SBL - Pocket Notes - 2020/2021 Strategic Business Leader Big Thanks to KAPLAN Promoter - www.ACCAGlobalBox.com G lo ba l ACCA Bo x Downloaded From "http://www.ACCAGlobalBox.com" Strategic Business Leader (SBL) AC C A Pocket Notes www.ACCAGlobalBox.com Strategic Business Leader (SBL) A catalogue record for this book is available from the British Library. AC C A Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millars Lane Wokingham Berkshire RG41 2QZ ISBN 978-1-78740-650-6 © Kaplan Financial Limited, 2020 Printed and bound in Great Britain. P.2 Bo x G lo ba l British library cataloguing-in-publication data The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Kaplan Publishing. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Strategic Business Leader (SBL) Contents Introduction to the SBL exam.........................................................................................1 Chapter 2 Concepts of strategy.......................................................................................................7 Chapter 3 Strategic analysis..........................................................................................................13 Chapter 4 Performance analysis...................................................................................................21 Chapter 5 Strategic choice............................................................................................................25 Chapter 6 Methods of strategic development................................................................................31 Chapter 7 Governance general principles.....................................................................................35 Chapter 8 Approaches to governance...........................................................................................47 Chapter 9 Stakeholders and corporate social responsibility.........................................................51 AC C A G lo ba l Bo x Chapter 1 Chapter 10 Effective leadership......................................................................................................55 Chapter 11 The board of directors..................................................................................................61 Chapter 12 Reporting to stakeholders.............................................................................................73 Chapter 13 Management internal control systems and reporting...................................................85 Chapter 14 Audit and compliance...................................................................................................97 KAPLAN PUBLISHING www.ACCAGlobalBox.com P.3 Strategic Business Leader (SBL) Chapter 15 Identification, assessment and measurement of risk.................................................107 Chapter 16 Managing, monitoring and mitigating risk................................................................... 117 Chapter 17 Professionalism, ethical codes and the public interest...............................................129 Bo x Chapter 18 Organising for success...............................................................................................143 Chapter 19 e-Business..................................................................................................................151 G lo ba l Chapter 20 Using IT successfully..................................................................................................159 Chapter 21 e-Marketing.................................................................................................................167 Chapter 22 Project management...................................................................................................173 Chapter 23 Financial decision making..........................................................................................183 Index P.4 AC C A Chapter 24 Managing strategic change........................................................................................195 ......................................................................................................................................I.1 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Strategic Business Leader (SBL) Aim Main Capabilities On successful completion of this paper, candidates should be able to: AC C A AApply excellent leadership and ethical skills to set the ‘tone from the top’ and promote a positive culture within the organisation, adopting a whole organisation perspective in managing performance and value creation. BEvaluate the effectiveness of the governance and agency system of an organisation and recognise the responsibility of the board or other KAPLAN PUBLISHING CEvaluate the strategic position of the organisation against the external environment and the availability of internal resources, to identify feasible strategic options. G lo ba l To demonstrate organisational leadership and senior consultancy or advisory capabilities and relevant professional skills, through the context of an integrated case study. agents towards their stakeholders, including the organisation’s social responsibilities and the reporting implications. Bo x Syllabus DAnalyse the risk profile of the organisation and of any strategic options identified, within a culture of responsible risk management. ESelect and apply appropriate information technologies and data analytics, to analyse factors affecting the organisation’s value chain to identify strategic opportunities and implement strategic options within a framework of robust IT security controls. www.ACCAGlobalBox.com P.5 FEvaluate management reporting and internal control and audit systems to ensure compliance and the achievement of organisation’s objectives and the safeguarding of organisational assets. The Examination GApply high level financial techniques from Skills exams in the planning, implementation and evaluation of strategic options and actions. Bo x Strategic Business Leader (SBL) The examination is based on an integrated case study containing a number of assignments which will vary at each examination. G lo ba l These assignments or tasks may require the candidate to take on different roles, depending on the situation. The number of marks allocated to all these assignments or the sub-parts of these will add up to 100 in total. AC C A HEnable success through innovative thinking, applying best in class strategies and disruptive technologies in the management of change; initiating, leading and organising projects, while effectively managing talent and other business resources. IApply a range of Professional Skills in addressing requirements within the Strategic Business Leader examination and in preparation for, or to support, current work experience. P.6 Within the total marks available, there are 20 Professional Skills marks. Usually each task will contain some professional skills marks which may vary by examination, depending on the requirements. All tasks must be completed. The examination is of 4 hours duration, but this includes Reading, Planning and Reflection time (RPRT). This time can be used flexibly at any time during the exam. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Strategic Business Leader (SBL) Varying number of tasks Total time allowed: 4 hours Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. AC C A G lo ba l NB More detail on exam guidance in Chapter 1 Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback for in MyKaplan. Bo x Number of marks 100 KAPLAN PUBLISHING www.ACCAGlobalBox.com P.7 AC C A G lo ba l Bo x Strategic Business Leader (SBL) P.8 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" 1 Bo x chapter G lo ba l Introduction to the SBL exam In this chapter • Overview. • Being a leader. AC C A • Thinking strategically. • Communication. • Commercial acumen. • Analysis. • Scepticism. • Evaluation. www.ACCAGlobalBox.com 1 Introduction to the SBL exam Overview Thinking strategically Bo x Being a leader G lo ba l The Strategic Leader AC C A INTRODUCTION TO THE SBL EXAM Professional skills Communication Commercial acumen Scepticism 2 Analysis Evaluation www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 1 Being a leader Thinking strategically As a leader, you are expected to be able to analyse a business situation and provide and implement appropriate, effective and sustainable solutions. Having a strategic perspective means that you can do the following: • Set the direction of the whole organisation and integrate its activities. G lo ba l • be clear and focussed, identifying the key issues in any situation Bo x This means that you can • Take a long term perspective. • Look at the whole organisation as well as individual products /divisions / SBUs. • analyse and address ethical concerns AC C A • use technical models and quantitative analysis to draw out key issues, establish causality and integrate a wide range of factors into a coherent argument • make recommendations that meet the needs of users and are ‘fit for purpose’. KAPLAN PUBLISHING • Consider the views of all stakeholders, not just shareholders. • Analyse the organisation’s resources and define resource requirements. • Relate the organisation to its environments. • Look at gaining a sustainable competitive advantage. www.ACCAGlobalBox.com 3 Introduction to the SBL exam Commercial acumen Syllabus spec (a) Demonstrate awareness of organisational and wider external factors affecting the work of an individual or a team in contributing to the wider organisational objectives. (b) Use judgement to identify key issues in determining how to address or resolve problems and in proposing and recommending the solutions to be implemented. (c) Show insight and perception in understanding work-related and organisational issues, including the management of conflict, demonstrating acumen in arriving at appropriate solutions or outcomes. AC C A G lo ba l Syllabus spec (a) Inform concisely, objectively, and unambiguously, while being sensitive to cultural differences, using appropriate media and technology. (b) Persuade using compelling and logical arguments demonstrating the ability to counter argue when appropriate. (c) Clarify and simplify complex issues to convey relevant information in a way that adopts an appropriate tone and is easily understood by the intended audience. Bo x Communication In summary, this means you have to express yourself clearly and convincingly through the appropriate medium while being sensitive to the needs of the intended audience. 