Role of the finance

function
The Operational Level

Focuses on WHAT the Focuses on HOW the

Focuses on WHAT the
finance function does
finance function does, finance function is
and its IMPLICATIONS ORGANISED

P1 F1 E1

2
E1 Overview
E1A: Role of the
Finance Function
20%

E1C: Data and

E1B: Technology in a 20%
20% Digital World
Information in a
Digital World

E1D: Shape and

Structure of the 20%
Finance Function

E1E: Finance
Interacting with the 20%
Organisation

3
E1 Overview
E1A: Role of the
Finance Function
20%

E1C: Data and

E1B: Technology in a 20%
20% Chapter
Digital World 1: Role of the Finance Function
Information in a
Digital World

Chapter 2: Activities of Finance Professionals

E1D: Shape and
Structure of the 20%
Finance Function

E1E: Finance
Interacting with the 20%
Organisation

4
 Role of the finance function
(overview)

1. The contexts that 2. The creation and preservation 3. Corporate governance,

organisations operate in of value by the finance function ethics and social responsibility

Introduction Introduction Corporate

governance
Sectors and types of
The concept of value
organisation
Ethics
Effect of organisation The role of
type on accountants in the
the finance function Corporate social and
digital world
digital responsibility
Vision, mission
and objectives The value of the
finance function
The digital world
5
1. The Contexts that Organisations Operate In
 The Contexts That Organisations
Operate In

There are various contexts which define and

influence organisations:

o The type of organisation that it is

o Which business sector the organisation operates in
o The mission, vision and objectives of the organisation
o The digital world and the business environment

Modern environments are dynamic and fast-changing

and we will look at important drivers of change that
disrupt the environment organisations operate in.

7
What is an organisation?

A social arrangement which pursues collective goals, controls its own

performance and has a boundary separating it from its environment

8
Types of Organisations
Private
• Profit-seeking organisations
• Multinational corporations (MNCs)
• Not-for-profit private organisations
• Mutual organisations/co-operatives
Public
• Government agencies (e.g. regulatory
bodies)
• Public services (e.g. police)
• State-owned industries (e.g. utilities)
• Non-Governmental (NGOs)*
9
Profit-seeking organisations

• Purpose is to generate profits for owners of the

organization

• Sole trader/partnership – no legal distinction

between private assets/liabilities of the owners and
those of the business

• Companies – owners enjoy “limited liability” for

debts of organization

• Most countries recognize two categories of

company – private and public

10
Company: Private, or Public?

PRIVATE COMPANY PUBLIC COMPANY

The shares of a private company The shares of a “public” company can

cannot be traded on a public stock be publicly traded on stock markets
market, and can only be traded
privately

11
Careful!

• Don’t confuse a public company with a

public sector organisation, or a state-owned
company!

• It’s unfortunately ambiguous terminology; but

whenever you see “public company”, you
know it is a company that can sell shares via
the stock market – and therefore is a private
organisation

12
Not-for-profit organisations

• It is a common error to state that not-for-profit

organisations have no interest in profits

• Rather, generating returns for the owners is not their

primary objective; they still need to be profitable
for the purposes of ensuring continued operation
(i.e. not loss-making!)

• Examples include: charities, unincorporated clubs,

and civil societies

13
Again, be careful!

• In fact, by definition government (i.e. public)

organisations are “not for profit” as well!

• And so “not for profit” is not an exclusively

private sector category. However, in common
parlance, “not for profit” is assumed to refer to
private sector organisations like charities

14
 Question:

Cohen Industries is an
organisation that • A private company
manufactures and sells car
parts in Lenland. The
company is seeking to
• A multinational company
expand its operations and
enter new markets, and
needs to raise additional
• A public company
finance in order to do so. It
issues new shares and sells
them on the Lenland Stock
• A not-for-profit organisation
Exchange.

Cohen Industries is an
example of:

15
 Answer:

Cohen Industries is an
organisation that • A private company
manufactures and sells car
parts in Lenland. The
company is seeking to
• A multinational company
expand its operations and
enter new markets, and
needs to raise additional
• A public company
finance in order to do so. It
issues new shares and sells
them on the Lenland Stock
• A not-for-profit organisation
Exchange.

