SBL Notes – JUNE 2020 Attempt

Sir Hasan Dossani – MHA

Chapter 5
Leadership
Leadership
Leadership means leading a group of people in an organization to achieve organizational goals. A leader can
be ‘transformational’ leader or a ‘transactional’ leader

Transformational Leader Transactional Leader (Manager)

Establishing mission & strategies Achieving mission & strategies
Innovation and growth Managing and controlling
Long term view Medium / short term view

Roles of Effective Leader

▪ Create inspiring vision and mission ▪ Empowerment and accountability
▪ Lead by example ▪ Communicate
▪ Result oriented ▪ Teamwork
▪ Manage change ▪ Coach and mentor
▪ Motivate ▪ Problem solving

Leadership Theories
Trait Theories
▪ Focuses on qualities of a good leader
▪ E.g. visionary, energy, communication skills, motivator, etc.

Style / Behavioral Theories

▪ Focuses on influencing style of the leader
▪ E.g. Ashridge: Tell, Sell, Consult, Join

Contingency Theories
▪ No ‘one right way’ of leading, that will serve all situations
▪ Leadership styles varies with the situation (contingent)
▪ Appropriate leadership style depends on the team and the nature of task
▪ E.g. Feilder: Psychologically Distant Managers, Psychologically Close Managers

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

McGregor - Theory X and Theory Y:

Theory X Manager:
▪ Manager feels that the team lacks expertise and responsibility
▪ Hence the manager dictates what needs to be done and the team is closely monitored
▪ The manager gets heavily involved in routine tasks and minor decision making as well
▪ The team is not accountable as they just follow orders
▪ This approach works for simple repetitive tasks

Theory Y Manager:
▪ Manager feels that the team has the expertise and willing to take responsibility
▪ The manager allows the team to do self-planning and decision making
▪ The manager does not gets involved in routine tasks and minor decision making
▪ The team is accountable as they are responsible for their decision making
▪ This approach works for complex tasks

Entrepreneurship & Intrapreneurship

Entrepreneurship
A person who takes risks and setups up his own business with a new idea or concept

Intrapreneurship
▪ An employee who promotes innovation and new ideas within his existing organization
▪ Intrapreneurs bears less risk compared to entrepreneurs as investment is made by the Organization
▪ Many organizations are now encouraging Intrapreneurship within the organization as it leads to
innovation by encouraging sharing of new ideas

Professional Code of Ethics

Professional
A professional is a person having specialist knowledge through intense education and experience, e.g. doctor,
accountant, etc.

Professional Code of Ethics for Accountants

The ACCA Professional Code of Ethics and Conduct is based on the IFAC’s Professional Code of Ethics for
Accountants, of the International Ethics Standards Board of Accountants (IESBA). If a matter is not resolved by
this Code, then legal advice should be obtained. All professional accountants are required to follow this Code of
Ethics.

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

Principles of Professional Ethics (IESBA / IFAC)

▪ Integrity: Honest, straight forward, truthfulness, do not conceal any wrong thing, fair dealing

▪ Objectivity: Fact based, no bias, no conflict of interest, no undue influence

▪ Professional competence and due care: Maintain professional knowledge and skills, up-to-date with all
laws, diligent in work, act with due care

▪ Confidentiality: Should not disclose confidential information unless there is legal or professional duty, do
not use confidential information for personal advantage

▪ Professional behavior: Avoid actions which discredits the profession / members, for e.g. not following
company policies or procedures

Threats to Professional Ethics / Conflict of Interest

Ethical threat is a situation where a person is tempted not to follow the principles of Professional Ethics.
Following are examples of possible ethical threats (from external Auditor point of view):

▪ Self Interest
 Financial interest in the company (e.g. owning shares)
 Close business relationship (e.g. high dependency on income from particular client)
 Close family or personal relationship
 Valuable gifts or hospitality
 Loans and terms outside normal course of business
 Overdue fees for earlier assignments
 Contingent fees (e.g. high fee for good report, low fee for bad report)
 Fee based on % age (e.g. % age of profit)
 Low-balling (quoting abnormally lower quote affecting the quality of audit)

▪ Self Review Threat

 Auditing your own work
 E.g. preparing financial statements and then auditing it yourself
 Audit firms do variety of work for a client, hence proper segregation / Chinese walls should exist
between teams

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

▪ Advocacy Threat
 Means when the auditor promotes a client to the point where auditor’s subsequent objectivity is
compromised
 E.g. the auditor is representing a client in a litigation

▪ Familiarity Threat
 Long association with the client to the extent which affects objectivity and independence
 For e.g. you have known the Finance Director for many years

▪ Intimidation Threat
 When the auditor is stopped from acting objectively by threats from directors or employees
 E.g. could be blackmail, bad feedback, physical or family treat, litigation, etc.