4 In summary, this means you have to show awareness of the wider business and external factors affecting business, using commercially sound judgement and insight to resolve issues and exploit opportunities. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 1 Scepticism Syllabus spec (a) Probe deeply into the underlying reasons for issues and problems, beyond what is immediately apparent from the usual sources and opinions available. (b) Question facts, opinions and assertions, by seeking justifications and obtaining sufficient evidence for their support and acceptance. (c) Challenge information presented or decisions made, where this is clearly justified, in a professional and courteous manner; in the wider professional, ethical, organisational, or public interest. AC C A G lo ba l Syllabus spec (a) Investigate relevant information from a wide range of sources, using a variety of analytical techniques to establish the reasons and causes of problems, or to identify opportunities or solutions. (b) Enquire of individuals or analyse appropriate data sources to obtain suitable evidence to corroborate or dispute existing beliefs or opinion and come to appropriate conclusions. (c) Consider information, evidence and findings carefully, reflecting on their implications and how they can be used in the interests of the department and wider organisational goals. Bo x Analysis In summary, this means you have to thoroughly investigate and research information from a variety of sources and logically process it with a view to considering it for recommending appropriate action. KAPLAN PUBLISHING In summary, this means you have to probe, question and challenge information and views presented to them, to fully understand business issues and to establish facts objectively, based on ethical and professional values. www.ACCAGlobalBox.com 5 Introduction to the SBL exam AC C A G lo ba l Syllabus spec (a) Assess and use professional judgement when considering organisational issues, problems or when making decisions; taking into account the implications of such decisions on the organisation and those affected. (b) Estimate trends or make reasoned forecasts of the implications of external and internal factors on the organisation, or of the outcomes of decisions available to the organisation. (c) Appraise facts, opinions and findings objectively, with a view to balancing the costs, risks, benefits and opportunities, before making or recommending solutions or decisions. In summary, this means you have to carefully assess situations, proposals and arguments in a balanced way, using professional and ethical judgement to predict future outcomes and consequences as a basis for sound decision-making. Bo x Evaluation 6 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Concepts of strategy In this chapter • Strategic planning. • The strategic planning process. • Strategic drift. AC C A 2 Bo x chapter www.ACCAGlobalBox.com 7 Concepts of strategy Strategic planning Benefits of strategic planning Disadvantages of strategic planning • Time consuming • Becomes a straightjacket • Provides direction • Creates bureaucracy • Ensures goals are met • Less relevant in a crisis G lo ba l • Can create competitive advantage Bo x • Improves fit with the environment • Makes best use of scarce resources AC C A • Ensures plans are properly implemented 8 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 2 The strategic planning process The 3 stage planning model (Johnson, Scholes & Whittington) AC C A G lo ba l Bo x Strategic analysis • External analysis to identify opportunities and threats • Internal analysis to identify strengths and weaknesses • Stakeholder analysis to identify key objectives and to assess the power and interest of different groups • Gap analysis to identify the difference between desired and expected performance. Strategic choice trategies are required to ‘close the gap’ • S • Competitive strategy – for each business unit • Directions for growth – which markets/ products should be invested in • Whether expansion should be achieved by organic growth, acquisition or some form of joint arrangement. KAPLAN PUBLISHING www.ACCAGlobalBox.com Strategy into action (implementation) • Structuring • Enabling • Change 9 Concepts of strategy AC C A G lo ba l Bo x Strategic drift 10 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 2 To avoid strategic drift: • assess the environment for changes • have flexible systems • have clear understanding of the mission and objectives AC C A G lo ba l • have strong leaders Bo x • break down barriers to change KAPLAN PUBLISHING www.ACCAGlobalBox.com 11 AC C A G lo ba l Bo x Concepts of strategy 12 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Strategic analysis In this chapter • PESTEL analysis. • 5 forces analysis. • Porter’s diamond. AC C A 3 Bo x chapter • Strategic capabilities. • Value chain analysis. • SWOT analysis. www.ACCAGlobalBox.com 13 Strategic analysis PESTEL analysis Key strategic use: to analyse potential impacts on future growth Key factors to consider Political Changes to government policy Economic Booms or recessions Social Changes to taste/fashion Technological New hardware/software capabilities Environmental Geographic location or use of resources Legal Restrictions or extra regulations AC C A G lo ba l Bo x Area of the model 14 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 3 5 Forces analysis Key strategic use: to analyse potential impacts on future margins Bo x NEW ENTRANTS INDUSTRY COMPETITORS AC C A SUPPLIERS Bargaining power of suppliers G lo ba l Threat of new entrants Bargaining power of buyers BUYERS INTENSITY OF RIVALRY Threat of new substitutes SUBSTITUTES KAPLAN PUBLISHING www.ACCAGlobalBox.com 15 Strategic analysis Porter’s diamond Bo x Key strategic use: to analyse potential new foreign markets for expansion G lo ba l Factor conditions • Basic factors: e.g. weather, local raw materials • Advanced factors: e.g. telecommunications, education system AC C A Demand conditions e.g. very demanding customers Related and supporting industries e.g. world class suppliers Firm structure, strategy and rivalry e.g. ownership, intense rivalry 16 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 3 Strategic capabilities Key strategic use: to analyse the ability to cope with changes in the external environment Capabilities for competitive advantage Unique resources Competencies Threshold competencies Core competencies AC C A • CSFs, hard to copy Threshold resources G lo ba l • Common with rivals Bo x Resources Threshold capabilities KAPLAN PUBLISHING www.ACCAGlobalBox.com 17 Strategic analysis Value chain analysis Key strategic use: to determine the source of competitive (dis)advantage Infrastructure Bo x Technology HRM Procurement Operations Outbound logistics Marketing and sales Profit Service AC C A Inbound logistics G lo ba l Support activities 18 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 3 SWOT Analysis Bo x Key strategic use: to bring together the internal and external analysis in order to understand overall strategic position Weaknesses G lo ba l Strengths AC C A SWOT Opportunities KAPLAN PUBLISHING www.ACCAGlobalBox.com Threats 19 AC C A G lo ba l Bo x Strategic analysis 20 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Performance analysis In this chapter • Quantitative analysis. • Benchmarking. • Baldrige performance excellence. AC C A 4 Bo x chapter www.ACCAGlobalBox.com 21 Performance analysis Non-financial data The quantitative information will typically include: Non-financial information will also be provided in tables, and candidates will be expected to use and interpret this information. Such tables will supplement, and to some extent replace, information traditionally given in the narrative scenario. Financial Data AC C A G lo ba l Specific marks will be available for interpreting financial ratios that can be calculated from the financial data. The questions will never ask for specific ratios, but there will always be enough information to calculate and interpret several financial ratios. The key will be to choose 3/4 key ratios and explain the cause of any changes and the effect that these changes might have on