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ACCA APPROVED CONTENT PROVIDER ACCA Approved Study Text Free access to our Exam Paper P1 Success site Governance, Risk and Ethics Look inside Study Text for exams up to June 2015ThiNganHang.com ThiNganHang.com
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S T U D Y PAPER P1 T E X GOVERNANCE, RISK AND ETHICS T BPP Learning Media is an ACCA Approved Learning Partner – content. This means we work closely with ACCA to ensure this Study Text contains the information you need to pass your exam. In this Study Text, which has been reviewed by the ACCA examination team, we: Highlight the most important elements in the syllabus and the key skills you need Signpost how each chapter links to the syllabus and the study guide Provide lots of exam focus points demonstrating what is expected of you in the exam Emphasise key points in regular fast forward summaries Test your knowledge in quick quizzes ThiNganHang.comExamine your understanding in our practice question bankReference all the important topics in our full index BPP's Practice & Revision Kit and i-Pass products also support this paper. FOR EXAMS IN DECEMBER 2014 AND JUNE 2015 ThiNganHang.com
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First edition 2007 All rights reserved. No part of this publication may be Seventh edition June 2014 reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, ISBN 9781 4727 1085 7 photocopying, recording or otherwise, without the prior (Previous ISBN 9781 4453 9653 8) written permission of BPP Learning Media Ltd. e-ISBN 9781 4453 6740 8 We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past British Library Cataloguing-in-Publication Data examination questions. The suggested solutions in the A catalogue record for this book practice answer bank have been prepared by BPP is available from the British Library Learning Media Ltd, unless otherwise stated. Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom by Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP ThiNganHang.com Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources. © BPP Learning Media Ltd 2014 ii ThiNganHang.com
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Contents Page Introduction Helping you to pass ......................................................................................................................................................... v Studying P1 .................................................................................................................................................................... vii Syllabus and study guide............................................................................................................................................... xiv The exam paper............................................................................................................................................................xxvii Part A Governance and responsibility 1 Scope of corporate governance ............................................................................................................................... 3 2 Approaches to corporate governance..................................................................................................................... 47 3 Corporate governance practice and reporting ........................................................................................................ 77 Part B Internal control and risk 4 Internal control systems ...................................................................................................................................... 137 5 Risk attitudes and internal environment............................................................................................................... 157 6 Risks ................................................................................................................................................................... 189 7 Risk assessment and response............................................................................................................................ 215 8 Information, communication and monitoring....................................................................................................... 251 Part C Professional values and ethics 9 Personal ethics ................................................................................................................................................... 289 10 Professional ethics .............................................................................................................................................. 319 11 Corporate social responsibility ........................................................................................................................... 359 Practice question bank ..............................................................................................................407 Practice answer bank .................................................................................................................415 Index .....................................................................................................................................................445 Review form ThiNganHang.com Contents iii ThiNganHang.com
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A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: Photocopying our materials is a breach of copyright Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your fellow students? We update for a reason.) Please note the e-products are sold on a single user licence basis: we do not supply ‘unlock’ codes to people who have bought them second-hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them? ThiNganHang.com iv ThiNganHang.com
