ACCA P1 Governance, Risk and Ethics - 2011 - Study text - Emile Woolf Publishing
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Paper P1: Governance, risk and ethics
444 © Emile Woolf Publishing Limited
DTR 7.2.3 R requires that, to the extent that it departs from that code, the company
must explain which parts of the code it departs from and the reasons for doing so.
DTR 7.2.4 G states that compliance with LR 9.8.6R (6) (the ‘comply or explain’ rule
in relation to the Combined Code) will also satisfy these requirements.
DTR 7.2.5 R states that the corporate governance statement must contain a
description of the main features of the company’s internal control and risk
management systems in relation to the financial reporting process.
The Combined Code
In addition the Code includes specific requirements for disclosure which are set
out below:
The annual report should record:
• a statement of how the board operates, including a high level statement of
which types of decisions are to be taken by the board and which are to be
delegated to management (A.1.1);
• the names of the chairman, the deputy chairman (where there is one), the chief
executive, the senior independent director and the chairmen and members of
the nomination, audit and remuneration committees (A.1.2);
• the number of meetings of the board and those committees and individual
attendance by directors (A.1.2);
• the names of the non-executive directors whom the board determines to be
independent, with reasons where necessary (A.3.1);
• the other significant commitments of the chairman and any changes to them
during the year (A.4.3);
• how performance evaluation of the board, its committees and its directors has
been conducted (A.6.1);
• the steps the board has taken to ensure that members of the board, and in
particular the non-executive directors, develop an understanding of the views
of major shareholders about their company (D.1.2).
The annual report should also include:
• a separate section describing the work of the nomination committee, including
the process it has used in relation to board appointments and an explanation if
neither external search consultancy nor open advertising has been used in the
appointment of a chairman or a non-executive director (A.4.6);
• a description of the work of the remuneration committee as required under
the Directors’ Remuneration Report Regulations 2002, and including, where
an executive director serves as a non-executive director elsewhere, whether or
not the director will retain such earnings and, if so, what the remuneration is
(B.1.4);
• an explanation from the directors of their responsibility for preparing the
accounts and a statement by the auditors about their reporting responsibilities
(C.1.1);
• a statement from the directors that the business is a going concern, with
supporting assumptions or qualifications as necessary (C.1.2);
• a report that the board has conducted a review of the effectiveness of the
group’s system of internal controls (C.2.1);
The combined code on corporate governance
© Emile Woolf Publishing Limited 445
• a separate section describing the work of the audit committee in discharging
its responsibilities (C.3.3);
• where there is no internal audit function, the reasons for the absence of such a
function (C.3.5);
• where the board does not accept the audit committee’s recommendation on
the appointment, reappointment or removal of an external auditor, a
statement from the audit committee explaining the recommendation and the
reasons why the board has taken a different position (C.3.6); and
• an explanation of how, if the auditor provides non-audit services, auditor
objectivity and independence is safeguarded (C.3.7).
The following information should be made available (which may be met by placing
the information on a website that is maintained by or on behalf of the company):
• the terms of reference of the nomination, remuneration and audit committees,
explaining their role and the authority delegated to them by the board (A.4.1,
B.2.1 and C.3.3);
• the terms and conditions of appointment of non-executive directors (A.4.4)
(see footnote 8 on page 10); and
• where remuneration consultants are appointed, a statement of whether they
have any other connection with the company (B.2.1).
The board should set out to shareholders in the papers accompanying a resolution
to elect or re-elect directors:
• sufficient biographical details to enable shareholders to take an informed
decision on their election or re-election (A.7.1);
• why they believe an individual should be elected to a non-executive role
(A.7.2); and
• on re-election of a non-executive director, confirmation from the chairman
that, following formal performance evaluation, the individual’s performance
continues to be effective and to demonstrate commitment to the role,
including commitment of time for board and committee meetings and any
other duties (A.7.2).
The board should set out to shareholders in the papers recommending appointment
or reappointment of an external auditor:
• if the board does not accept the audit committee’s recommendation, a
statement from the audit committee explaining the recommendation and from
the board setting out reasons why they have taken a different position (C.3.6).
