Part A - Governance and Responsibility

Principles-based vs. Rules-based

Principles -based approach

(1) Principles-based approach requires the company to adhere to the spirit rather than the letter of code. (2) The approaches focus on objectives rather than the mechanisms by which these objectives will be achieved. (3) The approaches can lay stress on those elements of corporate governance to which rules cannot easily be applied. (4) The approaches can applied across different legal jurisdictions rather being founded in the legal regulations of one country. (5) The approaches avoid inflexible legislation and allows companies to develop their own approaches to corporate governance. (6) The approaches are too board to be used as a guide to best corporate governance practice. (7) There may be confusion over what is compulsory and what isn’t.

Rules -based approach

(1) Rules-based approach places more definite achievement and provide clarity in terms of what you must do. The rules are legal requirement. (2) The approaches allow no leeway. The key is whether or not you have complied with the rules. (3) It should in theory be easy to see whether there has been compliance with the rules. But that depends on whether the rules are unambiguous. (4) It is rigid and difficult to deal with questionable situation that are not covered sufficiently in the rulebook.

Influence of ownership: Family firms vs. Joint-stock companies

Insider systems

Insider system is where companies are owned and controlled by a small number of major shareholders, which may be members of the company’s founding family.

(Advantages)(1) It is easier to establish ties between owners and managers. The agency problem is reduced in the case of that the owners are involved in management. (2) It is easier to influence company management even if the owners are not involved in management. (3) A smaller base of shareholders may be more able to take a long-term view. Long-term growth is a bigger issue for such families.

(Disadvantages)(1) There may be discrimination against minority shareholders and lack of minority shareholders protections. (2) Insider systems tend not to be monitored effectively and may be reluctant to employ outsiders in influential position. (3) Insider systems often don’t develop more formal governance structures. (4) Insider systems may be more prone to opaque financial transactions and misuse of fund.

Outsider systems

Outsider systems are companies where shareholding is more widely dispersed, and there is the manager-ownership separation.

(Advantages)(1) The separation of ownership and management has provided an impetus for the development of more robust governance to protect shareholders. (2) Shareholders have voting rights that they can use to exercise control. (3) Hostile takeovers become far more frequent and this kind of threats act as a disciplining mechanism on company management.

(Disadvantages)(1) Companies are more likely to have an agency problem and significant costs of agency. (2) Larger shareholders have often had short-term priorities.

Stakeholders in corporate governance

(1) Stakeholders are any entity (person, group or non-human entity) that can affect or be affected by the actions or policies of an organization. It is a bi-directional relationship. (2) Stakeholder theory indicates that large companies have significant impact on society so that they cannot only be responsible to their shareholders, but have accountability to a broad range of stakeholders. (3) Companies should concentrate on employees, creditors and government as well as behave ethically and have regard for the environment and society as a whole.

Instrumental view vs. Normative views

(Instrumental view)(1) From the point of instrumental view, the motivation of companies to fulfill the responsibilities towards stakeholders is that they believe that it would have an impact on maximizing company’s profits if not to do so. (2) The companies don’t have any moral standpoint of its own, therefore is devoid of any moral obligation.

(Normative view)

(1) From the point of normative view, the motivation of companies to fulfill the responsibilities towards stakeholder is that they have consciousness of accepting moral duty towards others. (2) The companies is altruistic, and have ethical, philanthropic responsibilities in addition to economic, legal responsibilities.

Impact on the corporate government

(1) Including social objectives in the mission statement of organization is a sign that the board believes that they have significant impact on corporate strategy. (2) Ethical codes are part of corporate guidance to promote good corporate behavior among their employees. (3) Company should report on ethical and social conduct in their Operation and Financial Review and also may prepare social accounts showing impact of stakeholders. (4) Impact of stakeholders on corporate governance may include representatives from key stakeholder groups on the board.

Institutional investor

(1) Institutional investors are now the biggest investors in many stock markets. They manage funds invested by individuals. Institutional investors can wield great power over the companies in which they invest. (2) The major institutional investors include pension funds, life insurance companies, unit trusts and venture capitals companies.

Role & influence

(1) The significant role of institutional investors is to promote good corporate governance. (2) Due to the size of their shareholdings, institutional investors can exert significant influence on corporate policy. (3) Institutional investors should make a dialogue with companies base on the mutual understanding of objectives. (4) Institutional investors can use many means to intervene and exert their influences on companies, such as voting, calling on extraordinary general meeting. (5) The key issue is to increase dominance of investors and contribute positively to corporate governance through concentrating power in a few hands.

Principal-agent relationship

(1) Under the form of joint-stock, companies are limited by shares. The separation of ownership from management makes agency is a significant issue in corporate governance, especially for large companies. (2) The problem of principals (owners) not being able to run the company themselves and therefore having to rely on agents (directors) to do so for them can cause issues if there is a breach of trust by directors who may pursue their own interests rather than he shareholders’.

Agency cost

(1) For principals, it is difficult and expensive to verify what the agent is doing and to introduce mechanism to control the activities of agent. (2) Agency costs are incurred when principals attempt to monitor the activities of agents as well as establishing control system. (3) Agency costs may be measured in monetary terms.

Agency accountability

(1) Agency accountability means that the agent is answerable under the contract to his principal and must account for the resources of his principal and the money he has gained working on his principal’s behalf. (2) Accountability relates to the need to act in shareholders’ interests, the need to provide good information, the need to operate within a defined legal structure. (3) Corporate governance systems are designed to enforce this accountability for principal.

Resolving the agency problem

(1) Alignment of interests is accordance between the objectives of agents acting with an organization and the objectives of the organization as a whole. (2) Alignment of interests may be achieved by giving managers profit-related pay or incentives that are related to profits or share price.

Transaction costs theory & Stakeholder theory

Transaction costs theory

(1) The way the company is organized and governed determines its control over transactions. (2) Outside transaction occur costs such as searching and bargaining costs. Keeping transaction internally may reduce the uncertainties about dealing with outside. (3) In terms of transaction costs, company consider to whether internalize their transaction or deal with outside. (4) Manager behave rationally and opportunistically to organize their transaction to pursue their own interests. (5) Asset specificity, certainty and frequency are three variables considered by company to determine the degree of monitoring and control. (6) Corporate governance costs build up including internal controls to monitor management. (7) Transaction costs theory is similar to agency theory to ensure that company managers pursue shareholder’s best interests rather than their own.

Stakeholder theory

(1) Stakeholder theory is based on companies being so large that they are not only responsible to their shareholders, but have a significant impact on society. (2) Stakeholders affect or be affected by companies include: shareholders, employees, customers, suppliers, creditors, community, government, and environment etc.(3) Stakeholder theory may be the necessary outcome of agency theory. Agency theory is a narrow form of stakeholder theory. Both of them have the purpose of aligning divergent interests.