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Helping you to pass BPP Learning Media – Approved Learning Partner - content As ACCA's Approved Learning Partner – content, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examination team. By incorporating the examination team’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies. The PER alert Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Your achievement of the PER should now be recorded in your on-line My Experience record. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying P1 outlines the content of the paper, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to highlight when and how specific topics were examined, or how they might be examined in the future. Using the Syllabus and Study Guide You can find the syllabus and Study Guide on pages xiv – xxvi of this Study Text ThiNganHang.comTesting what you can doTesting yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Questions – lots of them - both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v ThiNganHang.com
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Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Topic list Syllabusreference What you will be studying in this chapter and the relevant section numbers, together with ACCA syllabus references. Introduction Puts the chapter content in the context of the syllabus as a whole. Study Guide Links the chapter content with ACCA guidance. Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. Knowledge brought forward from earlier studies What you are assumed to know from previous studies/exams. Summarises the content of main chapter headings, allowing you to preview and review each section easily. Examples Demonstrate how to apply key knowledge and techniques. Definitions of important concepts that can often earn you Key terms easy marks in exams. When and how specific topics were examined, or how Exam focus points they may be examined in the future. Formulae that are not given in the exam but which have to Formula to learn be learnt. Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER). Question Gives you essential practice of techniques covered in the chapter. Case Study Real world examples of theories and techniques. ThiNganHang.comChapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review. Quick Quiz A quick test of your knowledge of the main topics in the chapter. Found at the back of the Study Text with more Practice Question Bank comprehensive chapter questions. Cross referenced for easy navigation. . vi Introduction ThiNganHang.com
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Studying P1 The P1 Governance, Risk and Ethics syllabus has been written with a different focus from the exams that you have sat so far. The exam is not about learning law, accounting standards or complicated calculation techniques. Instead it seeks to promote the underlying themes of professionalism and accountability. You cannot be professional in one area and unprofessional in another. 1 What P1 is about 1.1 Underlying themes The syllabus shows how accounting is underpinned by governance and ethics, and the need for accountants to repay the trust that society puts in them. A key element of governance is the concept of accountability, particularly of directors and auditors. There is an emphasis on the agency relationship between stakeholders and business managers, including directors and accountants. Governance is itself supported by sound internal control systems, internal audit and rigorous risk management. Judgement, underpinned by professional competence and ethics, is also a key theme. Lastly students are expected to consider carefully the concept of professionalism, and to discuss how the accountant should contribute to society. The paper's main themes should be seen as interconnected: "Every right implies a responsibility; for each opportunity there is an obligation and all rewards carry related risks." 1.2 Governance and responsibility Chapter 1 demonstrates the importance of the underlying themes of the syllabus. Corporate governance is a central part of the syllabus. Instead of going straight into the detailed requirements of the corporate governance reports, it discusses in detail the concepts that underpin good corporate governance, the agency relationship, the constituencies (shareholders and other stakeholders) that corporate governance is designed to serve and the extent of responsibilities towards different stakeholders. Chapter 2 deals with the basis of corporate governance legislation and codes, whether they are based on principles or a detailed rulebook and how governance codes incorporate wider ideas of social responsibility. Chapter 3 covers governance best practice, drawing on examples from different codes from all over the world. 1.3 Internal control and risk We consider Sections B to D of the syllabus together in Section B of this book. The syllabus highlights the issues of: Internal control The identification and assessment of risk Controlling and mitigating risk ThiNganHang.comas they have proved to be problematic in recent corporate failures. These issues also play a crucial part in an accountant’s responsibility to act in the public interest and the interests of shareholders: 'Sound systems of internal analysis, control and audit underpin all effective corporate governance systems. Effective management at the strategic level rests on the assumption that internal control activities can be controlled, verified and reported on internally. If management loses control of internal systems and procedures, any claim of sound governance is lost… The same is true of risk. Being aware of all possible risks, understanding their potential impact, as well as the probability of occurrence, are important safeguards for investors and other shareholders.' In Chapter 4 therefore we examine the objectives of control and risk management systems. We also look at systems that have been developed internationally, including the COSO enterprise risk management model. Introduction vii ThiNganHang.com