Cohen Industries is an
example of:

16
The Public Sector
The main objectives

• Public sector organisations aim to make good

and responsible use of public monies by
delivering goods and services to the public in
a cost-effective manner

• Economy (cost control), Efficiency (achieving

objectives at minimum cost), and
Effectiveness (degree of achievement of
objectives) are typical performance
measures for public sector organisations
(“Value for Money”)

18
Characteristics of public sector orgs.

Responsible to government – public sector organisations usually answer

directly to government for their activities, with their purposes often
defined or implied by the laws of the relevant state

Little control over their income – public sector organisations rely on

the incumbent government to deliver the funds they need to
operate

What is included in the public sector varies from country to

country – in many countries, education and healthcare are
exclusively delivered by public sector organisations. In others,
a combination of public and private

19
NGOs: Public sector? Private sector? Neither?

• Although classification is contentious,

Non-governmental Organisations are
typically considered part of the “public
sector”

• The debate is due in part to the fact

that there is such a wide variety of kinds
of NGOs

20
Non-governmental Organisations (NGOs)
Two key features of NGOs are:

Generating a profit is not a

primary goal, meaning they are
not focused on short-term
financial objectives. 01

02 They are not directly linked

to governments or
government departments.

21
Non-governmental Organisations
1) Campaigning NGOs

(such as the human rights organization Liberty).

This first type seeks to influence government policy through

lobbying and generating public feeling in its favour

2) Operational NGOs

(such as relief projects run by charities following a specific

natural disaster.)

This second type attempts to make a positive impact directly

in the area it is interested in, rather than through government

22
QUANGOs

• QUANGO stands for “quasi-autonomous non-

governmental organisation”

• Typically, these are private organsations to

which government has devolved
responsibility for delivering certain public
sector goods/services

• They will usually receive most or all of their

funding from government; but they will be
independent in terms of operations

23
Effects of different organisation types on finance

Owners and Stakeholders Funding sources

Different owners and/or stakeholders The type of organization may influence or
would have different goals and constrain the available sources of
objectives that need to be supported by funding. E.g. a not-for-profit may rely
the finance function entirely on voluntary donations or
philanthropy

How performance is measured Goal of the organisation

The different goal types will A company is driven by the goal
determine how performance is of maximizing shareholder wealth,
measured, e.g. a public sector org whereas a charity will prioritise
may not be as concerned with delivering a social need
cost control.

Use of technology
Of course, a typical tech company will require huge investment in
technology and R&D, whereas a social club may require virtually none 24
 Question:

The Justice Alliance is an

organisation that strives to • An Operational NGO
bring about criminal justice
reform in Gunland. It raises
funds through voluntary
• A QUANGO
donations, and lobbies the
government to repeal what
it deems to be harmful
• A not-for-profit organisation (a charity)
legislation and address
institutional corruption.
• A Campaigning NGO
The Justice Alliance is an
example of:

25
 Answer:

The Justice Alliance is an

organisation that strives to • An Operational NGO
bring about criminal justice
reform in Gunland. It raises
funds through voluntary
• A QUANGO
donations, and lobbies the
government to repeal what
it deems to be harmful
• A not-for-profit organisation (a charity)
legislation and address
institutional corruption.
• A Campaigning NGO
The Justice Alliance is an
example of:

26
Organisational Vision, Mission and Objectives

VISION MISSION OBJECTIVES

The desired future state of
the organisation. Generally
this will be aspirational and
timeless.
An expression of overall purpose and Specific goals that set and
scope of the organisation in line with control the overall
the values and expectations of functioning and progress of
stakeholders. It answers the question the organisation.
– what sort of business are we or do
we want to be?
27
Vision and Mission
The Vision Statement is the
organisation’s view of where it
sees itself going in the long
term. Vision must align with the
organisation’s mission and
objectives because these
concepts concern the purpose
of the organisation and its
future strategy.
Mission statements often have some of the
following characteristics:
• Stating the purpose of the organisation
• Stating the areas in which the
organisation intends to operate
• Providing a general statement of the
organisation’s culture
• Acting as a guide to develop the
direction of the organisation’s strategy
and its goals/objectives
28
Objectives

Objectives translate a mission into more specific milestones and targets for the
business strategy to follow and achieve. Objectives should be Specific, Measurable,
Achievable, Relevant and Time-related (SMART).

