and board fulfil.
and requirements for auditors to avoid conflicts of
interest.
2: Approaches to corporate governance
Topic List In this chapter we summarise the factors that have

influenced the ways corporate governance has
developed, including the important rules v principles
Development of guidance debate.You may be asked about these in part (a) of a
Basis of guidance question before you consider specific corporate
governance arrangements later in the question. We also
Major governance codes give details of the major worldwide codes, particularly
Sarbanes-Oxley those that have international impact.
Corporate social responsibility Corporate social responsibility is a major topic in this
exam, and the themes we cover here and in Chapter 11
Public sector governance will occur in many questions.
Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

guidance guidance governance codes responsibility governance
Internationalisation Investor treatment Financial reporting Individual country Corporate scandals

weaknesses characteristics
Governance development
Openness Integrity Accountability


Principles-based approach Key Principles

Most corporate governance codes use a principles-
based approach with broad guidelines supplemented by Fulfil strategic objectives
limited specific requirements. Encourage companies to Reinforce governance regulation
comply or explain. Minimise risk
Promote ethical behaviour
Rules-based approach Underpin investor confidence
Fulfil stakeholder responsibilities
Rules-based approach focuses on regulations and Establish management accountability
targets that must be met without any leeway. It should be Maintain NED/auditor independence
easy to ascertain compliance, but in practice there may Provide accurate reporting
be questionable situations which are not fully covered by Encourage owner involvement
the rules. Direct behaviour
Page 13 2: Approaches to corporate governance


Advantages of principles Problems with principles
Avoids inflexible rules Principles too broad

Less burdensome Lack of consistency
Allows scope for development Confusion over what is compulsory
Comply or explain Companies treat as non-binding
Emphasis on investor judgement Markets don't understand disclosures
Insider systems Outsider systems

Most companies listed on stock exchange are controlled Shareholdings are widely dispersed, manager/owner
by a few individuals, for example family companies. separation.
Insider Advantages/Disadvantages Outsider
Strong owner-manager links Robust governance regime
Longer-term view Hostile takeover threat constrains management
Discrimination v minority Agency problem
Lack of monitoring/governance Short-term priorities

UK Corporate Governance Code OECD principles

Code derived originally from Cadbury, Greenbury and Organisation for Economic Co-operation and
Hampel reports, supplemented by: Development produced non-binding principles to
address the interests of global investors. Companies
Turnbull report – risk and internal control should work towards achieving principles, and
Smith report – audit committees principles are guidelines for individual countries to
Higgs report – non-executive directors develop own codes.
Principles
ICGN report
International Corporate Governance Network has Shareholder/stakeholder rights
provided practical guidance for boards to operate Equitable treatment of all shareholders
efficiently and compete for scarce capital. Stakeholders rights protected
Timely/accurate disclosure of material matters
Board responsible for strategy and monitoring


Sarbanes-Oxley Weaknesses at Enron

The Sarbanes-Oxley Act was a response to the
collapse of Enron, one of America's biggest companies. Lack of transparency in accounts
The Act is more prescriptive than codes in other Non-executive directors weak
jurisdictions, impacting on review of controls, Lack of external audit scrutiny
disclosures, audits, ethics and directors’ share trading. Directors’ use of inside information
Dishonesty and law-breaking
Auditing requirements
The non-audit services auditors can provide are Corporate responsibility
significantly restricted and auditors are subject to Chief executive/chief finance officer certify:
various other rules:
Appropriateness of accounts
Compulsory partner rotation
Retention of audit papers Accounts fairly reflect operations and financial
condition
Quality control standards
Review internal control systems If accounts have to be restated, they forfeit their
bonuses.
Audit committees Internal control reports (s404)

Every listed company should have an audit Annual accounts must contain internal control reports
committee consisting of independent directors, with that:
member(s) with financial expertise. Audit committee
State management responsibility for control
should be responsible for:
structure/financial reporting procedures
Appointment, compensation and oversight of Assess effectiveness of control structure/financial
auditors reporting procedures (with audit report)
Discussing key accounting policies with auditors State whether code of conduct for senior financial
officers has been adopted
Setting up complaints mechanisms
Whistleblowing Off-balance sheet transactions

Employees/auditors will be granted whistleblowing There should be appropriate disclosure of material off-
protection if they disclose private employer balance sheet transactions.
information to parties involved in a fraud claim.


Significance of responsibility CSR and stakeholders

Large businesses in particular face expectations that Businesses benefit from goodwill and other aspects
they will act in a socially responsible fashion. of society and therefore owe those particularly
affected by their activities certain duties in return.
Problems with stakeholder view

Carroll's model
Four levels of responsibilities:
Collaboration time-consuming and expensive
Economic – shareholders/employees/customers
Legal – comply with laws Culture clashes with certain stakeholders
Ethical – act in fair and just way Collaboration on some issues, conflict on
Philanthropic – generosity to employees/ others
community
Lack of consensus between different
stakeholders
Ownership responsibilities
By buying shares, shareholders buy a responsibility to Impact of CSR
ensure that company is managed efficiently and in ways
consistent with public welfare. Responsibilities of institu-
tional shareholders have been stressed, institutional
shareholders' large % shareholdings meaning they Objectives
should be actively involved and pressure managers. Mission statements
Ethical codes
Ownership view problems Governance codes
Stakeholder board representation
Shareholders with small % holdings aren’t Corporate social reporting
influential
Shareholders can easily dispose of shares and
this loosens feelings of obligation


Public sector Private sector Charitable status NGOs/quasi NGOs
Purposes and objectives Public service Profit Relief of poverty, As defined by owners
research, etc
Performance Central regulation Financial reporting SORP Set outcomes
standards
Ownership Government Partners/ Donors Government
shareholders
Stakeholders The public, central Shareholders, Service users Government,