Paper P1: Governance, risk and ethics
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© Emile Woolf Publishing Limited
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Governance,riskandethics
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Index
A
Absolutism 267
ACCA Code of Ethics and Conduct 299, 313
Accountability 25, 44
Accountancy profession:
public expectations 301
Active stakeholders 31
Advocacy threat 195, 321
Agency conflicts 40
Agency costs 41
Agency law 39
Agency realationships – An overview 46
Agency relationship 39
Agency relationship - Charities 46
Agency relationship – Public sector 45
Agency theory 38
Agents: accountability 44
ALARP 241
American Accounting Association
model of ethical decision-making 280
Annual general meeting (AGM) 159
Appointments to the board 103
Association of British Insurers (ABI) 36
Audit committee 90
composition 95
responsibility for financial controls 108
role and functions 93
Audit committee and the external auditors 192
Audit plan 198
Audit: internal 186
Audit: social and ebvironmental 355
Auditor independence and non-audit work 197
Auditors: external 192
B
Balanced scorecard 346
Benchmarks 101
Best practice disclosures 151
Board balance 65
Board committees 88
Board of directors: composition 62
Board of directors:
governance responsibility for risk
management 172
role 56
size 62
two-tier boards 59
unitary boards 59
Board responsibilities for the
internal control system 108
Board: appointments 103
Bounded rationality 48
Burritt et al 352
Business probity risk 224
Business review 154
Business risk 170
Business risk 215
Business risks in different business sectors 227
C
Cadbury Code 136
Cadbury Report 16
Cadbury Report 107
Carbon neutrality 339
Categorical imperative 275
Paper P1: Governance, risk and ethics
448 © Emile Woolf Publishing Limited
Chairman: role 67, 68
Chief executive officer (CEO): role 67
Claims of stakeholders 29
Codes of ethics for accountants 312
Combined Code 94
Combined Code 139
revised 141
Combined Code on corporate governance 36
Combined Code: internal audit 191
Committees: audit 90
board 89
nominations 103
remuneration 97
risk 106
Compliance controls 176
Compliance risk 170
Compliance: box-ticking approach 176
Comply or explain 134
Confidentiality 315
Conflicts of interest 76
Conflicts of interest 321
Control environment 179
Conventional level of morality 270
Corporate code of ethics: content 307
Corporate codes of ethics 306
Corporate governance 16
issues 19
law and guidelines 18
Corporate governance and financial
reporting 90
Corporate governance and investor
confidence 36
Corporate governance codes:
reasons for development 128
Corporate governance in the UK: history 136
Corporate governance: codes 56
Corporate governance:
international codes and principles 142
principles-based approach 133
rules-based approach 130
Corporate governance:
principles-based approach 128
rules-based approach 128
Corporate governance:
stakeholder approach 52
Corporate governance: the need for
transparency and disclosure 148
Corporate social responsibility (CSR) 163, 293
COSO Framework 178
Credit risk 221
Critical theory: ethics and accountants 302
Cromme Code 60
CSR policy 165
CSR reporting 165
Culture 293
D
Delegation of power: within a company 56
Deontological approach to ethics 275
Deontology (Kant) 275
Derivatives risk 224
Descriptive ethical relativism 267
Direct stakeholder claims 29
Directors and the law 74
Directors' remuneration:
shareholder attitutes 126
Directors: appointment, election
and removal 75
disqualification 78
duties and legal obligations 75
executive and non-executive 62
induction 81
powers and rights 74
share dealings 77
training and professional development 82
Directors: basic salary 112
Directors: fiduciary duty 39
Directors: Independence 63
Directors: pensions 115
Directors’ remuneration 97, 110
ethical issues 124
reporting 121
Disclosure of interests 76
Disclosure:
best practice 151
general principles 148
mandatory and voluntary 153
Diversification 253
E
Eco-Management and Audit
Scheme (EMAS) 351
Electronic voting 161
Embedding risk 250
Environmental activity-based accounting 354
Environmental audits 357
Index
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Environmental footprint
(ecological footprint) 338
Environmental footprint’ for individual
companies 344
Environmental life cycle costing 354
Environmental management
accounting (EMA) 351
Environmental management systems 349
Equity incentive schemes 120