Role & Responsibilities of Board of directors

(1) Promote the success of the company(2) Direct and supervise the company affairs(3) Provide entrepreneurial leadership(4) Enable risk to be assessed/managed and a prudent/effective control system(5) Set company’s strategic aims(6) Ensure necessary financial and human resources in place for meeting objectives(7) Review management performance.(8) Set the company’s values and standards(9) Ensure company’s obligations to its stakeholders are met(10) Monitoring the CEO(11) Manage potential conflicts of interests(12) Ensure effective communication internally and externally

Unitary boards vs. two-tier boards

Advantages/disadvantages of unitary boards

(Advantages) (1) It is a structure that permits much more involvement. All directors, including executive directors and non-executive directors, have the equal legal responsibilities for the management of the company. (2) Non-executive directors are empowered. They bring not only the independent scrutiny to the boards, but their own expertise and perspectives and, which is valuable for the decision-making and management of company. (3) Accountability is enhanced. Under a cabinet-like arrangement, all directors are equally accountable. Meanwhile wider viewpoints provided by board discussion suggest better decisions. (4) Reduce the likelihood of abuse of power by a small number of senior directors and protect against fraud and malpractice.

(Disadvantages) (1) It is awkward to ask non-executive director or independent director to be both manager or monitor. (2) It requires non-executive director to spend much time on attending boarding meeting or the commitment required to obtain sufficient knowledge.

Advantages/disadvantages of two-tier boards

(Advantages) (1) Separating clearly and formally between those monitoring and those being monitored. In other words, between those managing the company and those who own the company or control it for the benefit of shareholders. (2) Taking account of the needs of stakeholders and allow wider involvement of stakeholders. The supervisory board has worker’s representatives who are important stakeholders of the company. (3) There is direct power over the management through the right to appoint members of the management. Meanwhile it allows effective guards against management inefficiency and fraud. (4) Encouraging transparency and independence of thought, discussion and decision within the company.

(Disadvantages) (1) There is confusion over authority and therefore a lack of accountability. (2) The management board may restrict the information passed on to the supervisory board. (3) There is dilution of power through stakeholder involvement. (4) There is bureaucracy and slower decision-making.

Non-executive Directors

Role & Purpose

(1) Strategy Role. Non-executive directors should contribute to strategy success, challenging strategy, and offering advice on direction. (2) Scrutiny Role. Non-executive directors should scrutinize the performance of executive management. They should represent the shareholders’ interests to ensure agency issues don’t arise to reduce shareholder value. (3) Risk Role. Non-executive directors should ensure the company has a robust system of internal controls and system of risk management in place. (4) People Role. Non-executive directors should be responsible for appointing & removing senior managers, and determining appropriate levels of remuneration for executives.

Independence

Non-executive directors should be independent-minded, which means exercising objective judgment in the best interests of the corporation whatever the consequences for the director personally. Non-executive directors should provide a balancing influence, and play a key role in reducing conflicts of interest between management and shareholders.

(Why)(1) Providing a detached and objective view of board decisions. (2) Providing shareholders with an independent voice on the board. (3) Reducing self-interest in the behavior of executives.

(4) Providing expertise and communicate effectively.

(How)(1) Non-executive directors should have no business, financial or other connection with the company except director’s fee and shareholdings. (2) Cross-directorships are a particular threat to independence of non-executive directors. It is where an executive director of firm A is a non-executive director of firm B, and an executive director of firm B is a non-executive director of firm A. (3) Non-executive directors should not take part in share option scheme and their service should not be pensionable. (4) Appointment of non-executive directors should be for a specified terms and reappointment should not be automatic.

Advantages/disadvantages

(Advantages)(1) Non-executive directors provide independent element on the board. It implies that they have the detachment to be able to monitor the company’s affairs effectively. (2) Non-executive directors may have experiences and knowledge which executive directors don not have. It expands the resources available for management to use. (3) Non-executive directors may improve the communication between shareholders and company and are often a comfort factor for third party such as creditors. (4) Non-executive directors can provide wider perspective, and institutional perception is enhanced.

(Disadvantages)(1) Non-executive directors may have difficulty imposing their views upon the board. (2) Non-executive directors face the problem of limited time that they can devote to their role. (3) Non-executive directors may damage company performance by weakening board unity and stifling entrepreneurship. (4) Poor remuneration might lead people don’t want the job of being non-executive director. On the other hand, high-caliber non-executive directors may gravitate towards the best-run companies rather than companies which are more in need of input from good non-executives.

Chairman vs. CEO

Role of Chairman

(1) Chairman is the leader of the board of directors. Chairman is responsible for ensuring the board’s effectiveness. (Internally)(2) Setting the agenda of the board and ensuring the board meetings held regularly. (3) Ensuring the board receives relevant information in advance of board meetings. (4) Encouraging active engagement of members of the board and facilitating & coordinating the

relationship between executive and non-executive directors. (Externally)(4) Representing the company’s ‘public face’ to the outside investor and other stakeholders. (5) Communicating effectively with shareholders e.g. at annual or extraordinary general meeting.

Role of CEO

(1) CEO is responsible for managing the company and implementing the decision of the board. (2) CEO has the responsibility to report to Chairman and board of directors for the performance of corporation and management team as well as making recommendations to the board committee. (3) CEO is responsible for proposing and developing of corporation’s objectives and strategy, and ensuring these objectives being achieved. (4) CEO is responsible for managing the risk and ensuring appropriate internal controls are in place.

Separation of the role of Chairman and CEO

(1) It is important to have a division of responsibilities at the head of a company in order to avoid the situation where one individual has unfettered control of the decision-making process. (2) The common way is to require the roles of Chairmen and CEO held by two different people. (3) The separation provides a position (Chairman) that is expected to be a representative of shareholders, and with no conflict of interest having a role of manager. (4) The separation makes the CEO concentrate on the management and to be truly accountable for the management. (5) The separation reduces the risk of a conflict of interests.

Continuing Professional Development (CPD) of directors

(1) To ensure directors have sufficient skills and ability to be effective in their role and remain an effective board. (2) Directors should extend and refresh their knowledge and skills continuously. Meanwhile companies need to provide resources for the CPD or directors. (3) There are some important issues should be covered by CPD, which including the technical background of company’s operation, the effective behavior of director, risk management issues, legal and regulatory issues and strategy issues. (4) Chairman should address the developmental needs of the boards as whole and also lead in identifying the development needs of individual directors.