Safeguards Against Threats to Professional Ethics

Ethical safeguards protect a professional from threats to professional ethics. It also helps in maintaining
confidence in the profession as well as upholding public interest.

Following safeguards are implemented to protect against threats to professional ethics:

▪ Adopting Professional Code of Ethics
▪ Policies and procedures
▪ Risk assessment
▪ Strong internal controls (e.g. quality control procedures, peer reviews, etc.)
▪ Training
▪ Referring matters to Organization’s Audit Committee
▪ Disciplinary procedures
▪ Regular rotations of audit partners and audit teams
▪ Chinese walls between departments (e.g. audits, tax, consultancy, etc.)
▪ Monitoring and improvement

Contents of a Professional Code of Ethics Document

1. Introduction (background, enforceability, disciplinary procedures)
2. Fundamental principles (integrity, objectivity, professional competence, confidentiality,
professional behavior)

3. Conceptual framework (explains how ‘spirit’ of principles is applied rather than ‘form’)

4. Detailed application (practical application of the codes, specific situations and examples)

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

Benefits of a Professional Code of Ethics

▪ Establishes ethical values and guidelines for members
▪ Clear communication to members and stakeholders
▪ Directs and control behaviors of members
▪ Consistent and transparent framework for issue resolution and disciplinary action
▪ Enhances reputation of the profession

Public Interest
Public Interest
▪ Public interest is one of the key themes in professionalism
▪ Public interest means working in the interest and well-being of the society, in addition to serving the
interest of the shareholders
▪ Professionals (including professional accountants) have a duty to protect public interest and have to
demonstrate high social values (integrity, fairness, no corruption, etc.)

Role Expected from of Professional Accountants in Society (Social Responsibilities)

▪ High Professional Ethics:
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behavior
▪ Factual and transparent reporting
▪ Fair dealing with all stakeholders
▪ Independent and reliable audits
▪ Stopping, highlighting and reporting fraud and corruption

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

Fraud
Definition
Fraud is an ‘intentional’ act of dishonesty to gain unjust or illegal advantage. There are two types of fraud:

▪ Misappropriation of assets (e.g. cash or inventory)

▪ Fraudulent financial reporting (e.g. overstating of profits)

Common types of frauds include fictitious employees, collusion with suppliers to inflate prices, fictitious
expense claims, stealing or misusing company assets, manipulation of financial statements, etc.

Conditions Required for Fraud - The Fraud Triangle

The Fraud Triangle identifies three fundamental conditions necessary for a fraud to be committed:

▪ Incentive (e.g. greed, financial pressure, affecting share prices, etc.)

▪ Opportunity (e.g. poor internal control, weak supervision, poor corporate governance)
▪ Rationalization (e.g. personal justification for committing fraud)

Organizations can only control the ‘opportunity’ factor in order to prevent fraud.

Measures to Reduce Chances of Frauds

Three stages approach is required to reduce chances of frauds:

▪ Prevention
 Commitment by top management / governance
 Create a right culture
 Implement policies and procedures
 Risk assessment
 Strong internal controls
 Segregation of duties
 Tight screening at the time employees are recruited
 Regular staff rotation
 Monitoring

▪ Detection
 Surprise checks
 Internal audits
 Whistle blowing procedures (see below)

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

▪ Response
 Strict disciplinary actions
 Legal prosecution

Whistle Blowing
A whistle blower is a person who provides any kind of information to senior management regarding fraud (or
suspected fraud) or illegal activity within an organization. Whistle blower can be internal (e.g. employee) or can
by an outsider (customer or supplier).

Sometimes whistle blowers are scared to highlight any fraud due to fear or later consequences. In UK, whistle
blowers are protected by law if they report something relating to public interest.

Effective whistle blowing program includes:

▪ Strong encouragement by governance (e.g. whistle blowing policy)

▪ Confidential reporting mechanism (e.g. whistle blowing number)
▪ Protection (e.g. job protection, physical protection, no biasness or revenge later on)

Bribery & Corruption

Corruption
Corruption is deviation from honest behaviour. Examples of corruption include bribery, misuse of authority, bid
rigging, cartels, etc. It is a serious breach of the principle of Integrity and is a illegal offence as it damages the
society.