They have the following functions:

• Planning: To define and set out milestones on how the organisation will achieve its
mission and vision.
• Responsibility: To define the responsibilities of managers and departments.
• Integration: To support the subordinate objectives and be consistent (to integrate the
efforts of different parts of the organisation).
• Motivation: To motivate managers (the first step in motivation is knowing what is to be
done). Objectives must be created for all areas of performance.
• Evaluation: To provide benchmarks for performance assessment and control.
29
Levels of Objectives

Organisational level Description

Strategic (corporate) objectives To set the overall long-term objectives for the
business as a whole.

Tactical objectives To plan and control individual functions within the

organisation.

Operational objectives To act as day-to-day performance targets to ensure

that the organisation’s operations are carried out
efficiently or effectively.

30
Specifying Objectives
Critical success factors (CSFs)
An organisation may break objectives down
into smaller goals, things that the organisation
must do well at in order to succeed.
Examples of CSFs for a large chain of hotels
might be:
• Offer a high-quality service
• Provide extensive leisure faciltiies
• Locate restaurants in convenient locations
Key performance indicators (KPIs)
Once an organisation has identified its critical success
factors, it should then set performance standards. These
are known as key performance indicators (KPIs) and are
specific, measurable objectives that need to be
achieved for the organisation to reach the level of
performance that it aspires to…
• Ratings on hotel comparison websites
• Number of types of leisure facilities
• Average travel time between hotels and major travel
hubs/depots
31
The Organisational Environment

DIGITAL WORLD BUSINESS ENVIRONMENT

This describes the increasing levels of This is everything that surrounds an

digital technology in our everyday lives.
Data and information is collected, stored
and communicated about organisations
and individuals in many different ways,
from computers, to smart phones and
new digital technologies. (We’ll be
covering this in detail in sections B and C)
organisation, physically and socially.
The overall business environment can be
considered on two levels,
• Macro and
• Micro environments

32
The Organisational Environment
Macro Environment
The macro (or general) environment covers all those
factors influencing all organisations indirectly.
• Political
• Economic
• Social
• Technological
• Environmental
• Legal

Micro Environment
The micro (or task) environment includes those areas
which have a direct impact on the organisation
(stakeholders)
33
Technological connectedness

This describes how data is created, stored, retrieved and synchronised. It has caused
the rules of business to change and become more dynamic.
There are three main consequences of this connectedness on competition and the
organisational context:

01 02 03
34
Test: The Function of Objectives

01 02 03 04 05

Planning R Integration M Evaluation

35
Test: The Function of Objectives

01 02 03 04 05

Planning Responsibility Integration Motivation Evaluation

36
2. Creation/Preservation of Value by Finance Function
The Specific Roles of the Finance Function
NARRATES HOW value is
ENABLES value creation/preservation created/preserved

Performance
Planning Forecasting Resource allocation management and Financial reporting
control

SHAPES HOW value is

created/preserved

38
Enabling Value Creation

PLANNING – the finance function is a key player in helping to create plans

that allow the organization to achieve its objectives and hence create
value. One of the most important examples is budgeting.

FORECASTING– Effectively forecasting financial information allows

the organization to anticipate changes in the environment and
preserve its value. For example, forecasting future sales or material
prices.