the organisation. Bo x Quantitative analysis 22 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 4 Benchmarking • determines where improvements are required • analyses how high performance is achieved Bo x • uses this information to improve performace levels in processes Types: This determines internal best practice Competitive This examines the performance of rivals Activity / best-in-class This examines the level of performance from a similar process in a different industry AC C A G lo ba l Internal KAPLAN PUBLISHING www.ACCAGlobalBox.com 23 Performance analysis Baldrige performance excellence 1 Leadership 5 Workforce Focus G lo ba l 2 Strategic Planning Bo x Organisational Profile: Environment, Relationships, and Challenges AC C A 3 Customer and Market Focus 7 Results 6 Process Management 4 Measurement, Analysis, and Knowledge Management 24 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Strategic choice In this chapter • Competitive strategies. • Growth strategies. • Strategy evaluation. AC C A 5 Bo x chapter www.ACCAGlobalBox.com 25 Strategic choice Competitive strategies A range of possible competitive positions is provided in the strategy clock: High 2 Low price AC C A Perceived products/ service benefits G lo ba l 3 Hybrid Bo x 4 Differentiation 1 No frills 5 Focused Differentiation 6 Strategy that will fail 7 Strategy that will fail 8 Strategy that will fail Low Low 26 Price www.ACCAGlobalBox.com High KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 5 Key elements of successful competitive strategies: Low cost CSFs Key threats Finding cheaper alternatives Changes in buyer preferences Eliminating all waste Loss of barriers to entry Economies of scale Bo x No frills Larger (international?) rivals A focus on cost reduction Economies of scale Loss of brand Branding Difficult to achieve Service levels Target for all rivals Innovation Being copied Branding Marketing New technology which differentiates Market knowledge Recession Unique product/service Small market size G lo ba l Hybrid AC C A Differentiation Focused differentiation Few barriers Failing strategies fail because they are beaten by competitive rivals. KAPLAN PUBLISHING www.ACCAGlobalBox.com 27 Strategic choice Growth strategies These can be derived from the Ansoff matrix: New product Market penetration Product development – Introduce a new or improved competitive strategy Bo x Existing market Existing product Risks Risks ompetitors will react – C – U nknown demand – C an lead to stagnation – C an harm existing products Market development Diversification AC C A New market G lo ba l – B est used when market is growing – C reate new or improved products – Or copy rivals arget a new market segment – T ew products and markets – N – S trategic alliances are often used to reduce risks – C an be forward, backward, horizontal or conglomerate Risks Risks uts a strain on capabilities – P – V ery different CSFs – N eed new external analysis – N eed new external analysis an reduce flexibility – C 28 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 5 Johnson, Scholes, Whittington • Suitability – is the strategy consistent, both externally and internally? –– Is the time-scale achievable? –– Do we have the critical success factors necessary to implement the strategy? AC C A G lo ba l –– D oes it give the firm a better fit with the environment? –– Portfolio analysis – how do new products fit with existing ones? –– Are their synergies with other parts of the business? –– Is the timing right? • Acceptability – is the strategy acceptable to the stakeholders? • Feasibility – is the strategy within the resources and capability of the organisation? Bo x Strategy evaluation –– Is the risk acceptable? –– Is it ethical? –– How will other stakeholders react? KAPLAN PUBLISHING www.ACCAGlobalBox.com 29 AC C A G lo ba l Bo x Strategic choice 30 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Methods of strategic development In this chapter • Main methods of development. • Portfolio analysis. AC C A 6 Bo x chapter www.ACCAGlobalBox.com 31 Methods of strategic development Start from a zero base alone Slow, but risky 32 Acquisition AC C A Organic growth G lo ba l Options Bo x Main methods of development Buy an existing business Quick but expensive Joint venture Strategic Alliance Partnering Do it with a partner Share skills and costs, but difficult to agree www.ACCAGlobalBox.com Franchise Allow others to use the brand Low cost, but lose control KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 6 Portfolio analysis BCG matrix Market growth Bo x Dog • T oo small to benefit from economies of scale • Market does not justify further investment • Divest Problem-child • A ttractive market but too small to capitalise on it. • Either invest heavily to gain market share or get out • ‘Double or quit’ AC C A G lo ba l High Star • A ttractive market so have to reinvest heavily to defend market share and grow • Little cash surplus Market share KAPLAN PUBLISHING High Low Low Cash-cow • Strong position in a low growth (therefore unattractive) market • Little threat from rivals • Just keep the product ticking over and collect the cash www.ACCAGlobalBox.com 33 Methods of strategic development Ashridge portfolio display This adapts the BCG idea to public sector organisations and the axis are “public need and funding effectiveness” and “value for money”. This model looks at the strategic fit between a parent company and the strategic business units it manages. High Ballast Heartland Alien territory Value trap Low AC C A Feel G lo ba l Bo x Low High The public sector portfolio matrix Benefit 34 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Governance general principles In this chapter • Overview of corporate governance. • Company ownership and control. • Coverage of governance. AC C A 7 Bo x chapter • Key concepts. • Purpose and scope of governance. • Agency Theory. • Key concepts of Agency Theory. • Stakeholder Theory. • Stakeholder claim. www.ACCAGlobalBox.com 35 Governance general principles Overview of Corporate Governance Definition Objectives G lo ba l Bo x Purpose AC C A Corporate Governance Key Concepts Agency Theory Stakeholders 36 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 7 Company ownership and control? Bo x • Corporate governance is the system by which companies are directed and controlled in the interests of shareholders and other stakeholders. Directors G lo ba l Shareholders AC C A Ownership Objectives KAPLAN PUBLISHING = Control Objectives www.ACCAGlobalBox.com 37 Governance general principles Coverage of governance G lo ba l Bo x Coverage of governance Strategic direction from board of directors 38 AC C A Internal to company Risk assessment and response Control of operations – internal control systems External to company Regulatory framework – legislation and/ or codes of practice www.ACCAGlobalBox.com Wider social and ethical responsibilties for companies KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 7 Key Concepts KAPLAN PUBLISHING Bo x Independence No conflict of interests for all directors (exec. and non-exec.) G lo ba l Fairness Even and ethical dealing with all stakeholders Probity/honesty Culture of honesty and clear sense of ethical stance AC C A Transparency Open and honest relations with shareholders/ clear decision making Key concepts in governance www.ACCAGlobalBox.com Reputation Develop and maintain personal reputation and moral stance Integrity Adherence to strict moral and ethical code 39 Governance general principles • • 40 Bo x G lo ba l • Innovation Innovation and experimentation in reporting The business moves away from rigid compliance towards the better communication of its individual value creation story for its providers of financial capital AC C A • Responsibility Acceptance of responsibility for governance decisions Clarity or roles and responsibilities Judgement Ability to make correct decision from many conflicting inputs www.ACCAGlobalBox.com • • • Accountability Provision of complete information to all stakeholders and effective risk management Scepticism Scepticism(often referred to as professional scepticism) is an attitude which includes a questioning mind To provide a critical assessment of evidence For example, non-executive directors apply scepticism in order to challenge and scrutinise management effectively KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 7 Purpose and scope of governance The three elements of value for money are: • Economy = a measure of inputs to achieve a certain service or level of service. • to monitor those parties within a company which control the resources owned by investors. • Efficiency = measure of outputs over inputs. G lo ba l • the primary objective of sound corporate governance is improved corporate performance and accountability in creating long term shareholder value. • Effectiveness = a measure of outputs, i.e. services/facilities. Bo x For the private sector: For the public and not for profit sectors: AC C A • objectives within these organisations are more complex and conflicting. • organisations are often appraised according to the “value for money” (VFM) that they generate. –– d efined as performance of an activity to simultaneously achieve economy, efficiency and effectiveness KAPLAN PUBLISHING www.ACCAGlobalBox.com 41 Governance general principles Agency