Bribery
Bribery is offering, giving, demanding or receiving a financial or other advantage to act or perform an activity
improperly

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

Why Corruption Exists

▪ Culture or norm
▪ Low pay scale as compared to authority and power
▪ No check and balance / weak internal controls
▪ Weak enforceability of law i.e. no fear or punishment

Why Organization Should Avoid Corruption & Bribery

▪ Socially unethical in most societies
▪ It is against the Corporate Governance principle of ‘PROBITY’
▪ For professional accountants, it is against the IFAC’s Professional Code of Ethics principles of ‘Integrity’
and ‘Professional Behavior’
▪ It is against public interest principle
▪ Loss of reputation
▪ Legal prosecution / penalties

Measures to Control Bribery & Corruption in an Organization

▪ Commitment by top management / Governance
▪ Establish right culture
▪ Implement policies and procedures, Code of Ethics, etc.
▪ Risk assessment (i.e. focusing more on risky areas)
▪ Strong internal controls
▪ Training
▪ Reporting and whistle blowing
▪ Monitoring and improvement

Some “Red Flags” Indicating Possible Bribery & Corruption Risk

▪ Excessive or unusual payments to a third party in foreign bank accounts
▪ Refusal or hesitance by third party to sign Anti-Corruption Undertakings
▪ Lavish life style not matching with the salary
▪ Excessive cash payments or excessive commission percentages
▪ Contingent commissions
▪ Weak or no bidding process for tenders

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

UK Bribery Act 2010

▪ This Act targets both bribery and corruption

▪ Four offences under the Act:

 Offering or giving bribe whether directly or through third party
 Demanding or receiving bribe whether directly or through third party
 Offering or giving bribes to Foreign Public Officials (i.e. outside UK)
 Commercial organization failing to prevent bribery due to inadequate procedures and controls
(See below section)

▪ The Act sets out 6 principles that help organization assess whether adequate procedures and controls
are in place to prevent bribery and corruption:

 Commitment by management
 Risk assessment (assess the size and nature of risk of bribery and corruption)
 Internal - procedures (procedures to be proportionate to the size and nature of risk)
 Due diligence (extra cautious with employees who are at greater risk for bribery and
corruption)
 Communication (regular training and education of all employees)
 Monitoring and review (procedures should be regularly reviewed and improved)

▪ Penalties:
 Guilty individual faces imprisonment upto 10 years
 Guilty organization is liable to unlimited fine
 The above is in addition to any civil claims and reputational loss

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

Corporate Code of Ethics

Corporate Ethics
‘Ethics’ are moral opinions about right and wrongs.

‘Corporate ethics’ means application of ethical values to business dealings. E.g. of unethical behaviours
includes:

▪ Providing bad quality / injurious ▪ Child labour

products to customers ▪ Government lobbying / using political connections
▪ Employee discrimination ▪ Social and environmental responsibilities
▪ Bribery and corruption

Corporate Code of Ethics

Corporate Codes of Ethics are written guidelines issued by an organization to its employees to help them
conduct their actions in accordance with organization’s ethics and values. The Corporate Code of Ethics must
be fully supported by top management and regular staff training should be conducted.

Contents of Corporate Code of Ethics Document

▪ Overall ethical principles and values of the organization
▪ Customers values (quality, safety, disclosure, data privacy)
▪ Suppliers values (fair dealing, no dealing with unethical suppliers)
▪ Treatment of employees (discrimination, health and safety)
▪ Community and wider stakeholders (social, environmental, CSR)

Benefits (Purpose) of Corporate Code of Ethics

▪ Establishes ethical values
▪ Clear communication to employees and stakeholders
▪ Directs and control behaviors of employees
▪ Consistent and transparent framework for issue resolution and disciplinary action
▪ Risk reduction / avoidance of fine and penalties
▪ Enhanced reputation / competitive edge

Exercise: Google for Corporate Code of Ethics for Amazon

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 SBL Notes – JUNE 2020 Attempt
Sir Hasan Dossani – MHA

How Ethical Problem Can Be Handled and Resolved

▪ Refer to Professional Code of Ethics
▪ Refer to organization’s Corporate Code of Ethics document
▪ Apply Tucker 5 Question Model (covered below)
▪ Assess how general public will think if they find out:
 How would this look in newspaper
 How would my family feel?
 Can we defend if a legal action is taken?

Ethical Decision-Making Framework – Tucker’s 5 Question Model

Many business decisions have ethical elements. We can use Tucker’s 5 Question Model to help assess decisions
from ethical aspects. Not all criteria might be relevant in every situation:

▪ Is it profitable?
▪ Is it legal?
▪ Is it fair to all stakeholders?
▪ Is it right ethically?
▪ Is it sustainable and environmentally friendly?

Practice Questions
P1 - Dec 2013 Q4: Director Leaving | Technology Risk | Professional Ethics (Lobo Co)

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