(including lobby groups) government, regulators, taxation lobbying groups
service users authorities
3: Corporate governance practice

and reporting
Topic List Corporate governance practice is a key area in this

syllabus, and you can expect to be asked whether an
organisation is following good practice. The role and
Role of board activities of the board will be significant elements in
Board membership many questions. How corporate governance practice
serves the interests of stakeholders will also be
Non-executive directors important.
Directors' remuneration
Stakeholder relationships
Reporting
Role of board Board Non-executive Directors' Stakeholder Reporting

membership directors remuneration relationships
Scope of board's role Advantages of diversity

The board should have a formal schedule of matters
reserved to it for decisions. Board is also responsible Maximise talent pool
for overseeing strategy, monitoring risk, control Broader range of knowledge
systems and management, and ensuring effective Access stakeholder constituencies
communication. Greater independence
Corporate citizen
Nomination of directors
Nomination committee should oversee appointments Legal and regulatory frameworks
and make recommendations to the board. Needs to
consider: Legal responsibilities
Executives/non-executives Avoidance of conflict of interest
Gaps in current board's skills Time limits on appointments
Expanding board diversity (age, gender, race, Limits on service contracts
ethnicity, education, background) Retirement by rotation
Continuity and succession planning Insider dealing
CPD and appraisals Board appraisal

All board members should have training covering
strategy, management, legal responsibilities and Performance against objectives
company related issues. Contribution to strategy/environment
Response to problems
There should be annual appraisals of the performance
Considering right matters
of the whole board and of individual directors.
Communication
Effectiveness of board committees
Multi-tier boards Quality of feedback
Adequacy of decision-making
Companies in some countries are run by two or more
boards, often with supervisory/management role split.
Advantages of multi-tier boards Disadvantages of multi-tier boards

Supervisors/supervised separation Lack of accountability
Deters management fraud Don't receive information from managers
Better links with stakeholders Supervisory board decision-making restricted
Better use of non-executive time Less effective at questioning managers
Page 23 3: Corporate governance practice and reporting


Board membership Division of responsibilities

Companies need to consider optimum No one individual should have unfettered control. Ideally chairman and
size, balance of executive and non- chief executive should be different people; if not there should be a strong
executive directors, and diversity of independent element on the board with a recognised senior member.
membership.
Responsibilities of chairman Responsibilities of CEO
Board committees
Board committees supervise specific Running board Strategic development
areas, doesn't absolve main board Accurate board information Investment analysis
from overall responsibilities. Key Shareholder communication Risk management
committees: (Chairman's Statement) Recommendations to
Nomination (this chapter) New director induction board committees
Audit (Chapter 8) Board appraisal Control systems
Remuneration (this chapter) Board development enforcement
Risk management (Chapter 5) Signing off accounts

Non-executive directors (NEDs) Number of NEDs

NEDs have no executive (managerial) responsibilities. USA/UK – Independent NEDs at least half of board,
They should provide balance and help to reduce others – sufficient for views to carry weight.
conflict between executive directors and shareholders.
Majority of NEDs should be independent. Independence of NEDs
Role: No business/financial/other connection
No share options/pensions
Strategy Risk management Appointment for specified term
Scrutiny Board personnel Ability to take independent advice
Advantages of NEDs Disadvantages of NEDs

External experience and knowledge Independence?
Wider perspective Restricted recruitment
Comfort for investors Difficult to impose views
Confidant/enabler Can’t prevent problems
Board members but objective Limited time


Principles Remuneration statement

UK's Greenbury committee suggests:
Consider and disclose:
Directors' remuneration set by independent board
members Remuneration policy
Bonuses related to measurable performance/enhanced Arrangements for individual directors
long-term shareholder value Consider allowing members to vote on
Full transparency in annual accounts remuneration statement in accounts.
Remuneration committee Service contracts

Committee of independent NEDs determining: If service contracts are too long, premature termination
may mean significant payments. Service contracts
Remuneration policy
shouldn't be >12 months normally.
Specific remuneration packages
Elements of remuneration package Factors affecting remuneration levels

Basic salary – in contract of employment
Need to attract and retain directors
Performance-related bonuses – limited possibly Interests of stakeholders
to maximum % of pay, shouldn't be given for Weighting and phasing of different parts of package
transactions, or if excessive risks taken? Director/manager differentials
Shares – granted on condition can't be sold Impact of director/manager resigning
Performance measures
Share options – purchased at specified exercise
price, encouragement to improve company's
performance and hence share prices, options
Performance measures
(and shares) to be held for certain length of time
Benefits-in-kind – is cost excessive and how Variety of financial/non-financial measures
comparable are they with what employees are Focus on current not historic performance
given? Avoid short-termism
Pensions – best practice to make only basic Reward individual effort
salary pensionable

Relationships with shareholders Relationships with stakeholders

Directors should be required to submit to regular OECD stresses role of:
re-election (every year/every three years). Boards should
Employees
consider relationships with all shareholders, particularly
institutional shareholders. Annual general meetings nor- Creditors
mal part of calendar, other general meetings discuss Suppliers
issues of immediate/serious concern. Investors
Government
Proxy voting
Position of stakeholders should be:
Myners report recommends:
Protected by law
Clear agreements between beneficial owners Enhanced by participation (eg employees share
and investment managers ownership, profit-sharing arrangements, seat on
Stock lending shouldn't happen board)
Electronic voting
Poll (including proxies) for all resolutions
Notice > 20 days Business Question and

before presentation answer sessions
Annual general meetings
Shareholders vote on Shareholders vote on

substantially report and accounts
separate issues


Reporting Major disclosures

London Stock Exchange requires:
Board composition, directors, NEDs, evaluation
Narrative statement of how principles in UK
of board performance
Corporate Governance Code have been applied
Committee reports
Statement of compliance/details of reasons for
non-compliance Relations with auditors and shareholders
Review of internal controls
Voluntary disclosures Going concern
Sustainability reporting
Disclosures above statutory/best practice minimum. Business review
Disclosures should follow certain principles:
Planned process Benefits
Transparency in disclosures made
Consultation with users Wider information provision
All relevant information considered Different forms of information
Greater assurance about management
Disclosures subject to review
Reflect investor interests
4: Internal control systems
Topic List In this chapter we look at the key elements of sound

control systems. The overall environment and ethos of
organisation is as important as the specific procedures.
Control systems The risks organisations face should have a significant
Nature of risks impact upon the control frameworks they adopt.You may
need to assess the effectiveness of control systems and
Control framework
the difficulties of implementing sound systems.
Control limitations
Enterprise risk management
Assessment of systems
Control Nature of Control Control Enterprise risk Assessment of

systems risks framework limitations management systems
Internal management control Features of control systems