Performance measurement of boards

Assessment criteria for performance of boards

(1) Appropriate composition of board and committees(2) Adequacy of board meeting and decision-making

(3) Quality of feedback to management(4) Performance against objectives(5) Contribution to strategy(6) Contribution to robust effective risk management (7) Contribution to develop corporate philosophy (8) Responses to problems or crises(9) Internal and external communication

Performance measurement criteria of individual directors

(1) Independence – free thinking, avoiding conflicts of interest(2) Preparedness – know key staff, organization and industry, aware of statutory and fiduciary duties(3) Practice – participates activity, questioning, insists on obtaining information, undertakes professional education(4) Committee work – understands process of committee word, exhibits ideas and enthusiasm(5) Development of the organization – makes suggestions on innovation, strategic direction and planning, helps with the support of outside stakeholders

Board committee

Role & Purpose of internal audit committee

(1) Consisting entirely of independent non-executive directors with at least one has had relative accounting or financial experience. (2) Reviewing financial statements and systems including quarterly/interim/annual accounts, financial reporting and budgetary systems. (3) Keeping liaison with external auditors, including appointing/removing of the external auditors, considering the threats to external auditor independence, discussing the scope of external audit, acting as a forum between external auditors, internal auditors and financial director and helping external auditors to obtain the information.(4) Reviewing internal audit through the following aspects: standards, scope, resources, work plan and reporting. (5) Reviewing internal control through the following aspects: the adequacy of internal control system (focusing on control environment), legal compliance/ethnic/codes of conduct, risk of fraud, and company’s annual statement on internal control. (6) Reviewing risk management through the following aspects: confirming there is a formal risk management policy in place, confirming risk management is updated to reflect current position and strategy, and reviewing the arrangements in order to ensure that responsibilities are aware by manager and staff. (7) Involving in implementing and reviewing one-off investigation.

Role & Purpose of remuneration committee

(1) Consisting of independent non-executive directors. (2) In charge of determining general remunerations policy on executive directors. (3) Determining specific remuneration package for each director. (4) Reporting to the shareholders about remuneration policy and packages of individual directors.

Role & Purpose of nomination committee

(1) Overseeing the process for board appointments and make recommendations to the board.(2) Reviewing regularly the structure, size and composition of the board. Ensure appropriate management diversity to board composition.(3) Evaluating regularly the balance of skills, knowledge and experience of the board. Consider the balance between executive director and non-executive directors.(4) Consider issues relating to re-election and reappointment of directors.

Role & Purpose of risk committee

(1) Approving the organization’s risk management strategy and risk management policy.(2) Reviewing reports on key risks prepared by business operating units, management and the board. (3) Monitoring overall exposure to risk and ensuring it remains within limits set by the board. (4) Assessing the effectiveness of the organization’s risk management systems.(5) Providing early warning to the board on emerging risk issues and significant changes in the company’s exposure to risks.(6) Reviewing the company’s statement in conjunction with the audit committee, on internal control with reference to risk management.

Director’s remuneration

Remuneration policy & strategy

(Remuneration policy)(1) Pay scales applied to each director’s package. (2) Proportion of different types of reward within each package. (3) What proportion of rewards should be related to measurable performance. (4) Transparency of directors’ remuneration. (5) Period within which performance related elements become payable.

(Remuneration strategy) (1) Board is motivated to strive to increase performance and adequately rewarded when performance improvements are achieved. (2) Board is seen to be paid appropriately for their efforts and success, and not be criticized for excessive pay.(3) Remuneration strategy should create a link to corporate strategy. To what extent it links is a measure of the remuneration strategy’s success.

(4) Remuneration strategy should consider problems such as choice of wrong measure, excessive focus on short-term results. (5) Remuneration strategy should consider encouraging long-term loyalty through share purchases schemes, the availability of company resources, more benefit in kind for lower basic salary.

Remuneration packages

(Basic salary)Is not related to performance, but is determined through benchmarking peer group salary, which how much other companies might be prepared to pay.

(Performance related bonuses)It is elements of remuneration dependent on the achievement of some of performance measurement criteria, such as cash bonus.

(Shares & share options) (1) Share options are the most common form of long-term incentive scheme. It gives directors the right to buy shares at a specified exercise price over a specified time period in the future. If the stock price rises so that it exceeds the exercise price by the time the option can be exercised, directors can buy at lower price than market price and then might sell it at a profit. (2) Share options can be used to give the executive the incentive to manage the company in sch a way that share price rises so that it aligns management and shareholder interests. This alignment would, in theory, overcome the agency problem.

(Benefits in kind & Pensions) (1) Benefits in kind are various non-wage compensations provided to directors and employees in addition to their normal wages or salaries such as life insurance, company car scheme, holidays, and loans. (2) There may be separate pension scheme available for directors at higher rates than for employees.

Other Issues associated with directors ’ remuneration

(Legal) (1) Considering compensation for the directors in the case of early termination. (2) Aiming to avoid rewarding poor performance.

(Ethical)(1) Public reaction to high profile corporation failure where directors were receiving what was perceived as excessive remuneration in relation to their performance. (2) Recent changes to best practice disclosure requirements on board structure and executive pay. (3) Incorporating business ethics into performance-related remuneration system.

(Competitive)

(1) It is vital for a company to have a proficient, motivated board of directors working for the interest of shareholders. (2) Shareholders should provide the company with resources to recruit and retain directors under competitive terms.

(Regulatory)(1) Directors need to submit a remuneration report to members at the annual general meeting each year. (2) The report must provide full details of directors’ remuneration, and should be clear, transparent and understandable to shareholders. (3) When an executive director serves as a non-executive director elsewhere, the remuneration report should state whether or not the remuneration of that director will retain and what the remuneration is. (4) The increasingly regulatory environment reflects the additional demand on and responsibilities of directors, and the heightened external scrutiny to the remuneration of directors.

Social responsibility in corporation governance

Carroll ’ s Four-part model

(Economic responsibilities)(1) Company has the responsibility to shareholders who demand a reasonable return. (2) Company has the responsibility to employees who want fair employment conditions. (3) Company has the responsibility to customers who seek good-quality goods at fair prices.

(Legal responsibilities)(1) Company has the responsibility to obey laws since law is the base line for companies operating with society. (2) The law is an acceptable rule book for company operation.

(Ethical responsibilities)Company has the responsibility to act in a fair and just way even if the law doesn’t compel them to do so.

(Philanthropic responsibilities)It is desired for company to make charitable donations or contributions to local community.

Shareholder responsibility

(1) The nature of wide dispersion of shareholders of large corporation means the shareholders with small percentage holdings have small influence on managers and limited responsibility to company. (2) The ease of share dispose on the stock market loosens shareholders’ feeling of obligation in relation to their property.

(3) Institutional shareholders have significant influence on the ownership responsibility. They have the level of shares enough to be used as a lever to pressure managers. They also have fiduciary responsibilities to their investor.

Organization as a corporate citizen

Definition

Corporate citizenship is the business strategy that shapes the values underpinning a company’s mission and the choices made each day by its executives, managers and employees as they engage with society.