Theory Bo x Agency theory is a group of concepts describing the nature of the agency relationship deriving from the separation between ownership and control. On behalf of AC C A Employs G lo ba l Principal (Shareholders) Accountable to Agent (Directors) To perform Task (Managing the company) 42 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 7 Essential to understanding agency theory. • An agent is employed by a principal to carry out a task on their behalf. • Agent objectives (such as a desire for high salary, large bonus and status for a director) will differ from the principal’s objectives (wealth maximisation for shareholders). • The most important agency costs are the external audit fee, attending meetings and reading both annual reports and analyst’s reports. G lo ba l • Agency refers to the relationship between a principal and their agent. • Stakeholders are any person or group that can affect or be affected by the policies or activities of an organisation. Bo x Key concepts of Agency Theory • Agency costs are incurred by principals in monitoring agency behaviour because of a lack of trust in the good faith of agents. AC C A • By accepting to undertake a task on their behalf, an agent becomes accountable to the principal by whom they are employed. • Directors (agents) have a fiduciary responsibility to the shareholders (principal) of their organisation (usually described through company law as ‘operating in the best interests of the shareholders’). KAPLAN PUBLISHING www.ACCAGlobalBox.com 43 Governance general principles Stakeholder Theory • The basis for stakeholder theory is that companies are so large and their impact on society so pervasive that they should discharge accountability to many more sectors of society than solely their shareholders. Management AC C A Shareholders G lo ba l Bo x • Stakeholders are not only are affected by the organisation but they also affect the organisation. Employees Future generations 44 Stakeholders Community www.ACCAGlobalBox.com Customers Suppliers Government KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 7 There are: G lo ba l A stakeholder claim is where a stakeholder wants something from an organisation. These claims can be concerned with the way a stakeholder may want to influence the activities of an organisation or by the way they are affected by the organisation. Bo x Stakeholder claim • Direct claims – made by stakeholders directly with the organisation and are unambiguous e.g. trade unions, they have their own voice. AC C A • Indirect claims – where the stakeholder is “voiceless”, e.g. an individual customer of a large retail organisation or the environment with the inevitable problem of interpretation. KAPLAN PUBLISHING www.ACCAGlobalBox.com 45 AC C A G lo ba l Bo x Governance general principles 46 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Approaches to governance In this chapter • Rules and principles based approaches to corporate governance. • Family structures. AC C A 8 Bo x chapter • Insider-dominated structures. www.ACCAGlobalBox.com 47 Approaches to governance • A rules-based approach instils the code into law with appropriate penalties for transgression. • global economic and political climate. Comply or explain A principles-based code requires the company to state that it has complied with the requirements of the code or to explain why it could not do so in its annual report. This will leave shareholders to draw their own conclusions regarding the governance of the company. G lo ba l • A principles-based approach requires the company to adhere to the spirit rather than the letter of the code. The company must either comply with the code or explain why it has not through reports to the appropriate body and its shareholders. • culture and history • levels of capital inflow or investment coming into the country Bo x Rules and principles based approaches to corporate governance AC C A Choice of governance regime The decision as to which approach to use for a country can be governed by many factors: • dominant ownership structure (bank, family or multiple shareholder) • legal system and its power/ability • government structure and policies • state of the economy 48 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 8 Family structures Problems A family structure exists where a family has a controlling number of shares in a company. • Gene pool – the gene pool of expertise in owner managers must be questionable over generations. • Fewer agency costs – since the family is directly involved. • Separation – families separate and this could be costly in terms of buying out shareholding and restructuring. G lo ba l • Ethics – threats to reputation are threats to family honour, increases the likely level of ethical behaviour. • Feuds – families fight, and this is an added element of cultural complexity. Bo x Benefits AC C A • Fewer short-term decisions – wealth already inherent in such families suggest long-term growth is a bigger issue. KAPLAN PUBLISHING www.ACCAGlobalBox.com 49 Approaches to governance Insider-dominated structures are where the listed companies are dominated by a small group of shareholders. Benefits: • Misuse of power i.e. reluctance to employ outsiders in influential positions and NED’s. • The market does not decide or govern (shareholders cannot exit easily to express discontent). G lo ba l • The agency problem is reduced – i.e. establish links with owners and managers. • Opaque operations and lack of transparency in reporting. Bo x Insider-dominated structures • Greater access to and potentially lower cost of capital i.e. smaller base of shareholders. • Reluctance of large independent shareholders to invest. AC C A • Smaller base of shareholders willing to take a long term strategic view of investment. • Tend to be reluctant until forced to develop formal governance structures. • Improved communication and influence over management. Problems: • Lack of minority shareholder protection (unlike protection in law in outsiderdominated structures). 50 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Stakeholders and corporate social responsibility In this chapter • Social responsibility. • Social responsiveness. AC C A 9 Bo x chapter • Stakeholder theory. • Managing stakeholder relations. • Corporate citizenship. www.ACCAGlobalBox.com 51 Stakeholders and corporate social responsibility • Corporation is separate legal entity therefore has responsibilities to others. • Work on principle of ‘enlightened selfinterest’ – if make positive contribution to society this also benefits company. Social responsiveness This refers to the capacity of the corporation to respond to social pressure, and the manner in which it does so. Carroll suggested four strategies: G lo ba l • Corporate social responsiblity (CSR) refers to organisations considering and managing their impact on a variety of stakeholders. • Integrate CSR into the culture, governance and strategy development of the company. Bo x Social responsibility Strategy Explanation Reaction The corporation denies any responsibility for social issues. • The board, must make an authentic, firm, and public commitment to CSR. Defence The corporation admits responsibility but fights it. • Determine the critical business objectives and priorities of the company. Accommodation The corporation accepts responsibility and does what is demanded of it. Proaction The corporation seeks to go beyond industry norms. CSR Strategy AC C A A suggested approach to develop and pursue CSR strategy is as follows: • Develop a CSR strategy that will contribute to the achievement of those objectives. • Align CSR strategy with the firm’s core competencies. 52 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 9 G lo ba l • The capitalist view ‘Customers, suppliers, shareholders and employees’. • Stakeholder model view adds ‘Government, civil society and competitors’. Stakeholder claims = demands that the stakeholder makes of an organisation. Low Who are stakeholders? Minimal effort Keep informed Keep satisfied Key players Power Stakeholder = any person or group that can affect or be affected by the policies or activities of an organisation. Company focus on key players, then those to keep satisfied to ensure they do not become key players. Bo x • High Stakeholder theory AC C A Managing Stakeholder relations High Low Level of interest Mendelow’s stakeholder mapping matrix • Classifies stakeholders according to their level of power and interest in the organisation. • Matrix used to determine company’s action regarding each group. KAPLAN PUBLISHING www.ACCAGlobalBox.com 53 Stakeholders and corporate social responsibility Corporate citizenship The organisation as a corporate citizen Corporate citizen = expanded view of corporation in society. Implies corporate accountability. Bo x Corporate accountability = whether the organisation is in some way answerable for the consequences of its actions beyond its relationship with shareholders. • • • 54 AC C A Government failure G lo ba l Reasons for viewing company as corporate citizen Government may be too slow to legislate against risks with new products and services. Other influences e.g. lack of political will, actions of pressure groups etc. also impede government action. Company must therefore take responsibility for safety of products/services. Corporate power • • • www.ACCAGlobalBox.com Over time, companies have tended to gain more power. E.g. decisions on where to locate workforce, privatisation of ‘old’ state monopolies. Companies should therefore use that power responsibly. KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Effective leadership In this chapter • The nature and importance of leadership. • What makes an effective leader? • Leadership and management. AC C A 10 Bo x chapter • Leadership and culture. • Entre and Intrapreneurship. www.ACCAGlobalBox.com 55 Effective leadership • Buchanan and Huczynski define a leader as ‘someone who exercises influence over other people’. • an attribute or a position, e.g. the managing director • a characteristic of a person – a natural leader • a category of behaviour. G lo ba l • Another definition is: Leadership is an interpersonal influence directed toward the achievement of a goal or goals. Leadership can be viewed from three standpoints Bo x The nature and importance of leadership Three important parts of this definition are the terms interpersonal, influence, and goal: AC C A • Interpersonal – means between persons. Thus, a leader has more than one person (group) to lead. • Influence – is the power to affect others. • Goal – is the end one strives to attain. Basically, this traditional definition of leadership says that a leader influences more than one person towards a goal. 56 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 10 Trait theories Many great leaders were considered to have: • physical traits, such as drive, energy, appearance and height • social traits, such as co-operation, tact, courtesy and administrative ability. Problems with trait theories: • The essence of leadership style theories is that a successful leader will exhibit a pattern of behaviour (i.e. ‘style’) in gaining the confidence of those they wish to lead. There are four main management styles: • Tells (autocratic) – the manager makes all the decisions and issues instructions which are to be obeyed without question. G lo ba l • personality traits, such as adaptability, enthusiasm and self-confidence Behavioural/style theories Bo x What makes an effective leader? AC C A • There will always be counter arguments - one theorist will say a leader should always be courteous whereas another will say that a rude and effective leader was identified. • Sells (persuasive) – the manager still makes all the decisions, but believes that team members must be motivated to accept them in order to carry them out properly. • Consults (participative) – the manager confers with the team and takes their views into account, although still retains the final say. • Joins (democratic) – the leader and the team members make the decision together on the basis of consensus. KAPLAN PUBLISHING www.ACCAGlobalBox.com 57 Effective leadership • Unfortunately, as with trait theories, it is possible to find counter examples e.g. Steve Jobs demonstrating the least effective style (autocratic) but running the largest technology company in the World. Contingency/contextual theories G lo ba l • The modern consensus is that there is no one best style of leadership that is equally effective for all circumstances. Bo x Problems with behavioural theories: AC C A • A theory that is a mixture of both trait and contingency is the situational approach. 58 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 10 Leadership and management Leadership and culture • A leader can be a manager, but a manager is not necessarily a leader. It has been proposed that there are two types of leaders: Bo x • Transactional leaders tend to be more passive. They see their relationship with their followers in terms of a trade. • Transformational leaders more proactive. They see their role as inspiring and motivating others to work at levels beyond mere compliance. G lo ba l • Management is the process of setting and achieving the goals of the organisation through the functions of management: planning, organising, directing (or leading), and controlling. • Leadership deals with the interpersonal aspects of a manager’s job, whereas planning, organising, and controlling deal with the administrative aspects. AC C A • Differentiating between leadership and management - employees willingly follow leaders because they want to, not because they have to. • Only transformational leadership is said to be able to change team/organisational cultures and move them in a new direction. • Transformational leadership enhances the motivation, morale, and job performance of followers. NB The distinguishing feature of transformational leadership is the ability to bring about significant change. KAPLAN PUBLISHING www.ACCAGlobalBox.com 59 Effective leadership Entre and Intrapreneurship AC C A G lo ba l • An intrapreneur is an employee of the company and does not usually have any ownership and minimum risk of financial loss. Bo x • An entrepreneur is an individual that ‘starts-up’ a business, is the owner and take all of the risk of financial loss. 60 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l The board of directors In this chapter • Board of directors. • Non-executive directors. • NEDs on the board. AC C A 11 Bo x chapter • Chairman and CEO. • Board committees. • Remuneration committee. • Components of directors’ remuneration package. • Non-executive directors’ remuneration. www.ACCAGlobalBox.com 61 The board of directors Roles and Responsibilities • provide entrepreneurial leadership of the company • represent company view and account to the public • meet regularly to discharge its duties effectively. For listed companies: • appoint appropriate NEDs • establish remuneration committee G lo ba l • decide on a formal schedule of matters to be reserved for board decision • ensure that its obligations to its shareholders and other stakeholders are understood and met Bo x Board of directors • establish nominations committee • select and appoint the CEO, chairman and other board members • assess its own performance and report it annually to shareholders AC C A • determine the company’s mission and purpose (strategic aims) • set the company’s values and standards • ensure that the company’s management is performing its job correctly • establish appropriate internal controls that enable risk to be assessed and managed • establish audit committee • submit themselves for re-election at regular intervals. NB All directors in FTSE 350 companies should be put forward for re-election every year. • ensure that the necessary financial and human resources are in place for the company to meet its objectives 62 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 11 Roles and Responsibilities • Strategy role – challenging strategy, offering advice and contributing toward strategic success. Advantages • Risk role – ensure adequate system of internal controls and system of risk management in place. AC C A • People role – oversee the appointment and remuneration of executive directors. KAPLAN PUBLISHING Disadvantages • monitoring role • unity of the board • additional expertise • quality of NEDs • enhanced perception of company • liability of the role G lo ba l • Scrutinising role – hold executive directors to account for decisions taken and results obtained. NEDs on the board Bo x Non-executive directors • communication with stakeholders • discipline over strategy www.ACCAGlobalBox.com 63 The board of directors Chairman and CEO Reasons for splitting the role • ‘A clear division of responsibilities must exist at the head of the company. No individual should have unfettered power of decision.’ • Representation: the chairman is clearly and solely a representative of shareholders with no conflict of interest. • Temptation: reduces the temptation to act more in self-interest rather than purely in the interest of shareholders. G lo ba l Responsibility of the chairman: Bo x Chairman’s responsibilities • Accountability: provides a clear path of accountability for the CEO and the management team. • ensure that the board sets and implements the company’s direction and strategy effectively AC C A • act as the company’s lead representative, explaining aims and policies to the shareholders. CEO’s responsibilities Responsibility of the CEO: • take responsibility for the performance of the company, as determined by the board’s strategy • report to the chairman and/or board of directors. 64 Reasons against splitting the role Unity: the separation of the role creates two leaders rather than the unity provided by a single leader. • Ability: both roles require an intricate knowledge of the company. It is far easier to have a single leader with this ability rather than search for two such individuals. • Human nature: there will almost inevitably be conflict between two high- powered executive offices. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 11 Nominations committee Importance of committees Responsibilities of nominations committee: Board sub-committees are a generally accepted part of board operations. • review regularly the structure, size and composition of the board and make recommendations to the board. Positives: • consider the balance between executives and NEDs on the board of directors. • ensure appropriate management of diversity to board composition. G lo ba l • reduces board workload and enables them to improve focus on other issues. Bo x Board Committees • creates structures that can use inherent expertise to improve decisions in key areas. • communicates to shareholders that directors take these issues seriously. AC C A • increase in shareholder confidence. • communicates to stakeholders the importance of remuneration and risk. • satisfy requirements of the UK Corporate Governance Code (2018) (or other governance requirements). KAPLAN PUBLISHING • provide an appropriate balance of power to reduce domination in executive selection by the CEO/Chairman. • evaluate the balance of skills, knowledge and experience of the board. • full consideration to succession planning for directors. • prepare a description of the role and capabilities required for any particular board appointment including that of the chairman. www.ACCAGlobalBox.com 65 The board of directors • recommendations to the board concerning the standing for reappointment of directors. AC C A G lo ba l • be seen to operate independently for the benefit of shareholders. Bo x • identify and nominate for the approval by the board candidates to fill board vacancies as and when they arise. 66 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 11 Remuneration committee Set remuneration for all executive directors and chairman G lo ba l Determine/ review company remuneration policy Bo x The role of the remuneration committee – to have an appropriate reward policy that attracts, retains and motivates directors to achieve the long-term interests of shareholders. AC C A Main activities Ensure remuneration is correctly disclosed in annual report Demonstrate that remuneration is set objectively KAPLAN PUBLISHING www.ACCAGlobalBox.com Ensure remuneration reflects performance 67 The board of directors • determine and regularly review the framework, broad policy and specific terms for the remuneration, terms and conditions of employment of the chairman, board and executive directors – including design of targets and any bonus scheme payments Bo x Responsibilities of the remuneration committee G lo ba l • recommend and monitor the level and structure of the remuneration of senior managers • establish pension provision policy for all board members AC C A • set detailed remuneration for all executive directors and the chairman • ensure that the executive directors and key management are fairly rewarded • the remuneration of the executive directors and key management is set by individuals with no personal interest • agree any compensation for loss of office of any executive director. 68 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 11 Components of directors’ remuneration package • Basic salary – e.g. based on the skills required to do the job, individual’s performance and market rates • Performance related – e.g. dependent on the achievement of performance measurement criteria Bo x • Pension – only basic salary is pensionable G lo ba l • Benefits in kind – e.g. non-wage compensations in addition to their normal wage and salaries Remuneration Components Remuneration level determined by: Amount depends on company resources/ e.g. cash for bonus? Basic salary Job description 1 2 3 AC C A Company strategy KAPLAN PUBLISHING www.ACCAGlobalBox.com 69 The board of directors 2 3 Judge where to position remuneration compared to other companies Performance related pay – linked to company success – short-term bonus – share options AC C A G lo ba l Bo x 1 70 Not too small – could lead to lack of motivation/ underachievement Not too easily earned to ensure that directors to improve performance Be aware of remuneration levels in comparable companies Pension contributions Significant proportion based on performance related elements Be aware of pay and conditions throughout the company Benefits in kind To attract and possibly motivate if increase with performance www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 11 • NED remuneration consists of a basic salary and non-executive directors may receive share awards. G lo ba l • Equity-based remuneration to nonexecutive directors should be fully vested on the grant date, but still subject to applicable holding periods. Bo x Non-executive directors’ remuneration AC C A • Performance measures remuneration whilst advocated in executive remuneration packages is not generally supported for non-executive remuneration. KAPLAN PUBLISHING www.ACCAGlobalBox.com 71 AC C A G lo ba l Bo x The board of directors 72 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Reporting to stakeholders In this chapter • Institutional investors. • Institutional shareholder intervention. • Disclosure – general principles. AC C A 12 Bo x chapter • Sustainability. • Social and environmental reporting. • Benefits and drawbacks of social and environmental reporting. • Integrated reporting. • Objectives for integrated reporting. • How to prepare an integrated report. • Value creation process. www.ACCAGlobalBox.com 73 Reporting to stakeholders Institutional Investors In the UK there are four types of institutional investor: • life assurance companies • unit trust AC C A • investment trusts. G lo ba l • pension funds Bo x Institutional investors manage funds invested by individuals. 74 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 12 • Strategy: in terms of products sold, markets serviced, expansion pursued or any other aspect of strategic positioning. • Social responsibility: a failure to adequately protect or respond to instances of environmental contamination or other areas of public concern. G lo ba l • Operational performance: in terms of divisions within the corporate structure that have persistently under-performed. • Succession planning: a failure to adequately balance board composition or recommendation of replacement executives without adequate consideration of the quality of the candidate. Bo x Institutional shareholder intervention • Acquisitions and disposals: this might be in terms of executive decisions that have been inadequately challenged by NEDs. AC C A • Remuneration policy: this might relate to a failure of the remuneration committee to curtail extreme or self-serving executive rewards. • Internal controls: failure in health and safety, quality control, budgetary control or IT projects. KAPLAN PUBLISHING www.ACCAGlobalBox.com 75 Reporting to stakeholders • The AGM is seen as the most important, and perhaps only, opportunity for the directors to communicate with the shareholders of the company. G lo ba l • As the only legally-required disclosure to shareholders, the annual report and accounts are often the only information shareholders receive from the company. Bo x Disclosure – general principles AC C A • General principles of disclosure relate to the need to create and maintain communication channels with shareholders and other stakeholders. This disclosure becomes the mechanism through which governance is given transparency. • Principles of mandatory disclosure discuss the target for disclosure (particularly shareholders) and the mechanism for disclosure (e.g. annual report or meetings). 76 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 12 • Sustainable development is development that meets the needs of the present without compromising the ability of future generations. Environmental footprint – an attempt to evaluate the size of a company’s impact on the environment in three respects: AC C A • company’s resource consumption. • Human Capital – personal health, knowledge, skills, experience that individuals have and use to take effective action. • Social Capital – networks of people and the mutually-held knowledge and skills they have and use in order to take effective action. G lo ba l • Sustainability – an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future. Social footprint – evaluates sustainability in three areas of capital Bo x Sustainability • harm to the environment brought about by pollution emissions • Constructed Capital – material things, such as tools, technologies, roads, utilities, infrastructures, etc., that people produce and use in order to take effective action. • measurement of the resource consumption and pollution emissions in terms of harm to the environment in either qualitative, quantitative or replacement terms. KAPLAN PUBLISHING www.ACCAGlobalBox.com 77 Reporting to stakeholders Environmental reporting • The ‘disclosure of information on environment related issues and performance by an entity’. Social reporting Social reporting is generally context specific, and typical contents will vary with industry. For example, the following issues should be included in a company’s considerations: Bo x Social and environmental reporting • human rights issues • training and employee issues G lo ba l It typically contains details of environmental performance in areas such as: • work place, occupational health and safety • measures of emissions (e.g. pollution, waste and greenhouse gases) • fair business practices minority and equity issues. AC C A • consumption (e.g. of energy, water and non-renewable mineral deposits). • fair pay for employees and suppliers 78 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 12 Benefits and drawbacks of social and environmental reporting Benefits Drawbacks Additional cost of reporting systems Reporting makes companies aware of potential risk to reputation Ambiguity of measures used Employees use this detail in choosing employers Bo x Increasingly important to investors in investment decision G lo ba l Influences customer buying decision Pre-empts potential regulatory intervention Promotes attention to good corporate governance Positive impact on share price AC C A Transparency of information KAPLAN PUBLISHING www.ACCAGlobalBox.com 79 Reporting to stakeholders Integrated reporting Objectives for integrated reporting: G lo ba l Integrated Reporting demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term. Bo x Integrated reporting (<IR>) AC C A Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing. An Integrated Report should be a single report which is the organisation’s primary report in most jurisdictions the Annual Report or equivalent. Central to Integrated Reporting is the challenge facing organisations to create and sustain value inthe short, medium and longer term. 80 • To improve the quality of information available to providers of financial capital. • To provide a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of activities. • To enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural. • To support integrated thinking, decision making and actions that focus on the creation of value over the short, medium and long term. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 12 These are: Manufactured capital Material goods, or fixed assets which contribute to the production process rather than being the output itself – e.g. tools, machines and buildings. Social capital This can be described as being concerned with the institutions that help us maintain and develop human capital in partnership with others; e.g. families, communities, businesses. AC C A G lo ba l Intellectual capital This form of capital can be described as the value of a company or organisation’s employee knowledge, business training and any proprietary information that may provide the company with a competitive advantage. Human capital This can be described as consisting of people’s health, knowledge, skills and motivation. Enhancing human capital through education and training is central. Bo x Five other types of sustainable capital (NB: Some of the subsets of intellectual capital include human capital, information capital, brand awareness and instructional capital.) KAPLAN PUBLISHING Natural capital This can be described as any stock or flow of energy and material within the environment that produces goods and services e.g. climate regulation, climate change, CO2 emissions. www.ACCAGlobalBox.com 81 Reporting to stakeholders How to prepare an integrated report • Materiality – Identifying relevant matters based on their ability to affect value creation • Reliability and completeness – should include all material matters, both positive and negative, in a balanced way and without material error G lo ba l • Strategic focus and future orientation – highlighting significant risks, opportunities and dependencies flowing from the organisation’s market position and business model, and giving the management’s view of how the organisation balances short, medium and long term interests. • Conciseness – should give sufficient context to understand the organisation’s strategy, governance and prospects without being burdened by less relevant information Bo x The following seven guiding principles underpin the preparation: AC C A • Connectivity of information – show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation’s ability to create value over time. • Stakeholder relationships – should provide insight into the nature and quality of the organisation’s relationships with its key stakeholders 82 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 12 AC C A G lo ba l Bo x Value creation process KAPLAN PUBLISHING www.ACCAGlobalBox.com 83 AC C A G lo ba l Bo x Reporting to stakeholders 84 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Management internal control systems and reporting In this chapter • Internal control systems. • Internal control roles and responsibilities. AC C A 13 Bo x chapter • Roles and responsibilities in risk management and internal control. • Internal control definitions. • Internal control objectives and benefits. • Sound control systems. • Effective internal control systems. • Information flows for management. • Information characteristics and quality. • Fraud risk management strategy. www.ACCAGlobalBox.com 85 Management internal control systems and reporting Internal control systems G lo ba l Bo x Responsibilities AC C A Internal Control Systems Definitions 86 Objectives www.ACCAGlobalBox.com Sound control systems KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 13 Internal control roles and responsibilities AC C A G lo ba l Bo x The board should maintain a sound system of internal control to safeguard shareholders’ interests and company assets Directors should implement a sound system of internal controls KAPLAN PUBLISHING This system should be reviewed on a regular basis (at least annually) www.ACCAGlobalBox.com 87 Management internal control systems and reporting Roles and responsibilities in risk management and internal control Role Responsibility 88 Internal auditors Evaluate the effectiveness of internal controls • Recommend improvements • Board of directors Ensuring adequacy and effectiveness of internal control system • Set corporate governance policy • G lo ba l Responsibility CEO Ultimate responsibility for internal control system AC C A Role Bo x Many stakeholders involved – not just directors. Risk committee Assists board in risk management obligations Heads of business units Establish specific internal control procedures and policies for their units www.ACCAGlobalBox.com All employees Operating and adhering to internal control procedures Executive management Setting internal control policies, and monitoring effectiveness of those systems External auditors Advice on establishing and monitoring internal controls KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 13 Internal control definitions • An internal control system – network of systems established in an organisation to provide reasonable assurance that organisational objectives will be achieved AC C A G lo ba l • Internal management control – procedures and policies in place to ensure that company objectives are achieved Bo x • Controls – attempt to ensure that risks are minimised. KAPLAN PUBLISHING www.ACCAGlobalBox.com 89 Management internal control systems and reporting Internal control objectives and benefits Accuracy/ completeness of accounting records 90 Objectives Bo x G lo ba l Prevention/ detection of fraud/error Internal control system AC C A Safeguarding assets Orderly and efficient conduct of business Effectiveness and efficiency of operations Reliability of financial reporting Benefits Compliance with laws/ regulations Timely preparation of financial information www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 13 Sound control systems Able to respond to changing risks within and outside the company. G lo ba l Bo x Embedded within operations and not treated as a separate exercise. AC C A Sound internal control system Includes procedures for reporting control failings or weaknesses. KAPLAN PUBLISHING www.ACCAGlobalBox.com 91 Management internal control systems and reporting Effective internal control systems Reviewing effectiveness of an internal control system (COSO) • • 92 C O S O • 3 Control activities Policies and procedures ensuring decisions and instructions of management carried out Occur at all levels in an organisation G lo ba l • • 1 Control environment ‘Tone at the top’ or the ethics and culture of the organisation. Set by management philosophy and style 2 Risk assessment Set objectives of organisation Then for each objective, identify and assess the risks affecting that objective Consider internal and external risks Distinguish between controllable and uncontrollable risks AC C A • Bo x Elements of an internal control system c l a s s i f i c a t i o n • • • • 4 Information & communication Communicate correct information to correct people so they can carry out their responsibilities Need quality information systems providing internal and external information 5 Monitoring Control system must be monitored – normally by internal audit www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 13 Information flows for management Three management levels recognised in company. Each level has responsibilities for internal controls and risk. 1 KAPLAN PUBLISHING Internal control responsibilities Risk responsibilities Monitoring and controlling organisation as a whole Reviewing internal control systems to ensure they are effective Assess the risk outcomes of different decisions – also advised by the risk committee 2 3 4 G lo ba l Strategic Activity AC C A Management level Bo x Information systems available to provide required information for each level. www.ACCAGlobalBox.com 93 Management internal control systems and reporting Information flows for management – (continued) 2 3 Tactical Implement decisions of strategic managers: ensure departments operating correctly Establish control systems, remedy control weaknesses, inform strategic management of control weaknesses Advise strategic managers on risks identified receive reports on operational risks and recommend risk mitigation procedures Operation of