Ethical conflicts: resolving 329
Ethical decision-making models 278
Ethical decision-making:
American Accounting Association
model 280
Tucker’s 5 question model 279
Ethical dilemmas:
rules-based approach 320
rules-principles-based approach 320
Ethical issues: remuneration 124
Ethical safeguards 325
Ethical stance: personal and corporate 288
Ethical theories: absolutism 267
Relativism 267
Ethical threats 321
Ethical threats and safeguards 320
Ethics 264
deontological approach 275
Teleological 276
Ethics 286
corporate codes 306
cultural context 293
Ethics and accountants: critical theory 302
Ethics and agency theory 45
Ethics codes: principles based 313
rules based 313
Executive directors 63
External audit process 198
External auditors: appointment 194
independence 195
terms of appointment and remuneration 194
External auditors: independence 92
External stakeholders 33
Extraordinary general meeting (EGM) 159
F
Familiarity threat 195, 321
Fiduciary duty 39
Fiduciary duty 76
Financial controls 175
Financial risks 170
Fixed-term contracts 75
Footprints: social and environmental 338
Full-cost accounting (FCA) 346
Fundamental principles 313
G
General meetings 157
AGM 159
EGM 159
Global Reporting Initiative (GRI) 166
Good governance 21
fairness 23
honesty and integrity 24
independence 24
judgment 26
openness/transparency 23
reputation 26
responsibility and accoutability 25
Governance 16, 286
Gray, Owen and Adams 290
Greenbury Report 138
H
Hampel Report 138
Hedging risks 255
Heinz dilemma 272
Higgs Report 69, 94, 140
I
ICGN Corporate Risk Oversight Guidelines 217
ICGN Principles 143
ICSA Guidance Note on matters
reserved for the board 58
IFAC Code (Code of Ethics for Professional
Accountants) 312
Illegitimate stakeholders 32
Incentive schemes: performance related 116
Independent Commission for Good
Governance in Public Service 21
Independent director 63
Independent non-executive directors 44
Paper P1: Governance, risk and ethics
450 © Emile Woolf Publishing Limited
Indirect stakeholder claims 29
Induction of new directors 81
Influence = Power ´ Interest 30
Input-output analysis 354
Institutional investors 35
Insurance companies 35
Integrity 314
Interim management statements (IMSs) 155
internal audit 186
function and importance 186
Internal audit and the role of the audit
committee 190
Internal auditors: independence,
objectivity and status 188
Internal control 178
establishing and maintaining a system 182
Internal control 174
Internal control effectiveness 200
Internal control failure 177
Internal control risk 170
Internal control system: monitoring 181
Internal control: annual review 200
evaluating 200
maintaining a sound system 208
reporting to shareholders 205
Internal control:
information systems and technology 210
transparency and disclosure 182
Internal stakeholders 33
Intimidation threat 195, 321
ISO 14000 349
J
Jensen and Meckling (agency theory) 40
Johnson and Scholes 287
Johnson and Scholes: the cultural web 294
K
Kant (deontology) 275
Key risk indicators (KRIs) 260
Known stakeholders 32
Kohlberg (moral development) 269
Kohlberg: criticisms 274
L
Legal risk 222
Legitimate stakeholders 32
Liquidity risk 221
Long-term incentives: share plans 113
Loss of office: compensation 123
M
Managing risk: A framework 258
Market risk 221
Mendelow framework 30
Metrics for environmental audits 357
Mirror test for resolving ethical issues 331
Model Code 78
Moral absolutism 267
Moral development (Kohlberg) 269
Moral development of accountants 303
Moral dilemmas 264
Moral philosophy 265
Morality: Conventional level 270
post-conventional level 271
pre-conventional level 270
Mutual funds 35
Myners Report 161
N
Narrative reports: business reviews
and interim management statements 154
Narrow stakeholders 31
National Association of Pension
Funds (NAPF) 36
NEDs: criticisms 72
Nolan’s Seven Principles of Public Life 26
Nominations committee 103
composition 105
duties 104
Nominations committee and
appointment of a new chairman 105
Non-executive directors 63
Non-executive directors:
appointment 71
role 70
Normative ethical relativism 267
Index
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O
Objectivity 314
OECD Principles 142
Open-Ended Investment Companies (OEICs) 36
Operational controls 175
Operational risk 170, 215
Opportunism 49
Ownership: separation from control 17
P
Passive stakeholders 32
Pension funds 35
Performance evaluation 83
Performance targets 118
Performance: assessments 84
Performance-related incentive schemes 116