Three Views

(1) Limited View. This is base on voluntary philanthropy and limited to such as charitable donations to local community. (2) Equivalent View. This is base on corporate social responsibility, and is partly voluntary and partly imposed. Self-interest is not the primary motivation, instead of focusing on legal requirements and ethical fulfillment. (3) Extended View. Corporate citizenship should have responsibility as well as rights, which including social rights, civil rights and political rights.

Relationship with shareholders, Reporting/Disclosure of corporate governance

(1) Shareholders are the legal owners of the company and therefore entitled to sufficient information of the company. (2) Disclosure is the means by which corporate governance is communicated and possibly ensured because of the scrutiny of stakeholders and shareholders. (3) Disclosure becomes the mechanism through which corporate governance is given transparency. (4) The annual general meeting is the most important form for the shareholders to communicate with the directors of the company. (5) The annual report is the only legally-required disclosure from which shareholders can get information of the company. (6) In an addition to compulsory disclosure, voluntary disclosure reduces information asymmetry and increases the corporate accountability.

Part B – Internal Control and Review

Internal control: Definition/Importance/Objectives

Definition/Importance

(Definition)

Internal control is any action taken by management to enhance the likelihood that established objectives and goals will be achieved. Management plans, organizes and directs the performance of sufficient actions to provide reasonable assurance that objectives and goals will be achieved. Thus the control is the result of proper planning, organizing and directing of management. Controls attempt to ensure that risks and those factors which stop the achievement of company objectives are minimized.

(Importance)(1) Internal control and risk management are fundamental components of good corporate governance. (2) Good corporate governance means that the board must identify and manage all risks within a company. (3) In terms of risk management, internal control systems span financial, operational, and other areas i.e. all the activities of the company. (4) However, internal control system are only as good as the people using them.

Objectives

(APB)(1) The orderly and efficient conduct of its business, including adhere to internal policies. (2) The safeguarding of assets. (3) The preventing and detection of fraud and error. (4) The accuracy and completeness of the accounting records. (5) The timely preparation of financial information.

(COSO)(1) Effectiveness and efficiency of operations. (2) Reliability of financial reporting. (3) Compliance with applicable laws and regulations.

Roles in risk management

Responsibility for internal control is not simply an executive management role. All employees have some responsibility for monitoring and maintaining internal controls.

(1) Board of directors: Ensuring adequacy and effectiveness of internal control system. (2) Senior executive management: Setting internal control policies; Monitoring effectiveness of internal control system. (3) Heads of business units: Establishing specific internal control policies and procedures. (4) All employees: Operating and adhering to internal controls.

Elements/Components of internal control system (COSO framework)

Control Environment

(1) It describes the ethics and culture of the organization, which provide a framework with which other aspects of internal control operate. (2) It is the attitude and actions of the board and management regarding the significance of control within the organization. (3) It provides the discipline and structure of the achievement of the primary objectives of the system of internal control. (4) It includes: (a) management’s philosophy and operating style; (b) organization structure; (c) Assignment of authority and responsibility; (d) human resources policies and practices; (e) competence of personnel.

Risk Assessment

(1) There is a connection between the objectives of an organization and the risks to which it is exposed. (2) The risks involved in achieving those objectives should be identified and assessed. (3) Risk assessment should form the basis for deciding how the risks should be managed.

Control Activities

(1) These are policies and procedures that ensure that the decisions and instructions of management are carried out. (2) Control activities include: (a) authorizations; (b) verifications; (c) reconciliations; (d) approvals; (e) segregation of duties; (f) performance reviews etc. (3) These control activities are commonly referred to as internal controls.

Information and Communication

(1) An organization must gather information and communicate it to the right people. (2) Managers need both internal and external information to make decision. (3) The quality of information systems is a key factor.

Monitoring

(1) The internal control system must be monitored. (2) This element of an internal control system is associated with internal audit. (3) It is important that deficiencies in the internal control system should be identified and reported up to senior management and the board of directors.

Internal audit

(1) Internal audit is an appraisal or monitoring activity established by management and directors for the review of the accounting and internal control systems as a service to the entity. (2) Internal audit functions by examining, evaluating and reporting to management and directors

on the adequacy and effectiveness of components of the accounting and internal control systems. (3) Internal audit is a management control. It reviews the effectiveness of other controls within a company. (4) The work of audit is varied – from reviewing financial controls through checking compliance with legislation. (5) The internal audit department is normally under the control of a chief internal auditor who reports to the audit committee.

(Importance)(1) In some situation, it is a statutory requirement to have internal audit. (2) In some situation, it is required to have internal audit by codes of corporate governance. (3) Internal audit provides an independence check on the control systems in a company. (4) Internal audit is a management control.

Auditor independence

(1) Internal audit is an independent objective assurance activity. (2) To ensure that the activity is carried out objectivity, the internal auditor must have their independence protected. (3) Independence is assured in part by having an appropriate structure with which internal auditors work. (4) Independence is assured in part by the internal auditor following acceptable ethical and work standards. (5) Internal auditors should be independent of executive management and should not have any involvement in the activities or systems that they audit. (6) The head of internal audit should report directly to a senior director or the audit committee and should have direct access to the chairman of the board of directors, and to the audit committee, and should be accountable to the audit committee. (7) The audit committee should approve the appointment and termination of appointment of the head of internal audit.

Threats to auditor independence

(Conceptual framework)(1) Self-interest threat: Occurs when the audit firm or a member of the audit team could benefit from a financial interest in, or other self-interest conflict with an audit client. (2) Self-review threat: Occurs when the audit firm, or an individual audit team member, is put in a position of reviewing subject matter for which the firm or individual was previously responsible, and which is significant in the context of the audit engagement. (3) Advocacy threat: Occurs when the audit firm, or a member of the audit team, promotes, or may be perceived to promote, an audit client’s position or opinion. (4) Familiarity threat: Occurs when, by virtue of a close relationship with an audit client, its directors, officers or employees, an audit firm or a member of the audit team becomes too sympathetic to the client’s interests.

(5) Intimidation threat: Occurs when a member of the audit team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of an audit client.

(Specific threats)(1) Financial interest in a client. Auditor owns shares in a client company. (2) Loans and guarantees. Auditor loans money to or receives loans from a client company. (3) Close business relationships. Auditor partner is director of a client company. (4) Family and personal relationships. Director’s spouse is director of a client company. (5) Employment with assurance clients. Member of assurance team accepts senior position at a client company. (6) Size of fees. Audit firm has a significant amount of fees derived from one client. (7) Gifts and hospitality. Auditor is provided with a free holiday by the client.

(Ethical threats to internal auditor)(1) Pressure from an overbearing supervisor, manager or director, adversely affecting the accountant’s integrity. (2) An auditor might mislead his employer as to the amount of experience or expertise he has in order to retain his position within the internal audit department. (3) An auditor might be asker to act contrary to a professional standard. Divided loyalty between his supervisor and the required professional standards of conduct could arise.