Management planning, organising and directing so
that organisational objectives are achieved. Ease of target Consistency of
Turnbull report listed key aims: achievement measures
Facilitate effective and efficient operation Qualitative/ Management
Ensure quality of reporting quantitative intervention
Ensure compliance with laws and regulations measures Automatic control
Short/long-term mechanisms
measures Reliance on social
Cybernetic control system relationships
Process of control within system.
Identification of system objectives Characteristics of control systems
Setting targets for system objectives
Measuring system achievements/outputs
Comparing achievements with targets Embedded in operations
Identifying corrective action Form part of culture
Implementing corrective action Capable of quick response

Risk classification Benefits of risk management

Risks can be classified in various ways:
Fundamental – affects society in general Predictability of cash flows
Particular – individual in control Limitation of effects of bad events
Speculative – good or bad consequences Increased shareholder confidence
Pure – only outcomes harmful Weigh costs
Risk and uncertainty Risk and corporate governance

Uncertainty means possible outcomes and/or chances
of each occurring are unknown. Corporate governance reports aim to address
shareholder concerns that directors are not
achieving adequate returns for risks incurred and
Risk and return provide mechanisms for controlling directors who
Businesses have to take some risks to trade are taking excessive risks. Directors' responsibility
(entrepreneurship). Businesses may tolerate higher for monitoring and disclosing risk management is
risk levels provided they receive higher returns. stressed.
Page 33 4: Internal control systems


CONTROL FRAMEWORK
Control environment Control activities

Purposes Control systems and risks
Orderly conduct of business Objectives Ability to reduce

Adherence to internal policies and laws Nature/extent of risks
Safeguarding assets risks Costs/benefits of
Prevention/detection of fraud Acceptable risks controls
Accuracy/completeness of accounting records Changes in risk
Quality of information and reporting Likelihood risks
materialise conditions

Costs > benefits Human error/Fraud Employee collusion
Limitations of controls
Management Designed for routine Depend on method

bypass transactions of data processing


Enterprise risk management (ERM) ERM benefits

ERM is framework suggested by COSO for dealing
with risk. It is a fundamental process, operated at Align risk appetite and strategy
organisation level, that helps staff understand risks, Link growth, risk and return
responsibilities and authority levels. ERM should: Choose best risk response
Minimise surprises and losses
Apply in strategy setting Manage risks over whole organisation
Apply in all areas and over whole organisation Allows organisation to seize opportunities
Identify events affecting entity
Manage risk according to risk appetite
Provide reasonable assurance
Support organisational objectives
COSO's Enterprise Risk Management framework

on
s
ng ce
ti ti lian
era p or mp
Op Re Co
Function
Operation Unit
Control Environment
Division
Risk Assessment
Entity Level
Control Activities
Information & Communication
Monitoring Activities


Human
Objectives Risk links Compatibility Control mix resources
Assessment
Framework Review Information Feedback Costs/benefits

5: Risk attitudes and internal environment
This chapter covers the underlying factors that help

Topic List determine how organisations respond to the risks they
face. These factors include attitudes to risk, the
Risk attributes environment and culture, and the organisational structure
including responsibilities for dealing with risks.
Stakeholders and risk
Internal environment
Risk management responsibilities
Objective setting
Risk attributes Stakeholders Internal Risk management Objective

and risk environment responsibilities setting
Size
Structure
Development
Emotional satisfaction Past experience
Risk-averse or risk- Focus on avoiding
seeking risk
Personal views Organisational influences
Risk attributes
National influences Shareholder requirements

Government protection Risk/return

Shareholders R Dividend impact

I Capital gain impact
Dependent on their risk appetite/diversification
Debt providers S Threat to repayment
K Security imposed
Threat of other debts
Employees Job threats
C Health and safety worries
O Ability to take action
Suppliers Losses on sales
N Unwilling credit suppliers
C Disruption of relationships
Customers E Delivery failures
Lack of value
R Poor quality
Wider community N Poor employment policies
Adverse impact on the environment
S
Page 41 5: Risk attitudes and internal environment

Internal/control environment Elements of internal environment

The control environment is the attitude, awareness and
actions of management in relation to internal controls, Management's philosophy and operating style
providing the background for the operation of other Control culture
controls. Organisational structure
Methods of imposing control
Integrity, ethical values and competence
Strong internal environment
Risk environment
Clear risk management strategies
Culture/code of conduct/HRM/reward systems support Risk management philosophy
objectives and risk limitation Risk appetite
Senior management commitment to competence, Integrity
integrity and trust Ethics
Clear authority and responsibility Organisational environment
Communication procedures
Staff have knowledge, skills and tools
Embedding risk awareness Risk register

Risk assessment should evolve into a consistent activity Formal collection of risk and response information.
embedded across all processes, focus on: Register lists and prioritises risks, and specifies
responsible individuals and action taken.
Threats to shareholders/stakeholders (future growth
opportunities/core business)
Consistent action-orientated risk assessment Risk policy statement
Changing risk culture Definitions and objectives

Regulatory requirements
Internal communications programme Links to strategic decision-making
Training Key areas
Involvement in risk identification Risk classification
Incentives Risk responsibilities
Key personnel persuasion Important controls
Infrastructure support Assurance reporting
Training


Determines risk management strategy and monitors overall risks, sets

Board and reviews internal control
Build on overall framework, specifying risk management methods and

Senior managers co-ordinate responses, may staff risk management group
Internal audit Audit risk management process/key risk area controls
External audit Audit risk areas that impact materially on financial statements
Identify and evaluate risks in their areas, use performance