RESOURCE ALLOCATION – figuring out which resources

(materials, labour, finance etc) will be needed where and
when in order to achieve the organization’s objectives

39
Shaping Value Creation

• Performance Management: the finance function

may provide management with performance
measures, which will allow the monitoring of
performance throughout the organization –
especially with quantitative measures, although
performance can be evaluated qualitatively too

• Control: actual performance can then be

compared and contrasted with planned
performance according to the measures, and
differences identified. Variance analysis can be a
key part of this process. Identification of differences
can be the basis of re-evaluation and
improvements (control)

40
Narrating Value Creation

• A key role of the finance function is in

preparing comprehensive reports on
the organisation’s activities and
performance throughout any given
year – particularly for the benefit of
shareholders, but also any other
interested stakeholders

41
The Concept of Value
• For profit-making organisations,
value is measured by increasing
shareholder wealth.
• For not-for-profit organisations,
value can be measured by the
achievement of goals and
objectives and the benefits that
the organisation brings to
members or society.
In general terms, value is added to
an organisation (both profit making
and not for profit) through processes
which follow the principles of
• Economy
• Efficiency
• Effectiveness
42
The role of accountants in the digital world

Fundamental finance activities:

There are four basic finance activities which

are interconnected.

The basic functions are (studied in depth in

Chapter 2):

• Assembling information

• Analysing for insights

• Advising to influence

• Applying for impact

43
The finance function value matrix

Preserve value Create value

1. Stewardship – the finance function is the
subject matter expert and supports strategic
Communication

decision-making
information
and use of

Value
Stewardship 2. Value enabling – through partnering with
enabling
other functions, offer insights on performance
issues (chapters 9 through 12)

3. Data integrity – the trusted source of

Maintaining management information
Sourcing and

information

Value
analysis of

data
analysis 4. Value analysis – analyses data for insights into
integrity
sources of organizational value

44
The Specific Roles of the Finance Function
NARRATES HOW value is
ENABLES value creation/preservation created/preserved

Performance
Planning Forecasting Resource allocation management and Financial reporting
control

SHAPES HOW value is

created/preserved

45
3. Corporate Governance, Ethics and CSR
Why is corporate governance important?

Ownership and control

The separation of ownership and control refers to

the situation in a company where the people who
own the company (the shareholders) may not be
the same people as those who run the company
(the board of directors)

47
Why is corporate governance important?

The Agency Problem

The risk that the directors may run the company in

their own interests, rather than those of the
shareholders and the other stakeholders

48
Corporate governance

Corporate governance: This is the system by which companies are directed and controlled.

It considers how directors can be held accountable to shareholders for their actions.

Company

Owned by Managed by

Corporate
Governance
Shareholders Directors

49
Examples of poor corporate
governance:

• Domination by a single individual

• Lack of involvement of board

• Lack of adequate control functions

• Lack of supervision

• Lack of independent scrutiny

• Lack of contact with shareholders

• Emphasis on short-term profitability

• Misleading accounts and information

50
 OECD Principles of corporate governance

1 Framework should promote transparent and fair markets

2 Framework should protect and facilitate the exercise of shareholders’ rights

Framework should provide sound incentives throughout the

3 investment chain

Framework should recognise the rights of stakeholders established

4 by law or through mutual agreements

Framework should ensure that timely and accurate disclosure is

5
made on all material matters regarding the corporation

6 Framework should ensure the strategic guidance of the company,

the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.

51
UK Corporate Governance Code covers:

05
Remuneration

04
Audit, risk and internal control

03
Composition, succession and evaluation
02
Division of responsibilities

01
Board leadership and
company purpose

52
UK Corporate Governance Code (UKCGC):

All companies listed on the London Stock Exchange

are required to apply the principles of the
UK Corporate Governance Code…

53
Rules-based approach
(e.g. Sarbanes-Oxley Act of Corporate Governance legislation in the USA)

Advantages Disadvantages

Consistent application Costly to learn every rule

Breaches easy to identify Removes member discretion

Rules for specific outcomes Long and lengthy rulebooks

54
Framework approach
(the UK Corporate Governance Code)

Advantages Disadvantages

Encourages proactive actions Interpretations can be subjective

Treats members as individuals Potential for inconsistency

Flexibility helps in complex situations Ambiguity may be confusing

Harder to search for loopholes Guidelines eventually become rules

55
UKCGC: The Board

• The board should have a balance of skills,

experience, independence and knowledge

• An annual report should identify the Chairperson,

Deputy Chairperson, CEO, senior independent
directors, and the members/chairs of the board
committees (which we come to later)