Effectiveness of internal control

For a system of internal controls to be effective, it needs to successfully mitigate the business risks identified by management.

(1) A system of internal control plays a key role in managing significant risks to the achievement of business objectives. (2) A sound system of internal control contributes significantly to protecting the investment of shareholders, safeguarding the assets of the company and ensuring compliance with laws and regulations. (3) One of the objectives of an internal control system is to prevent or reduce the likelihood of fraud, and to detect fraud when it does occur. (4) The internal control system should be reviewed continually and managed. (5) The costs of a control should not exceed the likely benefits from reduced risks. (6) Internal control systems should be an integral part of an organization. (7) Effective financial controls, including the maintenance of proper accounting records, are an important element of a system of internal control.

Reporting on internal control

(1) Shareholders are entitled to know whether the internal control system is sufficient to safeguard their investment.

(2) The board should, at least annually, conduct a review of the effectiveness of internal control systems and report to shareholders. (3) The review should cover all material controls, including financial, operational and compliance controls and risk management systems. (4) The objectives of reporting are to recommend for changes, to assist management identification of risk and control issues, and to ensure action takes place. (5) Reporting may be voluntary or required by statue.

Content of report

(1) Objectives of audit work. (2) Summary of process undertaken by auditor.(3) Major outcomes of the work and audit opinion. (4) Recommendation and key action points.

Management information

(1) To enable management to identify and manage risks and monitor internal controls, they need adequate information. (2) There should be effective channels of communication within the organization. (3) Information should be provided regularly to management. (4) Management need both internal and external information. (5) The actual information provided to management varies, depending on different levels of management. (6) There should be an adequate, integrated information system, supplying internal financial, operational and compliance data and relevant external data. (7) The information should be reliable, timely and accessible, and provided in a consistent format (more understandable). (8) The characteristics of information will change depending on the management level.

Risk

(1) Risk is the chance of exposure to the adverse consequences of uncertain future events. Risk can have an adverse impact on the organization’s objectives. (2) For shareholder’s concerns, the relationship between the level of risks and the returns achieved should be addressed. (3) The link between director’s remuneration and risks take should be addressed. (4) Corporate governance requires: (a) Establish appropriate control mechanisms for dealing with the risks the organization faces; (b) Monitor risks by regular review and a wider annual review; (c) Disclose risk management processes. (5) The elements of risk management include: (a) Risk identification; (b) Risk analysis; (c) Risk planning; (d) Risk monitoring. (6) Risk management is the process of reducing the possibility of adverse consequences either by reducing the likelihood of an event or its impact.

(7) Management is responsible for establishing a risk management system in an organization. (8) Management needs to monitor risk on an ongoing basis. For the reasons of (a) To identify new risks to determine an appropriate risk management strategy; (b) To identify changes to existing or known risks to amend the risk management strategy.

Strategic vs. Operational risks

(Strategic risks)(1) Strategic risks relate to the fundamental and key decisions that the directors take about the future of the organization. (2) Strategic risks are risks arising from the possible consequences of strategic decisions taken by the organization, such as merger and acquisition. (3) Strategic risks should be identified and assessed at senior management and board or director level.

(Operational risks)(1) Operational risks refer to potential losses that might arise in business operations. It is the risk of loss from a failure of internal business and control processes. (2) Operational risks can be defined as including losses from internal control or audit inadequacies, information technology failures, human error, loss of key-person risk, fraud and business interruption events.

(Main differences)(1) Strategic risks relate to the longer-term places of organization and relate with outside environment. (2) Operational risks relate to what could go wrong on a day-to-day basis and are not generally very relevant to the key strategic decisions.

Risks impact on stakeholders

(1) Shareholders: Potential loss of value of investment (fall in share price) and loss of income (decrease in dividends).(2) Directors: Loss of income (assuming remuneration is linked with company performance) and potential for poor reputation. (3) Managers/Employees: Fall in remuneration or become demotivated. (4) Customers: Mainly negative impact on the company because of poor product reputation. (5) Suppliers: Loss of supply. (6) Government: Less tax revenue raised. (7) Banks: Loans and interest due to banks are not repaid.

Risk assessment

Risk map

(1) The map identifies whether a risk will have a significant impact on the organization and links that into the likelihood of the risk occurring. (2) The approach can provide a framework for prioritizing risks in the business. (3) Risks with a significant impact and a high likelihood of occurrence need more urgent attention than risks with a low impact and low likelihood of occurrence. (4) The significant and impact of each risk will vary depending on the organization.

Board consideration of risk

(1) The board considers risk at strategic level and defines the organization’s attitude and approach to risk. (2) The board is responsible for ensuring that risk management supports the strategic objectives of the organization. (3) The board will determine the level of risk which the organization can accept in order to meet its strategic objectives, and which cannot be managed or is not cost-effective to manage. (4) The board ensures that the risk management strategy is communicated to the rest of the organization and integrated with all the other activities. (5) The board is responsible for driving the risk management process and ensuring that managers responsible for implementing risk management have adequate resources.(6) The board reviews risks and identifies and monitors progress of the risk management plans.

Reporting on internal control and risk

(1) (2) (3) (4) (5)

Part D – Controlling Risk

Role of risk manager

(1) Risk manager is a member of the risk management committee, reporting directly to that committee and the board. (2) The role of manager focuses primarily on implementation of risk management policies. (3) The risk manager is supported and monitored by the risk management committee. (4) Policy is set by the board and the risk management committee and implemented by the risk manager therefore the role is more operational than strategic.

(Risk manager is responsible for)(1) Identifying and evaluating the risks affecting an organization. (2) Implementing risk mitigation strategies including appropriate internal control to manage identified risks.

(3) Seeking opportunities to improve risk management methods and practices. (4) Developing, implementing and managing risk management programs and initiatives. (5) Maintaining good working relationships with the board and the risk management committee. (6) Working with the external auditors to provide assurance and assistance in their work in appraising risks and controls of the organization. (7) Reporting on risk management.

Role of internal/external auditing

(1) Risk is integral to the work of internal and external audit, both in terms of influencing how much work they do and also what work they actually do. (2) Risk auditing assists the overall risk monitoring process by providing an independent view of risks and controls in an organization. (3) With auditing, a fresh pair of eyes may identify errors or omissions in the original risk monitoring process. (4) External auditors will be concerned with risks that impact most on the figures shown in the financial accounts. (5) Internal auditors have more flexible role and their approach depends on whether they focus on the control or the overall risk management process.