Line managers indicators for monitoring, implement responses
Follow risk management procedures, have good understanding,

Staff report dangers
Risk committee Risk management personnel

Committee of directors, separate from audit Risk specialist – consultant called in to advise on particular
committee, responsible for monitoring and aspects of risk management
supervising risk identification and management. Risk manager – employee with specific responsibility for
Can be staffed by executive directors dealing appropriately with risks
Allows audit committee to concentrate on Risk management function – employees in larger
financial risks organisations
Role of RM committee Role of RM function
Determine risk management Helping determine risk management strategies

strategy/policy Champions of risk management
Review reports on risk Building risk awareness culture
Monitor overall exposure Establishing risk policy and structures
Monitor changes in circumstances Developing and reviewing risk management processes
Assess effectiveness of RM systems Co-ordinating functional responses
Review statement on internal control Preparing report for board/shareholders


Mission COSO model

A general objective, visionary, often unwritten and Strategic – high level goals, support mission
very open-ended, without any time limit for Operational – effectiveness and efficiency
achievement. Reporting – reliability
Compliance – with applicable laws
Objective setting and risk
Strategic objectives and mission will influence risk Corporate objectives
management.
Profitability
However businesses should also determine risk
Market share
appetite (willingness to take risks) and risk
Growth
strategy.
Cash flow
These in turn should influence business objectives. Customer satisfaction
Businesses should take a portfolio view of risks, Quality
looking at relevant risks over the whole organisation. Added value
6: Risks
In this chapter we look at the risks that organisations

Topic List face. We draw various important distinctions between
different kinds of risk, and emphasise the link between
Strategic and operational risks risk and return. We also look at examples of the key risks
that organisations have to counter.
Types of risks
Risk identification
Strategic and Types of risks Risk identification

operational risks
Strategic risks Operational risks

Fundamental risks to organisation's profits/existence Risks of loss from failures in internal business and
arising from the sector it’s in and the nature of what it control processes.
does. Strategic risks arise out of decisions about
resources, products, acquisitions and investments.
Factors affecting strategic risks Examples
Stakeholders IT failures
State of economy Human error
Nature of industries/markets Loss of key staff
Level of competition Fraud
Availability/price of resources Business interruptions
Flexibility of production Internal audit weaknesses
Ability to innovate/R&D
Stage of product life cycle

operational risks
Entrepreneurial risks Product risks

Risks from carrying out business activities. Risks of financial loss due to producing a poor
Entrepreneurial risks must be taken if business is to quality product. They include need to compensate
make profits. dissatisfied customers, possible loss of sales and
need for expenditure on quality control procedures.
Financial risks
Threats to organisation’s continued existence Legal risks
through lack of available funds or taking on Risks of fines or threats of closedown, or incurring
excessive or unsuitable commitments. Risks also costs to fight legal actions.
include credit risk from non-paying debtors and
currency/interest rate risks. Political risks
Political risk is the risk that political action will affect
Market risks organisation. Examples include quotas, tariffs,
Risks arising from markets within which a company exchange controls and nationalisation.
operates, risks arising from movements in market
value of asset.
Page 49 6: Risks

operational risks
Technological risks Fraud risks

Risks of loss through the inadequacies/disruption of Risks of loss through fraudulent activities of employees
IT systems and resources, risks arising from or managers. Fraud risks are often increased by poor
information strategy pursued. corporate governance procedures, allowing senior staff
to commit fraud because mechanisms to challenge
Health and safety risks their behaviour are ineffective.
Risks include loss of employees' time and having to
pay compensation or legal costs. Risks arise Knowledge management risks
because of lack of policy, poor culture, lack of Risks of losses due to failure to secure knowledge
emergency procedures. resources adequately. Risks include abuse of
intellectual property, power failures leading to loss of
Environmental risks information, loss of key staff.
Risk arising out of environmental effects of
operations. Organisations can suffer fines, bad Property risks
publicity, non-co-operation. Risks from damage, destruction or theft of property.
Dangers include fire, wind, water leakage and
vandalism.
Trading risks Organisational risks

Risks of disruption in the course of trade. Risks that members/employees of an organisation
Physical – goods/documentation lost/stolen will behave in ways detrimental to the organisation,
Trade – customer refuses goods/cancels order eg failure to adapt to change.
Liquidity – inability to finance activities
Reputation risks
Disruption risks Risk of loss of reputation arising from adverse
consequences of another risk.
Risk of disruption to operations caused by IT
failures, employee problems, supplier loss, legal
action. Poor reputation
Resource wastage risks Crystallisation of risks

Risks include incurring excessive costs or waste of Poor customer service
employees' time and resources. Failure to innovate
Poor ethics
Page 51 6: Risks
Strategic and Types of risks Risk

operational risks identification
Risk identification
Need to know whether likely perils are present and be aware of possibility of unlikely risks. Identification can
focus on targeting unacceptable risks or risk levels.
Risk condition identification Event identification
Physical inspection External events eg economic conditions

Enquiries Internal events eg human errors
Brainstorming Conditions resulting in risks
Checklists Trends and root causes
Benchmarking Event interdependencies
7: Risk assessment and response
In this very important chapter, we deal with how risks are

Topic List managed, in particular how risks are reduced by control
activities.
Risk assessment
Risk responses
Control activities
Risk Risk Control

assessment responses activities
Risk management Risk management Stakeholder

effectiveness costs pressures
Risk assessment
Comprehensive Accurate analysis Responsive to

coverage changing risks
Likelihood/Consequences matrix Risk quantification

Use Likelihood/Consequences matrix as basis for Need an idea of possible results or losses, together
setting priorities for risk management. with distributions and confidence limits.
Consequences
Low High Key calculations
Low
Average or expected result or loss
Loss of key customers
L Loss of suppliers Frequency of losses
i Failure of computer systems
k Chances of losses
e Largest predictable loss
l
i
h Loss of senior or specialist
o
o Loss of lower-level
staff Sensitivity analysis
d Loss of sales to competitor Examine impact of key variable changes, such as
staff
Loss of sales due to sales price + volume, initial + operating costs, cost of
High macroeconomic factors capital.
Page 55 7: Risk assessment and response