Performance-related schemes:
UK Combined Code 117
Post-conventional level of morality 271
Pre-conventional level of morality 270
Primary stakeholder 31
Principles-based approach to ethical
dilemmas 321
Principles-based ethics codes 313
Professional 298
acting professionally 299
Professional competence and due care 314
Proxy voting 161
Public interest 300, 304
Pure risk (downside risk) 214
R
Re-election of directors 79
Relativism 267
Remuneration and shareholder attitudes 125
Remuneration committee 97
composition 101
duties 100
Remuneration of executive directors:
problems 101
Remuneration package structures 112
Remuneration package: components 110
purpose 111
Remuneration: executive and
non-executive directors 110
Reputation risk 223
Residual risk 230
Residual risk 260
Resolving ethical conflicts 329
Restricted stock awards 119
Review process 201
Rewards for failure 98
Risk 214
identification 233
Risk appetite 231, 256
Risk assessment 180
Risk assessment 260
Risk assessment: dynamic nature 230, 238
Risk auditing: role 248
Risk avoidance 255
Risk awareness 250
Risk capabilities 260
Risk committee 106
Risk committees: role 247
Risk dashboard 239
Risk identification 233
Risk management 170, 214, 216
concepts 229
responsibility 217
Risk management and internal control 172
Risk management and risk control:
responsibility of the board 106
Risk management as a corporate
governance issue 106
Risk management system 218
Risk manager: role 246
Risk mapping 260
Risk profiling 237, 260
Risk retention 255
Risk sharing 255
Risk transfer 254
risk:
assessing 237
board policy 231
business 170
business probity 224
categories 220
control methods 253
credit 221
derivatives 224
embedding 250
exposure 229
hedging 255
identifying risk 240
Paper P1: Governance, risk and ethics
452 © Emile Woolf Publishing Limited
impact on stakeholders 234
internal control 170
legal 222
liquidity 221;
market 221
measuring 238
monitoring 246
prioritising 239
pure 214
residual 230
role of the board of directors in
speculative 214
technological 222
Risk-based approach 231
Rotation of audit partners 92
Rotation: retiring by 79
Rules-based ethics codes 313
S
Sarbanes-Oxley Act 2002 18, 131, 173
Schein: three levels of culture 294
Secondary stakeholder 31
Self-interest threat 195, 321
Self-review threat 195, 321
Senior independent director 70
Senior independent director (SID) 158
Service contracts 74
Shaper of society 287
Share dealings by directors 77
Share dealings by directors: stock market
restrictions 78
Share option schemes 119
Share options 113
Share options: under water 114
Share plans and performance targets 115
Shareholder activism 158
Shareholder activism and voting rights 160
Shareholder theory 286
Shareholders: voting 159
Short-term incentives: bonus 113
Singapore Code of Corporate Governance 95
Singapore Code of Corporate Governance on
performance evaluation 84
Smith Report 94, 141, 193
Social and environmental audit 355
Social and environmental effects:
measurement 341
Social and environmental reporting 355
Social contract theory 287
Social ecology 340
Social footprint 340
Social responsibility 286, 290
Social responsibility: 7-level classification
by Gray, Owen and Adams 290
Speculative risk (two-way risk) 214
Stakeholder theory 52
Stakeholder theory 286
Stakeholder theory and agency theory 53
Stakeholder theory: definition 52
Stakeholders 28
external 34
internal 34
shareholders and directors 33
Stakeholders: impact of risk 234
Strategic risk 215
Succession planning 103
Sustainability 342
Sustainability Assessment Model (SAM) 346
Sustainable development 343
Sustainable development: reporting
by companies 343
Systems audit 187
T
TARA framework for risk management 257
Technological risk 222
Teleological approach (consequentialist
approach) to ethics 276
Transaction cost economics (TCE) 48
Transaction cost economics theory 47
Transaction cost economics:
comparison with agency theory 51
variables 49
Transparency 148
Triple bottom line reporting 344
Tucker’s 5 question model of ethical
decision-making 279
Turnbull Report 139, 171, 178, 200
Two-tier boards 59
U
UK Combined Code 172
Index
© Emile Woolf Publishing Limited 453
UK Combined Code on
performance evaluation 83
Unitary boards 59
Unitary boards and two-tier boards:
comparison 60
Unknown stakeholders 32
Utilitarianism 276
V
Value for money (VFM) audits 187
Voting: electronic 161
proxy 161
W
Whistle blowing 210
Whistleblowing procedures 309
Wide stakeholders 31