Risk awareness/attitude

(1) In general, a lack of risk awareness means that an organization has an inappropriate risk management strategy. (2) Risks may not have been identified meaning there will be a lack of control over that risk. (3) Risk may occur and the control over that risk is not active due to lack of monitoring and awareness. (4) Continued monitoring within the organization is therefore required to ensure that risk management strategies are updated as necessary. (5) Risk awareness can be divided into three levels: strategic level, tactical level, and operational level. (6) Risk attitude is influenced by many factors: (a) response to shareholder demand; (b) the size, structure and stage of development of the organization; (c) the pursuit of business opportunities, say entrepreneurial risk. (d) personal views and cultural influence.

Embedding risk

Organization ’ s systems/procedures

(1) Embedding risk means that ensure risk management is included within the control systems of an organization. (2) Embedding risk also means that risk assessment should evolve into a consistent, embedded activity within a company’s strategic, business, budget and audit planning process rather than be executed as a significant stand-alone/separate process.

(3) Embedding risk is a statutory requirement of a code of best practice. To be successful, embedding risk management needs approval and support from the board.

Organization ’ s culture/values

(1) Embedding risk into system/procedure may still fail unless all workers (board to employee) in a company accept the need for risk management. (2) Embedding risk into culture and values implies that risk management is ‘normal’ for the organization. (3) Embedding a risk management frame of mind into an organization’s culture requires top-down communications on what the risk philosophy is and what is expected of the organization’s people. (4) Whether the culture is open or closed affects the success of embedding risk management within the culture and values of an organization.

Spreading/Diversifying risks

(1) Diversification is based on the idea of ‘spreading the risk’, which relates to portfolio management. The total risk should be reduced as the portfolio of diversification gets larger. (2) Risk can be diversified in terms of financial management and market/product management.(3) Diversification only works where returns from different business are not positively correlated. (4) Risks that can be diversified away are referred to as unsystematic risk. The inherent risk – the systematic or market risk – cannot be diversified away.

Risk avoidance vs. Risk retention

Risk avoidance and risk retention strategies relate in part to the risk appetite of the organization, and then the potential likelihood of each risk, and the impact/consequence of that risk.

Risk avoidance

(1) A risk strategy by which the organization avoids a risk. Organizations will often consider whether risk can be avoided and if so whether avoidance is desirable. (2) A risk avoidance strategy is likely to be followed where an organization has a low risk appetite.

Risk retention

(1) A risk strategy by which an organization retains that particular risk within the organization. It is where the organization bears the risk itself. (2) A risk retention strategy will be followed where the risk is deemed to be minimal or where other risk strategies are simply too expensive.

Risk Attitude and Necessity

R isk attitudes

(1) An organization’s attitude to risk is determined by its risk strategy, risk appetite and risk capacity. (a) the overall risk strategy determines the overall approach to risk; (b) the risk appetite determines how risks will be managed; (c) the risk capacity indicates how much risk the organization can accept. (2) If the risk capacity has been reached, then the organization will tend to seek low-risk activities whereas risky projects may be undertaken. (3) A high-risk appetite will indicate that the organization will normally seek a higher number of high risk/return activities whereas a low-risk appetite means a higher number of low risk/return activities preferred. (4) The organization’s overall strategy is likely to have a portfolio of projects from which the overall risk appetite is met. (5) A risk strategy of primarily self insurance, which implies risk minimization as an overall strategy, may limit the organization’s strategy regarding undertaking risky projects.

Necessity of risk

(1) Incurring an acceptable amount of risk tends to make a business more competitive whereas not accepting risk tends to make a business less dynamic. (2) Incurring risk also implies that the returns from different activities will be higher. The benefits can be financial or intangible, which both will lead to the business being able to gain competitive advantages.

Risk attitude and organization

In general, a small, young company may have a higher risk appetite as it takes risks in order to get its product into the market whereas a larger, older company may appear to be more risk adverse as it seeks to protect its current market position.

Part E – Professional Values and Ethics

Ethical theories: Relativism vs. Absolutism

Relativism and absolutism both refer to the ethical and moral belief systems in society.

Relativism

(1) Relativism is the view that there are a wide variety of ethical beliefs and practices in different cultures. According to relativism, what is ‘correct’ in a given situation will depend on the conditions at the time. The right and wrong are culturally determined. (2) There are many sets of moral rules. Those rules will change over time in one society and will be different in different societies. (3) Moral ‘truth’ is less likely to be imposed, simply because different ethical and belief systems are accepted within the theory. (4) Ethical and beliefs continue to change.

(Advantages)(5) Relativism highlights our cognitive bias and notational bias. (6) Relativism highlights differences in cultural beliefs. Relativism resolves moral conflict between people.

(Disadvantages)(7) It is possible to argue that some universal truths exist. Relativism leads to a philosophy of ‘anything goes’. Denying the existence of morality and permitting activities that are harmful to others. (8) Ideas such as objectivity and final truth do have value.

Absolutism

(1) Absolutism is the view that there is an unchanging and immutable set of moral rights or precepts that will hold true in all situations. There standard beliefs and practices will be common to all societies. Absolutism is built on the principle that objective, universally applicable moral truths exist and can be known.(2) There is one set of moral rules that are always true.(3) Absolutism implies that ‘truth’ in one culture may be imposed as ‘truth’ in another culture.(4) Absolutists tend to believe that each culture has its own ‘truths’ and that truth should be protected in that culture. However, some basis morals will always be included within each culture.

(Advantages)(5) Absolutism lays down their certain unambiguous rules that people are able to follow.

(Disadvantages)(6) Absolutist ethics takes no account of evolving norms within society and the development of

‘advances’ in morality. (7) What happens when two absolutist positions appear incompatible?

Kohlberg’s Stages

(1) Kohlberg explains the ethical development of individuals in terms of progression through three levels of moral development with two sub-stages within each level. (2) Level One: the individual is focused on self-interest, external rewards and punishment. (a) Right and wrong are defined according to expected rewards/punishment; (b) Right is defined according to whether there is fairness in exchanges. (3) Level Two: the individual tends to do what is expected of them by others. (a) Actions are defined by what is expected of individuals by their peers and those close to them; (b) The consideration of the expectations of others is broadened to social accord in general terms rather than immediate peers. (4) Level Three: the individual starts to develop autonomous decision making which is based on internal perspectives of right/wrong ethics. (a) Right and wrong are determined by reference to basic rights, values and contracts of society; (b) Individuals make decision based on self-chosen ethical principles which they believe everyone should follow.

Deontological vs. Teleological

Deontological approach

Deontology is concerned with the application of universal ethical principles in order to arrive at rules of conduct. It is a non-consequentialist theory. An action can only be deemed right or wrong when the morals for taking that action are known. The motivation or principle is important.

(Three key maxims)An action is morally right if it satisfies all three. (1) Act only according to that maxim by which you can at the same time will that it should become a universal law. (2) Act so that you treat humanity, whether in your own person or in that of another always as an end and never as a means only. (3) Act only so that the will through its maxims could regard itself at the same time as universally lawgiving.