Risk Risk Control

Objective/subjective risks
Accounting ratios Objective risks can be assessed with high accuracy.
Ratios can demonstrate risks to companies and
shareholders, particularly liquidity or solvency risks. Subjective risks cannot be quantified easily,
assessment depends on knowledge and skills of
assessor.
Key ratios Related risks

Risks may be related/correlated because their
Debt ratio causes are the same, or one risk links to another.
Gearing
Interest cover Consolidation of risk
Cash flow ratio
Need to aggregate at organisation levels risks
Current ratio
identified and quantified at operational level.
Quick ratio
Need also to consider impact of correlated risks,
where two or more different risks vary together.
Risk Risk Control

Likelihood/Consequences matrix
Consequences
Low High
L Low Accept Transfer
i
k Cost of action/benefits Insurance/contingency planning
e
l
i High Reduce Avoid
h Controls to limit risk Immediate action required,
o occurrence/impact possible abandonment of activities
o
d Stop/Drop – Not taking profitable opportunity on grounds of excessive risk
Go – Going ahead with activity and incurring losses
ALARP– Reducing risks to as low as reasonably practicable levels

Risk Risk Control

Natural hedging
Debt/equity mix Internal netting
International Working capital management
Diversification Internal strategies
Financial risk management
Risk sharing Risk transfer

Forwards Joint ventures Options Securitisation
Futures Swaps Insurance
Risk Risk Control

Classification of controls Types of control procedure

Corporate are general policy, culture, values, overall
monitoring Authorisation
Management include planning, performance monitoring, Performance reviews
risk evaluation Information processing
Administrative include organisation structure, authority Physical controls
and reporting lines, communication channels Segregation of duties
IT general controls
Accounting are recording of transactions and
IT application controls
safeguarding records, transactions and assets
Prevent stop errors happening including checks of
documentation before payment/deliveries made
Detect pick up errors
Correct minimise or negate errors eg back-up
Non-discretionary can't be bypassed
General relate to environment

Risk Risk Control

Assurance from internal controls Benefits of controls

Internal controls can only provide Benefits may be financial
reasonable assurance that management (less costs)
objectives will be achieved, because of their Benefits may be non-financial
limitations. (efficiency and effectiveness improvements, less internal
audit resource required)
Costs of controls Benefits v costs

Costs include direct costs (salary), opportunity
costs (time) and perhaps reduced flexibility, Difficult to estimate risk exposure
responsiveness and creativity. Difficult to estimate impact of controls
Comparison of financial costs v non-financial benefits
8: Information, communication and monitoring
This chapter emphasises the importance of information

Topic List flows and communication between managers and staff.
The principles of good communication also apply to
Internal communication formal reports in the accounts on risk and internal
control. We also cover the monitoring activities required
Monitoring to ensure control systems remain effective.
Internal audit
Audit committee
Board review and reporting
Internal Monitoring Internal audit Audit committee Board review

communication and reporting
Directors' information requirements Communication of policies

Directors need information about risks linked to Turnbull report recommends policies are communicated in
achievement of organisation's objectives and following areas:
control mechanisms that should respond to Customer relations
changes in business environment. Service levels
Directors should: Health, safety and environment
Compare different sources of data Asset security and business continuity
Consider adequacy of communication Expenditure
channels Accounting, financial and other reporting
Provide feedback Communication methods
Review management/information systems
Guidance from chief executive
Circulation of risk policies
Staff involvement in policy development
Workshops and training
Whistleblowing procedures

Monitoring ensures that internal controls continue to operate effectively. This process involves
assessment by appropriate personnel of the design and operation of controls on a timely basis and
taking necessary actions.
Elements of monitoring Monitoring procedures

Ongoing monitoring includes routine, day-to-day
reviews. Audit committee liaison with auditors
Separate evaluation includes annual review of Internal audit work on control
controls plus internal audit evaluations. Monitoring programs in information systems
Reports of potential failures
Effective/efficient monitoring Supervisory controls
Management self-assessment
Quality control on internal audit
Strong control environment
Prioritisation
Communication structure/reporting
Page 63 8: Information, communication and monitoring


Internal audit
Internal audit is an independent appraisal activity established within an organisation which examines and
evaluates the adequacy and effectiveness of other controls.
Need for internal audit Internal audit areas

Need depends on complexity of activities, employee
numbers, cost-benefit considerations. Necessary when: Accounting and internal control systems
Changes in organisational structure Financial and operating information
Changes in key risks Economy, efficiency and effectiveness
Problems with internal control systems Compliance with laws and regulations
Increased number of unexplained or unacceptable Safeguarding of assets
events Implementation of organisation's objectives
Objectives depend on information and recommendations Risk auditing
required by organisation, also state of organisation's risk Special investigations
management.
Independence Objectivity I
IA should be independent of activities and n
management being audited.
Impartiality d
Threats to independence e
Threats include involvement in systems design and Unbiased views p
consultancy, familiarity with other staff and reporting
to finance director whose activities are being audited.
e
Valid opinion n
Dealing with threats
d
IA staff don't audit their previous departments
Access to all areas e
IA staff don't audit systems they designed n
Unrestricted access to records, staff, personnel
Report to audit committee
Relevant skills c
Rotation of IA staff
Audit senior managers
e


Role of audit committee Duties of audit committee

The audit committee's work should improve public Review of financial statements including changes
confidence in corporate governance, by helping to in policies, judgemental areas, compliance
create a climate of control and improving the quality of
financial reporting. The committee should also: Relationship with external auditors including
appointment/removal, independence, scope, liaison
Enable NEDs to play positive role
Review of internal audit including standards,
Help finance director independence, scope, resources, reporting, work
Strengthen position and independence of external plans, liaison with external auditors, results
auditors
Review of internal control including systems
adequacy, legal compliance, fraud risk, auditors'
reports, disclosures
Audit committee membership
Audit committee should consist of independent non- Review of risk management
executive directors and should include member(s) Investigations
with significant and recent financial experience.