• Meeting numbers/attendance should also be

recorded

• Since 2018 revisions, the board is now responsible

for workforce policies and practices that reinforce
a “healthy culture”
56
UKCGC: Chairperson and
CEO

• The position of the chairperson and CEO should

be separated

• This is with a view to avoiding the earlier first

example of poor corporate governance – one
person “dominating” or having too much power
and influence

• At the time of appointment, the Chairperson

should be independent (i.e. not hired from within
company ranks)

57
UKCGC: Non-Executive Directors

• Non-Executive Directors (or NEDs) serve an

oversight function on the board, and do not get
involved in the day-to-day “execution” of
company policy

• NEDs only attend board meetings or relevant

committee meetings

• NEDS must be independent, and not:

• have been a company employee in the last 5 years;
• have had a direct/indirect material stake in the company in
the last 3 years;
• participate in the company’s share options
• have close family ties with executive directors/senior
management
• serve as a NED for more than 9 years
• have cross-directorship 58
UKCGC: NEDs continued

• It is generally recommended that at least 50% of

the board is comprised of NEDs (though smaller
companies are simply expected to have at least 2
NEDs)

• One of the NEDs should be appointed as a “senior

independent director”, serving as the direct
contact for shareholders who wish to raise issues
outside the formal channels of communication with
the board

59
UKCGC: Nomination
Committees

• Nomination committees are responsible for

making or authorizing new appointments to the
board

• Over 50% of the committee should be comprised

of NEDs

• The revised 2018 document states that the

nomination committee should be involved in
succession planning when developing a more
diverse board, and that the gender balance of
the company’s senior management should be
reported

60
UKCGC: Remuneration Committee

• This is made up entirely of NEDs – the reason being

that no director should be responsible for deciding
their own remuneration

• For FTSE 350 companies, it should contain at least 3

NEDs; for smaller listed companies, at least 2

• The Chairperson can be a member but cannot

chair the committee. The chair must have been a
committee member for at least 12 months

• The revised 2018 Code states that there should be

clear reporting on how remuneration helps the
organisation to achieve its strategy and its
alignment with workforce remuneration
61
UKCGC: Audit Committees
• Again, it consists solely of NEDs (3 for FTSE 350
companies, 2 for smaller listed companies)

• Responsible for monitoring and reviewing the

company’s financial controls and the integrity of
the financial statements

• The committee acts as a go-between for the

board of directors on the one hand and the
internal and external auditors on the other

• Among their specific duties is to:

• Review the work and effectiveness of the internal audit
function
• Monitor the external auditor’s independence and
objectivity
• Short-list external audit firms when a change is needed

62
UK Corporate Governance Code Reporting Requirements:

Listed companies are required to make the

following two general disclosures:

(i) a narrative statement of how they have applied the principles

set out in the UK Corporate Governance Code, with explanations

(ii) a statement as to whether or not they complied throughout the

accounting period with the provisions set out in the UK Corporate
Governance Code, with reasons given in case of non-compliance

63
Ethics
Ethics:
This refers to a code of moral
principles that people follow
with respect to what is right or
wrong. Ethical principles are
not necessarily enforced by
law, although the law
incorporates moral judgements
(eg theft is wrong ethically, and
is also punishable legally).
A number of factors might be
considered when determining whether
something is ethically right or wrong:
• Values (identity, mission, goals)
• Principles (abstract rules)
• Motivations (desires)
• Consequences (outcomes of the
action)
64
Ethics

There are a range of approaches that can

be taken when making ethical decisions:

• Egoists look after their own needs when making a

decision.
• Pluralists consider whether other stakeholders are
compromised by a decision (“plural” value
sources)
• Absolutists are concerned about whether a course
of action is fundamentally correct “in itself” –
regardless of potential consequences or costs
• Consequentialists will focus on the consequences
of a decision before determining a course of
action.
• Utilitarians seek to maximise the overall benefit to
society when making a decision 65
Ethics in organisations

Organisations are coming under increasing

pressure to adopt an ethical approach towards:

• Stakeholders (employees, customers,

competitors, suppliers and society as a whole)
• Environmental issues (such as climate change
and recycling)
• The disadvantaged
• Dealings with unethical companies or
governments

66
What is an ethical dilemma?

Ethical Dilemma

A situation in which a decision-maker has to decide

what is the right or wrong thing to do, usually in a
context conflicting interests and/or commitments

67
Examples of Ethical Dilemmas

Directors’ Pay: Bribes:

For example, directors awarding Paying prospective partners, clients or project
themselves generous bonuses in a sponsors to win contracts – especially where in
situation where the company is some countries, bribes are deemed “routine”
performing poorly.