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Chapters 5 to 8 are organised around the stages identified in the COSO enterprise risk management model. Chapter 5 deals with the underlying factors that affect how a business is controlled and how risk is managed. These include how much appetite the business has for risk, and how environmental factors within the business affect control and risk management. We also look at the importance of setting business objectives that are consistent with the risk that directors, shareholders and other stakeholders wish the business to bear. Chapters 6 and 7 deal with the various stages of risk assessment and management, including internal control procedures that act to reduce risk. Chapter 8 brings out two other elements that are vital in control systems. These are a two-way flow of appropriate information between the board and managers and staff. This should enable the board and managers to carry out effective monitoring of operations, and provide feedback so that systems and controls can be improved. The results of business monitoring will also form the basis for external reporting about the company’s systems. 1.4 Professional values and ethics This section of the syllabus requires you to think carefully about the ethical assumptions that guide individual behaviour and underpin the role of accountants. Chapter 9 is a very important chapter in this text, dealing with the ethical stances of individuals and also the factors that determine the ethical decisions individuals take. In the exam you may have to argue from a specific ethical position, even if you don’t agree with the position. In Chapter 10 you need to look critically at the ethical codes accountants follow as well as the codes that businesses operate. It is true that you need to have a good knowledge of what the accountancy profession’s codes say on ethical threats and conflicts and to be able to use that knowledge in recommending solutions to ethical dilemmas. However you are also expected to question how much help the codes actually are in resolving dilemmas and whether the ethical frameworks are in the best interests of society and the accountancy profession. The exam may ask you to question the role of the accountant in protecting shareholder wealth and focusing on the performance of capital investment. Does this mean that accountancy is a servant of capital and makes the implicit assumptions about morality that capitalism does? Chapter 11 looks at corporate social responsibility, concentrating on what organisations have done to address issues such as sustainability and the implications for accounting, disclosure, control systems and audit. ThiNganHang.com viii Introduction ThiNganHang.com
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2 Skills you have to demonstrate 2.1 Knowledge and application Even with exams you’ve previously taken, you'll remember that passing didn't only mean reproducing knowledge. You also had to apply what you knew. At Professional level, the balance is tilted much more towards application. You will need a sound basis of technical knowledge. The exams will detect whether you have the necessary knowledge. However you won't pass if you just spend your time acquiring knowledge. Developing application skills is vital. 2.2 Application skills What application skills do you need? Many P1 questions will include detail in a scenario about a specific organisation. The following skills are particularly important when you're dealing with question scenarios. (a) Identifying the most important features of the organisation and the organisation's environment. Clues to these will be scattered throughout the scenario. The technical knowledge that you have should help you do this, but you will also need business awareness and imagination. There will be a main theme running through most scenarios that you'll need to identify. (b) Using analysis techniques that will give you more insight into the data that you're given. (c) Selecting real-life examples that are relevant to the scenario. You should look at contemporary business stories and try to identify P1 issues, for example directors’ remuneration. (d) Making informed judgements that follow from your analysis about what the organisation is doing and should be doing. (e) Communicating clearly and concisely your analysis and recommendations. Perhaps you will be reporting to a specific individual. If so, you should take into account the needs of this individual. 3 How to pass 3.1 Study the whole syllabus You need to be comfortable with all areas of the syllabus. Compulsory Question 1 will always span a number of syllabus areas and other questions may do so as well. In particular you must have a very good knowledge and awareness of the themes in the ethical section of the syllabus, as compulsory Question 1 will always include an element on ethics. The examination team has also stressed that study and revision should cover the entire syllabus in detail. Students should not question-spot or prioritise one area of the syllabus over another. The examination team has identified in its examination team's reports topics which students who question-spotted clearly believed would not be examined, but unfortunately were. 3.2 Focus on themes, not lists ThiNganHang.comThere are quite a number of lists in the texts. This is inevitable because corporate governance guidancequoted as best practice is often in list form. Lists are also sometimes the clearest way of presentinginformation. However the examination team has stressed that passing the exam is not a matter of learningand reproducing lists. Good answers will have to focus on the details in the scenario and bring out the underlying themes that relate to the scenario. The points in them will have more depth than a series of single-line bullet points. 3.3 Read around Wider reading will help you understand the main issues businesses face. Reading the business pages of newspapers will highlight key business risks organisations face and topical corporate governance issues. General news pages may cover significant ethical and corporate responsibility issues. You should also refer to websites of organisations promoting social responsibility such as CERES. Introduction ix ThiNganHang.com