Risks Identifying, Control system Actions to Need for more

Strategic evaluating and effectiveness reduce risk monitoring
Consequences/likelihoods managing risks
Regular review
Risk assessment Control environment/activities Information and communication Monitoring

Clear objectives Risk management policy Quality of reports Effective processes
Assessment of significant Effective culture Changing information needs Flexibility
risks Senior management Balanced reporting? Follow-up
Acceptable risks commitment Whistleblowing channels Significant event
understood Clear authority lines reporting
Communication


Annual review of controls External reporting on risk management

Review should be wider-ranging than normal review: Board should disclose existence of process for
Changes in risks faced managing risks, how the board reviewed the
Changes in organisation's ability to respond to risks effectiveness of the process and whether the
Scope and quality of management’s monitoring process accords with the Turnbull guidance.
Work of/need for internal audit
Extent and frequency of reports to board Contents of report
Significant controls, failings and weaknesses
Responsibility for internal control
Internal risk reporting Responsibility for review of effectiveness
Needs to be comprehensive and carried out systematically System manages, not eliminates, risk
and regularly. Most serious risks may need to be reported System provides reasonable assurance v
daily. Reports should show: loss
Risk levels before controls implemented Summary of review
Actual risks vs predicted risks Process for dealing with problems
Feedback on action taken Weaknesses resulting in material losses
Level of residual risks
9: Personal ethics
Don’t think of this chapter as too theoretical.You may see

Topic List questions where you have to determine what would
influence an individual's ethical decision-making, or use
Ethical theories Tucker or the AAA model to assist the decision-making
process.
Individual influences
Situational influences
Approaching ethical problems
Ethical theories Individual Situational Approaching

influences influences ethical problems
Lack of objective standards Objective standards

Non-cognitivism – no possibility of acquiring objective Cognitivism – objective, universal principles exist and
knowledge of moral principles. can be known, ethics can be regarded as absolute.
Moral relativism – right and wrong are culturally
determined. Deontological ethics
Kant stated that acts can be judged in advance by
Teleological Consequentalist ethics moral criteria:
Moral judgements based on outcomes or Do what others should be doing
consequences. Utilitarianism means acting for the Treat people as autonomous beings and not as
greatest good to the greatest number. means to an end
Act as if acting in accordance with universal laws
Egoism
Act is ethically justified if decision-makers pursue
Pluralism
short-term desires or long-term interests (justification Different views may exist but it should be possible to
for free market). reach a consensus; morality is a social phenomenon.

National and cultural beliefs Psychological factors

Differences lie in four main areas. Focus is on how people think and how they decide
Role of individual v collective good what is morally right and wrong.
Acceptance of power distribution
Desire to avoid uncertainty Locus of control
Masculinity v femininity (money/possessions v Influence individuals believe they have over their own
people/relationships) lives.
Internal – individuals have significant influence
Education and employment External – lives shaped by luck/circumstances
People's education/work background seems to be more
significant with globalisation. Moral development
Kohlberg's three levels – ethics determined by:
Morality 1 Rewards/punishments (Pre-conventional)
Actions are influenced not only by people's own 2 Others' expectations/law (Conventional)
integrity but also how much awareness they have of
their actions' moral consequences. 3 Individual's own decisions (Post-conventional)
Page 71 9: Personal ethics


Moral intensity Moral framing

Can be used to decide how ethically significant an How issues are perceived in organisations. Use of
issue is. language can be important (fairness/honesty), but also
significant is the degree to which managers are willing
Criteria to frame issues in moral terms.
Magnitude of consequences Organisational culture

Society's view of problem Basic assumptions that define organisation's view of
Probability of effect itself and its environment.
Speed consequences will occur
Nearness of those affected Components of organisational culture
Level of suffering of those affected
Values
National/cultural context Beliefs
Behaviours
Ethical decision may be shaped by nation in which it Taken for granted assumptions
happens.
Systems of reward Bureaucracy

Ethical positions can be affected for better or worse by A system including detailed rules and procedures,
remuneration. that underpins reward and authority systems.
Basis of reward may encourage undesirable practices
Failing to reward/punishing ethical behaviour may Bureaucracy characteristics
deter it
Rules override individual beliefs
Authority Morality in terms of following procedures
Managers can encourage good or bad behaviour by the Distancing individuals from consequences
example they set, whether they set targets that encourage Denial of individuals’ moral status
poor behaviour, or fail to stop unethical behaviour.
Organisational field
Work roles Organisations share a common business
The work role individuals have will determine what they environment, and hence common norms and
believe to be ethical. values.
Page 73 9: Personal ethics


Tucker's model of decision-making

How to gain marks
Marks will be awarded for: Profitable Right
Analysis of the situation Legal Sustainable
Recognition of ethical issues Fair
Explanations of relevant ethical guidance
Making clear, logical and appropriate American Accounting Association
recommendations
Justifying recommendations in practical business
and ethical terms Facts Best course of
Ethical issues action
Norms/principles/ Consequences
values Decision
Alternative courses
of action
10: Professional ethics
In this chapter we focus on professional and business

Topic List ethics. Knowledge of the ethical threats is as important
as it was in earlier auditing papers, and you need to
Company codes adopt a logical approach to solving ethical dilemmas.
However, in this paper it’s also important to understand
Professional codes why codes take the form they do and how much impact
Ethical threats and safeguards they have. Independence will be a key issue in many
questions.
Accountants in business
Public interest
Company codes Professional Ethical threats and Accountants Public interest

codes safeguards in business
Code of conduct Contents of codes

Code seeks to establish organisation's values, promote
business objectives, emphasise responsibilities to Ethical principles
stakeholders, control individuals' behaviour. Commitment required from employees
However, issuing a code isn't enough, a code needs to Compliance with law
be backed by: Treatment of customers
Commitment of senior management Treatment of suppliers
Staff understanding of importance of ethics Commitment to fair competition
Staff commitment to ethics Commitment to environment
Commitment to community
Other measures Corporate citizenship
Detailed guidance
Recruitment/Selection/Induction Problems with codes
Training Codes may be seen as inflexible and unfair sets of
Reward schemes rules, that are not relevant to the ethical situations
Whistle-blowing procedures employees encounter.
Ethical departments/audits