Creative accounting: Product decisions:

The attempt to manipulate accounts Are certain products inherently unethical to
in order to conceal or exaggerate produce and sell (e.g. cigarettes)? Should
reported profits. products that damage the environment be
sold?

68
Examples of Ethical Dilemmas
Hiring practices:
For example, employers may actively
avoid or discourage the hiring of young,
married women on the assumption they
are more likely to become pregnant
and miss work.
Advertising:
Is it ethically appropriate to advertise
potentially controversial/unhealthy
products to children?
Health and safety:
A company may wish to cut back on health
and safety training in an effort to reduce costs,
despite it potentially putting employees at
greater risk
Anti-competitive behaviour:
Companies may engage in overt, illegal anti-
competitive behaviour (e.g. price fixing), or
more subtle forms (e.g. “encouraging”
suppliers to not supply a new entrant in order
to squeeze them out of the market)
69
Ethics and CIMA members
All CIMA members and registered students are subject
to CIMA’s Code of Ethics for Professional Accountants
(CIMA, 2017).

These guidelines make it clear that individuals must:

o Observe the highest standards of

conduct and integrity

o Uphold the good standing and

reputation of the profession

o Refrain from any conduct which

might discredit the profession

70
 Professional
competence
and due care

Objectivity CIMA’s fundamental Integrity

ethical principles

CIMA’s fundamental ethical

principles can be
remembered using the
mnemonic PIPCO and are:

Confidentiality Professional
behaviour

71
Question:
Jacob is a CIMA member, and financial controller of X plc, a large company
manufacturing furniture. X plc is currently looking for a new supplier of printed fabrics.
Three suppliers are being considered, one if which is Y ltd. Y ltd is owned by Stacey,
an old school friend of Jacob. Stacey has asked Jacob to ‘put in a good word for Y
ltd’ with the procurement manager of X plc. Stacey knows that Jacob is good friends
with X plc’s procurement manager.

Which one of the following principles would Jacob be violating by agreeing to

Stacey’s request?

Professional
Confidentiality
competence

Objectivity Integrity

72
Answer:
Jacob is a CIMA member, and financial controller of X plc, a large company
manufacturing furniture. X plc is currently looking for a new supplier of printed fabrics.
Three suppliers are being considered, one if which is Y ltd. Y ltd is owned by Stacey,
an old school friend of Jacob. Stacey has asked Jacob to ‘put in a good word for Y
ltd’ with the procurement manager of X plc. Stacey knows that Jacob is good friends
with X plc’s procurement manager.

Which one of the following principles would Jacob be violating by agreeing to

Stacey’s request?

Professional
Confidentiality
competence

Objectivity Integrity

Objectivity means ensuring that business is not

73
compromised by bias or conflict of interest.
Corporate social and digital responsibility

Corporate social responsibility:

This can be thought of as a set of actions which an organisation is not obliged to
undertake, but does so in any case for the wellbeing of stakeholders and the
public.

Corporate responsibilties:

Economic Legal Ethical Philanthropic

74
 Proactive Willingly contribute
strategy

Reactive
strategy
General CSR Defence
strategy
strategies
Respond Minimise
to external obligations
pressure
Accommodat
-ion
strategy
Pre-empt potential
pressure
75
Benefits of following a CSR strategy

There are a number of reasons why

following a CSR strategy can be
strategically beneficial for businesses:
• Customer expectations
• Brand name
• Lower environmental costs
• Trading opportunities
• Access to staff
• Investment and funding

76