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3.4 Lots of question practice You can develop application skills by attempting questions in the Practice Question Bank and later on in the BPP Learning Media Practice and Revision Kit. 4 Answering questions 4.1 Analysing question requirements It's particularly important to consider the question requirements carefully to make sure you understand exactly what the question is asking, and whether each question part has to be answered in the context of the scenario or is more general. You also need to be sure that you understand all the tasks that the question is asking you to perform. Remember that every word will be important. If for example you are asked to: 'Explain the importance of identifying all risks that Company X is facing', then you would explain that: Taking risks is bound up with strategic decision-making Some risks may have serious consequences Identifying all risks means they can be prioritised and managed efficiently and effectively You would NOT identify all the risks that Company X would be facing. 4.2 Understanding the question verbs Important! In the report for the first P1 exam, the examination team highlighted lack of understanding of the requirements of question verbs as the most serious weakness in many candidates' scripts. The examination team will use question verbs very deliberately to signal what is required. Verbs that are likely to be frequently used in this exam are listed below, together with their intellectual levels and guidance on their meaning. Intellectual level 1 Define Give the meaning of 1 Explain Make clear 1 Identify Recognise or select 1 Describe Give the key features 2 Distinguish Define two different terms, viewpoints or concepts on the basis of the differences between them 2 Compare and Explain the similarities and differences between two contrast different terms, viewpoints or concepts 2 Contrast Explain the differences between two different terms, ThiNganHang.com2 Analyse viewpoints or conceptsDetermine the strengths/weaknesses/ importance/Give reasons for the current situation or what hashappened 3 Assess significance/ability to contribute 3 Examine Critically review in detail 3 Discuss Examine by using arguments for and against 3 Explore Examine or discuss in a wide-ranging manner 3 Criticise Present the weaknesses of/problems with the actions taken or viewpoint expressed, supported by evidence x Introduction ThiNganHang.com
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Intellectual level 3 Evaluate/critically Determine the value of in the light of the arguments for evaluate and against (critically evaluate means weighting the answer towards criticisms/arguments against) 3 Construct the case Present the arguments in favour or against, supported by evidence 3 Recommend Advise the appropriate actions to pursue in terms the recipient will understand A lower level verb such as define will require a more descriptive answer. A higher level verb such as evaluate will require a more applied, critical answer. The examination team has stressed that higher- level requirements and verbs will be most significant in this paper, for example critically evaluating a statement and arguing for or against a given idea or position. The examination team aims to set questions that provide evidence of student understanding. Certain verbs have given students particular problems. (a) Identify and explain Although these verbs are both Level 1, the examination team sees them as requiring different things. You have to go into more depth if you are asked to explain than if you are asked to identify. An explanation means giving more detail about the problem or factor identified, normally meaning that you have to indicate why it’s significant. If you were asked to: (i) Identify the main problem with the same person acting as chief executive and chairman – you would briefly say excessive power is exercised by one person. (ii) Explain the main problem with the same person acting as chief executive and chairman – you would say excessive power is exercised by one person and then go on to say it would mean that the same person was running the board and the company. As the board is meant to monitor the chief executive, it can’t do this effectively if the chief executive is running the board. Also you may be asked to explain or describe something complex, abstract or philosophical in nature. (b) Evaluate Evaluate is a verb that the examination team uses frequently. Its meaning may be different from the way that you have seen it used in other exams. The examination team expects to see arguments for and against, or pros and cons for what you are asked to evaluate. Thus for example if a question asked you to: ‘Evaluate the contribution made by non-executive directors to good corporate governance in companies’ you would not only have to write about the factors that help non-executive directors make a worthwhile contribution (independent viewpoint, experience of other industries). You would also have to discuss the factors that limit or undermine the contribution non-executive directors make (lack of time, putting pressure on board unity). ThiNganHang.comIf the examination team asks you to critically evaluate, you will have to consider both viewpoints.However you will concentrate on the view that you are asked to critically evaluate, as the markscheme will be weighted towards that view. 4.3 Analysing question scenarios When reading through the scenario you need to think widely about how the scenario relates to the underlying themes of the syllabus, and also important content from whatever areas of the syllabus the question covers: Introduction xi ThiNganHang.com