Teleological approach

Teleological approach is a consequentialist theory. Whether a decision is right or wrong depends on the consequences or outcomes of the decision. As long as the outcome is right, then the action itself is irrelevant. The outcome of an action is important.

(Egoism)(1) An act is ethically justified if decision-makers freely decide to pursue their own desires or

interests. What is best for me? (2) The egoist will also do what appears to be right in society because it makes them feel better.

(Utilitarianism)(1) An action is morally right if it results in the greatest amount of good for the greatest number of people affected by that action. What is best for the greatest number? (2) It applies to society as a whole and not the individual and is highly subjective.

Ethical decision-making models

American Accounting Association model

(1) What are the facts of the case? (2) What are the ethical issues in the case? (3) What are the norms, principles and values related to the case? (4) What are the alternative courses of action? (5) What is the best course of action that is consistent with the norms, principles and values identified in step 3? (6) What are the consequences of each possible course of action? (7) What is the decision?

Tucker ’ s 5-question model

(1) Profitable? (2) Legal? (3) Fair? (4) Right? (5) Sustainable or environmentally sound?

Gray, Owen & Adams seven position

(1) Organizations should have some social responsibility. With social responsibility there is social accountability – organizations must account for their actions. (2) The belief means that there may be a difference between how the world is now and how it should be.

Seven viewpoints of social responsibility :

(1) Pristine capitalist. (2) Expedients. (3) Proponents of social contract. (4) Social ecologist. (5) Socialist. (6) Radical feminist.

(7) Deep ecologist.

Ethical stance

An organization’s ethical stance relates to how it views its responsibilities to shareholders, stakeholders, society and the environment.

Short-term shareholder interests

An organization might limit its ethical stance to taking responsibility for short-term shareholder interest on the grounds that it is for government alone to impose wider constraints on corporate governance.

Long-term shareholder interests

Organization might take a wider view of ethical responsibilities when considering the longer-term interest of shareholders based on two reasons: (a) the organization’s corporate image may be enhanced by an assumption of wider responsibilities; (b) the responsible exercise of corporate power may prevent a build-up of social and political pressure for legal regulation.

Multiple stakeholder obligations

Organization might accept the legitimacy of the expectations/claims of stakeholders other than shareholders because without appropriate relationships with them, the organization would not be able to function. Organizations have a duty to respect the legal rights of stakeholders other than shareholders.

Shaper of society

The role of shaper of society is even more demanding and largely the concern of public sector organizations and charities. The legitimacy of this approach depends on the framework of corporate governance and accountability. Organization must also satisfy whatever requirements for financial viability are established for them as well as pursuit such a role.

Cultural context for ethics and corporate social responsibility

Economic

Economic responsibilities, which relate to the ability of the organization to stay in business and therefore provide for its stakeholders, must be satisfied by organizations. (a) shareholders requiring a return on their investments; (b) employees to be provided with safe and fairly paid jobs; (c) customers to be able to obtain good quality products at a fair price.

Legal

Legal responsibility implies that an organization will follow the laws of the jurisdiction in which it is based as well as internal moral views or objectives. Organizations must act within the law to show that it is socially responsible. Legal responsibilities may therefore limit economic responsibilities.

Ethical

Ethical responsibilities relate to what is expected by society from organizations compared with what those organizations have to do from an economic or legal viewpoint. Ethical responsibilities relate to doing what is seen to be right therefore are higher than both economic and legal responsibilities.

Philanthropic

Philanthropic responsibilities generally concern actions desired of organization rather than those required by organizations, such as make donations to charities and sponsor the arts. These activities are carried out because the organization believes it is the correct thing to do rather than because it must.

Profession vs. Professionalism

Profession

(1) Profession means a body of theory and knowledge which is used to support the public interest. (2) A body of theory may include (a) ethical standards; (b) auditing standards to determine the standard of auditing work; (c) an examination system which ensures accountants obtain the knowledge required. (3) Knowledge which guides its practice and commitment to the public interest may include (a) Guidance notes on how to apply ethical standards; (b) experience built up in terms of the acceptable actions of accountants and how to apply ethics to specific situations; (c) the need to remain a profession which can be trusted. (4) Over time, the profession appears to be taking more of a proactive than a reactive approach.

Professionalism

(1) Professionalism means taking action to support the public interest. Within a profession, the members will normally be expected to take actions that contribute to the public interest. (2) Professional behavior imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession.(3) Professionalism may be interpreted more as a state of mind while the profession provides the rules.

Public interest

(1) Public interest is considered to be the collective well-being of the community of people and institutions the professional accountant serves, including clients, lenders, government, employers, employees, investors and other who rely on the work of professional accountants/ (2) Acting in the public interest may seriously affect the idea of human rights. (3) The actions of a majority of the shareholders may adversely affect the minority shareholders. The actions of the organization itself may be harmful to society. (4) In law, public interest is a defense to certain lawsuits and an exemption from certain laws or regulations.

Accountancy profession in organizational context

(1) Financial accounting(2) Audit(3) Management accounting(4) Consulting(5) Tax(6) Public sector accounting

Accountancy profession in social context

(1) Mechanistic issues. Accounts are used to judge the performance of a company or its directors in line with a regulation or contract. (2) Judgmental issues. The figures in the accounts influence the judgment of their users.

Value-laden profession

(1) Accountants have specialist skills and knowledge which can be used in the public interest. (2) Society may have the objective of obtaining a more equal distribution of power and wealth. (3) Given their abilities, accountants can probably advise on how that power and wealth can be distributed. (4) Accountants produce information for individual or corporations seeking to maximize their personal wealth. (5) The result of the individual pursuit of economic benefit is economic efficiency, maximum profits and economic growth, and everyone within society being better off.

Accounting and public interest

Acting against public interest

(1) Acting against the public interest implies that information is not being made available by accountants to the public when that information should be made available. (2) Accounting rules give priority to client confidentiality over disclosure in the wider public interest.

(3) Accounting rules allow too great a variety of accounting treatments and fall to impose meaningful responsibilities on auditors. (4) Acting against the public interest also implies that information which should be kept confidential is disclosed.

Areas of behavior covered by corporate codes of ethics

An ethical code typically contains a series of statements setting out the organization’s values and explaining how it sees its responsibilities towards stakeholders. Corporate ethics relates to the application of ethical values to business behavior.