Professional codes Fundamental principles

Professional codes stress the Professional competence/due care – maintain knowledge/comply with
importance of the public interest. standards
Most then set out: Integrity – straightforwardness/honesty
Fundamental principles Professional behaviour – avoid actions discrediting profession
Conceptual framework Confidentiality – don't disclose to third parties unless legal/professional
Threats to compliance duty
Safeguards Objectivity – avoid influence by bias/conflicts of interest/undue influence
Professional codes
Advantages Disadvantages
Emphasise public interest/confidence Lack of focus
Onus on active thought Permit box-ticking
International application Don't capture regional variations
Can include detailed guidance/prohibitions Not legally enforceable
Prescribe minimum behaviour Examples interpreted as rules
Page 77 10: Professional ethics

Company codes Professional Ethical threats Accountants Public interest

codes and safeguards in business
T Self-interest Professional safeguards

H Self-review
R Entry requirements
Training requirements
E Advocacy
CPD requirements
A Familiarity
Professional standards
Professional monitoring
T Disciplinary procedures
S Intimidation External review
Importance of independence Safeguards in practice

Independence promotes:
Reliability of financial information Peer review
Credibility of financial information Independent consultation
Value for money of audit Partner/staff rotation
Credibility of profession Discussion/disclosure to audit committee
Reperformance by another firm
Employment with assurance client

Close business
relationships
Financial Partner on client board
interests
Family and personal relationships
Recruitment SELF-INTEREST THREAT Gifts and hospitality
Loans and guarantees

Lowballing
% or contingent
High % fees
Overdue fees
of fees
Recent service General other
with assurance services
client
Preparing accounting records

and financial statements
Other services SELF- REVIEW THREAT Valuation services
Corporate
finance Tax services
Internal audit
services

Company codes Professional Ethical threats Accountants Public interest

codes and safeguards in business
Familiarity threat
Advocacy threat
Where accountants take client's part, act as their Family relationships between client and firm
advocate or will only earn fees from client if Personal relationships between client and firm
successful outcome is achieved (contingent fees). Long association with client
Examples include provision of legal service and Recent service with client
corporate finance advice. Future employment with client
Intimidation threat
Conflicts of interest
These can arise from accountants acting for clients
with whom they are in dispute, eg over quality of Close business relationships
work. It can also arise through disputes between two Family relationships
clients for whom accountants are acting. Personal relationships
Staff employed by client
Litigation

Preparation and reporting of information Bribery and corruption

Information should describe clearly nature of Bribery is giving value in return for influence,
business transactions, classify and record information corruption also includes systems abuse, bid giving
in timely and proper manner, and represent facts and cartels.
accurately.
Problems with bribery
Acting with expertise
Competent performance by accountant may be Lack of honesty/good faith
threatened by lack of time, lack of information, Conflicts of interest
insufficient training, inadequate resources. Misallocation of resources
Poor international risk management
Financial interests Loss of reputation
Share ownership, share options and profit-related
bonuses provide incentives to manipulate Measures to combat bribery include code of conduct,
information. Accountants may be offered risk assessment, conduct of business rules and
inducements to act illegally. whistleblowing questionable transactions.


Public interest Professionalism

The collective well-being of the community of people Compliance with relevant laws and regulations, and
and institutions the accountant serves. But lack of avoidance of actions that may bring discredit on
statutory definition can make it difficult to enforce. profession.
Critics have claimed profession acts against public
interest in a number of ways.
Influence of profession
Critics have accused the profession of:
Against public interest
Getting the numbers wrong
Failing to realise the assumptions used in
Accounting standards allow excessive leeway preparing accounts support a capitalist-
Ineffective auditing standards authoritarian view of society
Emphasise confidentiality over public interest
11: Corporate social responsibility
In this chapter we examine organisations' impact upon

Topic List the natural and human environment. This has been
highlighted as an important topic and it illustrates how
Corporate citizenship various aspects of control systems (management
systems, internal audit and external reporting) are
Ethical stances applied.
Social responsibility
Social and environmental impacts
Environmental audits
Corporate Ethical Social Social and Environmental

citizenship stances responsibility environmental impacts audits
Corporate citizenship Core principles

The business strategy shaping the values under-
pinning mission and choices made as the Minimising harm
corporation engages with society. Corporate Maximising benefit
social responsibility discussions are often in Accountability and responsiveness to stakeholders
terms of corporate citizenship, focusing on rights
(carrying on business lawfully) as well as
responsibilities.
Limited view Voluntary philanthropy, corporate citizen engages with local communities and
employees, mainly for self-interest.
Equivalent view Focus on a broad range of stakeholders and response to demands of society and
legal requirements.
Active social and political citizenship, promotion of social, civil and political rights,
Extended view filling void caused by lack of government action.

Wider view of ethical responses

Minimum compliance Better for reputation
Government imposes wider constraints Prevents more legal regulation
Short-term shareholder Long-term shareholder

interest interest
Ethical stance
Multiple stakeholder Shaper of society

Building relationships Constitution requirements
Which stakeholders? Accountability
Which obligations? Financial viability
Page 85 11: Corporate social responsibility


Private property rights paramount, companies exist to make profits

Pristine capitalists and achieve economic efficiency
Acknowledgement of business excesses, acceptance of limited social
Expedients and moral responsibilities
Social contract proponents Survival depends on delivery of benefits to society/groups that

determine its power, behaviour adheres to society norms
Social ecologists Modification needed of economic processes, resulting in resource

exhaustion, waste, pollution
Socialists Society's framework should promote equality, not requirements of

capitalism
Need for emphasis on feminine values such as co-operation and
Radical feminists reflection, fundamental readjustment of society required
Human rights to existence don't exceed other species' rights.
Deep ecologists Economic systems should not trade species survival v economic
imperatives