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(a) Corporate governance In questions on corporate governance, you are likely to be looking out for weaknesses in the current arrangements and trying to recommend improvements that are line with governance best practice. (b) Control systems With control systems questions, you are most likely to be interested in the design and appropriateness of the control systems, whether there are obvious shortcomings with them, and also details of the control environment. (c) Culture If you are asked about the organisation’s culture and ethos, you should be looking for evidence of directors’ views and actions, for signs of how the tone is being set at the top of the organisation. You should also look for evidence of how the ethos is being established further down the organisation, in particular how the organisation’s culture, systems, procedures, reward mechanisms, human resource policies, training are used to embed the tone of the organisation. (d) Risks With risks you are looking for the most significant risks. If these are not highlighted, you should look for the risks that are connected with the organisation’s strategy or which relate to significant changes that the organisation and its business environment are going through, or are about to go though. You should also try to determine the extent to which risk awareness is embedded in the organisation’s culture. (e) Risk management If you are asked how organisations should respond to particular risks, you’ll need to use the scenario detail to determine how serious these risks are, and suggest responses that are relevant to counter the risks and are appropriate for the organisation. It’s no use for example suggesting that the organisation sets up a large risk management function if it is not big enough to warrant one. (f) Ethics With ethical issues you are not just looking to determine not only the ethical issues at stake. You also need to consider the ethical position of the organisation and individuals and the factors that determine the ethical position. These will be significant when you think about solutions to the ethical problems. (g) Framework Look out in any question scenarios or frameworks for hints that you may have to provide a critique of the overall framework or model that is being operated. If you're basing your answer on content from corporate governance or ethical codes, will you have to criticise the principles or rules on which they are founded. If you have to make recommendations that benefit shareholders, is the shareholders' viewpoint the most valid or should other stakeholders' interests be taken into ThiNganHang.comaccount. 4.4 Consider the moral and ethical frameworks The examination team has stressed that these will affect the judgements you make when answering questions as they do in real-life. In particular the stakeholders affected by business and strategic decisions and whether some stakeholders are being favoured over others need to be considered. Remember the exam is designed to make you take a questioning approach to wide issues, and this may mean having to argue in favour of a viewpoint with which you don't agree. xii Introduction ThiNganHang.com
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4.5 Content of answers Well-judged, clear recommendations grounded in the scenario will always score well as markers for this paper have a wide remit to reward good answers. You need to be selective. As we’ve said, lists of points memorised from texts and reproduced without any thought won't score well. Important! The examination team identified lack of application skills as a serious weakness in many student answers. What constitutes good application will vary question by question but is likely to include: Only including technical knowledge that is relevant to the scenario. For example, although the SPAMSOAP mnemonic can be a useful memory aid, you shouldn’t quote it in full just because the question requirements contain the word 'control' Only including scenario details that support the points you are making, for example quoting from the scenario to explain why you're making a particular recommendation Tackling the problems highlighted in the scenario and the question requirements Explaining why the factors you're discussing are significant Taking a top-down strategic approach – remember that at Professional level you're meant to be adopting the viewpoint of a partner or finance director. Excessive detail about operations is not important 5 Gaining professional marks As P1 is a Professional level paper, 4 or 5 professional level marks will be awarded in the compulsory question. The examination team has stated that some marks may be available for presenting your answer in the form of a letter, presentation, memo, report, briefing notes, management reporting, narrative or press statement. You may also be able to obtain marks for the layout, logical flow and presentation of your answer. You should also make sure that you provide the points required by the question. Whatever the form of communication requested, you will not gain professional marks if you fail to follow the basics of good communication. Keep an eye on your spelling and grammar. Also think carefully, am I saying things that are appropriate in a business communication? 6 Brought forward knowledge You will have covered some of the corporate governance, company law and ethics contents of P1 in law and auditing papers that you have previously sat. However because the students studying this paper will have sat different variants of the law and auditing exams, this text includes full coverage of the knowledge you need for this exam even though some of it has been covered in other exams. Knowledge brought forward from F9 on ways of quantifying risks and uncertainty and expected results ThiNganHang.commay also be helpful. You may also have to use the techniques for interpreting financial information that you covered in F7. 7 ACCA ethics module We would strongly recommend that you sit the module before taking P1. The module will give you insights to a range of ethical perspectives that will be valuable in your professional career, and will also assist you in tackling the ethics content of the P1 syllabus and indeed the syllabuses of other Professional level exams. Introduction xiii ThiNganHang.com
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Syllabus and study guide The P1 syllabus and study guide can be found below. ThiNganHang.com xiv Introduction ThiNganHang.com
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