(1) The purpose and values of the business. (a) the products or services to be provided; (b) the financial objectives of the company; (c) the role of the business in society. (2) Employees. (a) working conditions and rewards; (b) recruitment and retirement; (c)

development and training; (d) health, safety and security. (3) Customer relations. (a) product quality; (b) fair pricing; (c) after sales service. (4) Shareholders or other providers of money. (a) providing a proper return on shareholder investment; (b) providing timely and accurate information to shareholders on the company’s historical achievement and future prospects. (5) Suppliers. (a) attempt to settle invoices promptly; (b) cooperate with suppliers to maintain and improve the quality of inputs; (c) not use or acceptable bribery as a mean of securing contracts with suppliers; (d) attempt to select suppliers based on some ethical criterion. (6) Society or the wider community. (a) how it complies with the law; (b) obligations to protect, preserve and improve the environment; (c) involvement in local affairs, including specific staff involvement; (d) policy on donation to educational and charitable institutions. (7) Implementation. This means that the process by which the code is finally issued and then used, including continuous review and revise.

Content and principles of professional codes of ethics

Content

(1) Introduction. It provides the background to the code, stating who it affects, how the code is enforced and outlines disciplinary proceedings. (2) Fundamental principles. It is the key principles that must be followed by all members of the institute. (3) Conceptual framework. It explains how the principles are actually applied, recognizing that principles cannot cover all situations and so the ‘spirit’ of the principles must be complied with. (4) Detailed application. It explains the examples of how the principles are applied in specific situations.

Principles

(1) Fundamental ethical principles are obligations placed on members of a professional institute.

(2) Principles apply to all members, whether or not they are in practice. (3) The conceptual framework provides guidance on how the principles are applied. (4) The framework also helps identify threats to compliance with the principles and then applies safeguards to eliminate or reduce those threats to acceptable levels.

Accounting professional codes of ethics

(1) Integrity. Members should be straightforward and honest in all business and professional relationships. (2) Objectivity. Members should not allow bias, conflicts of interests or undue influence of others to override professional or business judgments. (3) Professional competence. Members have a continuing duty to maintain professional knowledge and skill at a required level. (4) Confidentiality. Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper or specific authority or unless there is a legal or professional right or duty to disclose. (5) Professional behavior. Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Conflict of interest/Ethical resolution

Conflict of interest/ Threats to independence

(1) Self-interest(2) Self-review(3) Advocacy(4) Familiarity(5) Intimidation

Ethical conflict resolution

Firms should have established policies to resolve conflict. Professional accountants should consider the followings: (1) The facts(2) The ethical issues involved(3) Related fundamental principles(4) Established internal (firm) procedures(5) Alternative courses of action, considering the consequences of each

Ethical threats/Safeguards

Ethical threats/ Safeguards

(1) Ethical threats apply to accountants – whether in practice or business. (2) The safeguards to those threats vary depending on the specific threat.(3) The professional accountant must always be aware that fundamental principles may be compromised and therefore look for methods of mitigating each threat as it is identified.

(4) An ethical threat is a situation where a person or corporation is tempted not to follow their code of ethics. / An ethical safeguard provides guidance or a course of action which attempts to remove the ethical threat. (5) Conflict between requirements of the employer and the fundamental principles. / Obtaining advice from employer, professional organization, employer providing a formal dispute resolution process, legal advice. (6) Preparation and reporting on information. / Consultation with superiors in the employing company, those charged with governance, and professional body. (7) Having sufficient expertise. / Obtaining additional advice or training and assistance from relevant experts. (8) Financial interests. / Remuneration being determined by others, disclosure of relevant interests to those charged with governance, consultation with superiors or relevant professional body. (9) Inducements – receiving offers. / Don’t accept, inform relevant third parties after taking legal advice. (10) Inducements – giving offers. / Don’t offer, follow the conflict resolution process. (11) Confidential information. / Disclose information in compliance with relevant statuary requirements.

Ethical decision-making

(1) Knowing what is the correct thing to do. (Moral issue) (2) The actual action taken. (Moral behavior)

4-stages process

(1) Recognize moral issue. (2) Make moral judgment. (3) Establish moral intern. (4) Engage in moral behavior.

Social/Environmental impacts

(1) Economic activity has social and environmental effects. In general terms, that activity is only sustainable where the long-term impact on the environment and effect on society is sustainable. (2) In terms of organizations, the effect of their social and environmental activities must be sustainable. Lack of sustainability implies that the organization is also not sustainable. (3) Environmental footprint is the impact that a business’s activities have upon the environment including its resource environment and pollution emissions. (4) Social footprint means that organizations need to consider other aspects of corporate social

responsibilities in addition to environmental footprint.

Sustainability

(1) Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. (2) Sustainability is an attempt to provide the best outcomes for the human and natural environment both now and into the indefinite future. (3) Sustainability affects every level of organization, from the local neighborhood to the entire planet. (4) It is the long-term maintenance of systems according to economic, environmental and social considerations. (5) Some problems should be considered: (a) sustainable for whom; (b) sustainable in what way; (c) sustainable for how long; (d) sustainable at what cost; (e) sustainable by whom.

Full cost accounting

Full cost accounting allows current accounting and economic numbers to incorporate all potential/actual costs and benefits into the equation including environmental/social externalities to get the prices right.

(Advantages)(1) Knowledge of full extent of environmental/social footprint. (2) Reducing environmental/social footprint. (3) Assisting decision-making. (4) Favorable publicity.

(Disadvantages)(1) Data required. (2) Which cost figures to use? (3) Inclusion of social externalities. (4) Translating activities into impacts.

Environmental management system

EMAS

Requirements for EMAS registration: (1) An environmental policy containing commitments to comply with legislation and achieve continuous environmental performance improvements. (2) An on-site environmental review. (3) An environmental management system. (4) Environmental audits at sites at least every 3 years. (5) A public environmental statement.

ISO 14000

ISO 14001 prescribes an environmental management system must comprise: (1) An environmental policy statement. (2) An assessment of environmental aspects and legal and voluntary obligations. (3) A management system. (4) Internal audits and reports to senior management. (5) A public declaration that ISO 14001 is being complied with.

Environmental Accounting/Audit

Social auditing

(1) Establishing whether the organization has a rationale for engaging in social responsible activity. (2) Identifying that all current environment programs correspond with the mission of the company. (3) Assessing objectives and priorities related to these programs. (4) Evaluating company involvement in such programs past, present and future.

Environmental auditing

(1) Aims to assess the impact of the organization on the environment. (2) Normally involves the implementation of appropriate environmental standards such as ISO 14000 and EMAS. (3) Provides the raw data for environmental accounting.

Environmental accounting

(1) Environmental accounting is to use the metrics produced from an environmental audit and incorporate these into an environmental report. (2) Environmental accounting is to integrate environmental performance measures into core financial processes to generate cost savings and reduce environmental impact through improved management of resources. (3) This is the development of an environmental accounting system to support the integration of environmental performance measures. (4) It builds on social and environmental auditing by providing empirical evidence of the achievement of social and environmental objectives. (5) Without social and environmental auditing, environmental accounting would not be possible.