Depletion of Adverse visual and Air and water

natural resources aural impacts emissions
Indirect impacts How organisations affect Contribution to

through supply
chain the environment climate change
Waste Positive/negative Raising/lowering

disposal health impacts local quality of life


Environmental costs Contingencies

£
Waste management X Remediation/compensation
Remediation X Future regulatory impacts
Compliance activities X Essential product improvements
Employee health and safety
Permit fees X
Environmental knowledge acquisition
Environmental training X Non-sustainable inputs
R&D X Impaired assets
Maintenance X
Legal costs X
Environmental assurance bonds X
Stakeholders and reputation risk
Environmental certification X Increasingly stakeholders are aware of environmental
Natural resource inputs X impacts and require businesses to do more to deal
with them. Being known as a poor corporate citizen
Record keeping and reporting X
can pose a serious reputation risk.
X
Sustainability For whom?

Other species
Sustainability is ensuring that economic % of current population
development meets the needs of the present In what way?
without compromising the future. Natural/social/economic
Sustainability for organisations means How long?
developing strategies by which an organisa- Availability of raw materials
tion only uses resources at rate that can be Dependent on climate change
replenished, and emissions of waste don't At what cost?
exceed environment’s ability to absorb them. Presentation
Substitution/compensation possible
Strong sustainability Weak sustainability
Fundamental change in perceptions required Catastrophe prevention

Harmony with natural world Sustaining humanity
Sustain all species Regulate resource usage
Continue to pursue economic growth? Maintenance of existing system


The Global Reporting Initiative aims to develop Sustainability Reporting Guidelines for organisations to use
when reporting on economic, environmental and social dimensions of their activities, products and services.
Sustainability report GRI indicators
Vision and strategy Direct economic impact – on key stakeholders

Profile Environmental – use of natural resources, emissions,
Governance structure and management transport usage, compliance with standards
systems Labour practices – employment practices, health and
GRI content index safety, training, diversity
Performance indicators Human rights – strategy, non-discrimination, workers’
rights, low-paid labour
Society – community contribution, political activities,
competitive attitudes
Products – customer health and safety, advertising,
privacy
Advantages of external reporting Integrated reporting

Integrated reporting links reporting on sustainability
Enhances transparency and accountability issues with reporting on financial results and operations.
Promotes improvement in control systems It emphasises reporting on goals and strategies as well
Addresses investor worries about risk as issues and impacts. Businesses should show their
Enhances reputation relationships with capitals used (financial, manufactured,
Limits damage if incidents occur human, intellectual, natural, social).
EMAS Environmental control systems

Control systems should cover relevant functions and
Emphasis on verified improvement and disclosure. activities:
Requirements include:
Policy development and objectives
Environmental policy statement Life-cycle assessment
On-site environmental review Compliance
Environmental management system Waste and pollution minimisation
Environmental audits and actions R&D
Public environmental statement Performance reporting


Environmental audit Audit review

Assesses how organisation is safeguarding the Auditors will concentrate on a number of aspects that
environment. It should enhance management control affect environmental impact:
of environmental practice and compliance with
Board knowledge
internal policies and external reputation.
Compliance procedures
Types of audit Environmental information systems
Performance targets and review
Implementation of previous recommendations
Environmental impact assessment of major True and fair reporting
projects
Surveys of organisation's impact on targets Audit work
SWOT analysis
Quality management programme Establish metrics
Eco-audit Compare planned/desirable and actual
BS7750 compliance performance
Supplier audits Report results

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1: Scope of corporate governance

This chapter sets out the foundations of good corporate

Definition Concepts Agency Stakeholders Main issues

Risk management Appropriate control Framework to

Guards against Spirit of codes Accountability to

Definition Concepts Agency Stakeholders Main issues

Fairness Take into account all stakeholders with legitimate interests

Page 3 1: Scope of corporate governance

Definition Concepts Agency Stakeholders Main issues

Agency Agency in corporate governance

Definition Concepts Agency Stakeholders Main issues

Stakeholders Stakeholder power mapping

Page 5 1: Scope of corporate governance

Definition Concepts Agency Stakeholders Main issues

Proximity to organisation Primary and secondary stakeholders

Active and passive stakeholders

Voluntary and involuntary stakeholders Legitimacy of stakeholders

Page 7 1: Scope of corporate governance

Definition Concepts Agency Stakeholders Main issues

Directors Executive full-time managers, non-executive monitoring

Government Establish overall climate, encourage private shareholdings, provide subsidies,

Page 9 1: Scope of corporate governance

Definition Concepts Agency Stakeholders Main issues

Duties of directors Directors' remuneration

Board composition Board supervision

Accounting and auditing Corporate social responsibility

2: Approaches to corporate governance

Topic List In this chapter we summarise the factors that have

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

Internationalisation Investor treatment Financial reporting Individual country Corporate scandals

Openness Integrity Accountability

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

Principles-based approach Key Principles

Page 13 2: Approaches to corporate governance

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

Advantages of principles Problems with principles

Avoids inflexible rules Principles too broad

Insider systems Outsider systems

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

UK Corporate Governance Code OECD principles

Page 15 2: Approaches to corporate governance

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

Sarbanes-Oxley Weaknesses at Enron

Audit committees Internal control reports (s404)

Whistleblowing Off-balance sheet transactions

Page 17 2: Approaches to corporate governance

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

Significance of responsibility CSR and stakeholders

Problems with stakeholder view

Page 19 2: Approaches to corporate governance

Development of Basis of Major Sarbanes-Oxley Corporate social Public sector

Public sector Private sector Charitable status NGOs/quasi NGOs

Stakeholders The public, central Shareholders, Service users Government,

3: Corporate governance practice

Topic List Corporate governance practice is a key area in this

Role of board Board Non-executive Directors' Stakeholder Reporting

Scope of board's role Advantages of diversity

CPD and appraisals Board appraisal

Advantages of multi-tier boards Disadvantages of multi-tier boards