detailed internal controls – report weaknesses to tactical managers Identify risks at operational level and inform tactical managers 94 G lo ba l AC C A Operational Bo x 1 Controlling dayto-day operations of the organisation www.ACCAGlobalBox.com 4 KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 13 Information characteristics and quality Strategic → Operational Time period Forecast → Historical Timeliness Delayed → Immediately available Objectivity Subjective → Objective Quantifiability Qualitative → Quantitative Accuracy Approximate → Accurate Certainty Uncertain → Certain Completeness Partial → Complete Breadth Broad → Specific → Highly detailed KAPLAN PUBLISHING G lo ba l AC C A Detail Bo x Characteristic Little detail www.ACCAGlobalBox.com 95 Management internal control systems and reporting Fraud risk management strategy • Fraud response Bo x A risk management strategy needs to be developed for fraud. For example: An anti-fraud culture Risk awareness Whistleblowing Sound internal control systems • Fraud detection • Internal disciplinary action, in accordance with personnel policies. • Civil litigation for the recovery of loss. • Criminal prosecution through the police. AC C A –– –– –– –– Organisations response to fraud may include: G lo ba l This strategy should include three key elements: • Fraud prevention For example: Dealing with suspected cases of fraud, theft or corruption via procedures for evidence-gathering to assist decision making and subsequently admissible in any legal action. For example: performing regular checks, e.g. stocktaking and cash counts. 96 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Audit and compliance In this chapter • The function and importance of internal audit. • Factors affecting the need for internal audit. • Auditor independence. AC C A 14 Bo x chapter • Potential ethical threats. • Audit committee roles. • Audit committee internal controls. • Audit committee and internal audit. • Audit committee and external auditors. • Reporting on internal controls to shareholders. www.ACCAGlobalBox.com 97 Audit and compliance Function and importance of internal audit Exam focus Bo x Internal audit = an independent appraisal activity established within an organisation as a service to it. Examining financial and operating information AC C A Reviewing accounting and internal control systems G lo ba l Main roles/functions of internal audit: Special investigations, e.g. into suspected fraud Roles of internal audit department Assisting with the identification of significant risks Reviewing compliance with laws and other external regulations Reviewing the economy, efficiency and effectiveness of operations 98 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 14 Need for internal audit AC C A Problems with internal control systems Number of employees (more employees increases need) G lo ba l Scale, diversity and complexity of company activities Bo x Factors affecting the need for internal audit Cost-benefit of department KAPLAN PUBLISHING Increase in unacceptable events Amount of change in information systems Changes in key risks www.ACCAGlobalBox.com 99 Audit and compliance Auditor independence Factors protecting independence • Internal auditor independent of executive management. • Chief internal auditor has access to Chairman. G lo ba l • Chief internal auditor reports to audit committee. Bo x Internal auditor independence necessary to ensure work carried out objectively. AC C A • Audit committee approve appointment and termination of chief internal auditor. 100 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 14 Potential ethical threats = threats (real or perceived) to ability of auditor to provide independent opinion. Threats to auditor independence AC C A Advocacy Auditor promotes an audit client’s position or opinion G lo ba l Self-interest Auditor could benefit from financial interest in client Bo x Apply to both internal and external audit. Familiarity Auditor becomes too ‘friendly’ with client by working for client for a number of years Self-review Auditor in position of reviewing work they have been responsible for Intimidation Auditor is subjected to intimidation KAPLAN PUBLISHING www.ACCAGlobalBox.com 101 Audit and compliance Audit committee roles Most of the board objectives relating to internal controls will be delegated to the audit committee. • Consists entirely of NEDs – one with recent financial experience. Bo x • Oversee work of internal audit AC C A G lo ba l Review of internal control systems Roles Monitor integrity of financial statements 102 www.ACCAGlobalBox.com Review work of external audit KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 14 Audit committee and internal controls Discuss with management effectiveness of internal controls KAPLAN PUBLISHING G lo ba l Bo x Review company’s internal financial controls Objectives of board of directors regarding internal controls Objectives of audit committee regarding internal controls Review assessments/ effectiveness of internal control system Receive reports from internal audit on tests of internal controls AC C A Implement internal audit recommendations re internal controls Review company strategy and risk appetite www.ACCAGlobalBox.com Review company’s internal control/ risk management systems Approve statements in annual report re internal controls 103 Audit and compliance Audit committee and internal audit Audit committee role in overseeing internal audit function AC C A Ensure accountable to the audit committee Review and assess the annual internal audit work plan G lo ba l Monitor and assess effectiveness Bo x Audit committee responsible for overseeing work of internal audit function. Ensure recommendations are actioned 104 Check efficiency www.ACCAGlobalBox.com Approve the appointment or termination of head of internal audit Preserve independence KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 14 Audit committee and external auditors Audit committee responsible for oversight of company relations with external auditors. ‘Oversee’ selection process for new external auditors G lo ba l Recommend to board appointment of external auditor Bo x The UK Corporate Governance Code provides recommendations regarding the work of audit committee and company’s external auditors: Audit committee and external auditors Approve terms of engagement/ remuneration of external auditors Review scope of audit with external auditor Ensure external auditors independent and objective AC C A Carry out post-completion audit review Review plans for audit at beginning of annual audit KAPLAN PUBLISHING www.ACCAGlobalBox.com 105 Audit and compliance Reporting on internal controls to shareholders Audit committee and shareholders AC C A Sarbanes Oxley more detailed legal reporting requirements Shareholders right to know whether internal controls sufficient to safeguard their investment G lo ba l Chair of audit committee available at AGM for shareholder questions To provide shareholders with necessary information board should conduct an annual review of internal control systems 106 Bo x Important points regarding reporting to shareholders: Annual report explains work of audit committee Review covers all material controls and risk management systems www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Identification, assessment and measurement of risk In this chapter • Risk definition. • Why incur and manage risk? AC C A 15 Bo x chapter • Risk management and the “as low as reasonably practicable” principles. • Enterprise risk management. • COSO ERM framework matrix. • Risk identification: strategic and operational risks. • Risk identification: Business risks. • The concept of related risk factors. • Risk assessment. • Risk heat map. www.ACCAGlobalBox.com 107 Identification, assessment and measurement of risk Why incur and manage risk? • Risk can be defined as an unrealised future loss arising from a present action or inaction. Why incur risk? Incur risk to G lo ba l • Risks are the opportunities and dangers associated with uncertain future events. Bo x Risk definition AC C A Gain competitive advantage 108 Increase financial return Why manage risk? • Downside risks managed to identify new risks and changes in existing risks. • Upside risks identified to make best use of opportunities. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 15 Risk management and the “as low as reasonably practicable” principles • List of potential risks Risk assessment Prioritised risk list Risk planning Risk avoidance and contingency plans Risk monitoring Risk audit G lo ba l Risk management = process of reducing adverse consequences by reducing likelihood of event or its impact. Risk identification Bo x Risk management Process of risk management Responsibility for risk management system rests with management. The As Low As Reasonably Practicable Principle (ALARP) Expresses a point at which the cost of additional risk reduction would be grossly disproportionate to the benefits achieved. • Usually applied to safety critical, high integrity systems e.g. oil rig. KAPLAN PUBLISHING AC C A • www.ACCAGlobalBox.com 109 Identification, assessment and measurement of risk Enterprise risk management (ERM) • risk management in the context of business strategy • the creation of a risk aware culture G lo ba l • risk management is everyone’s responsibility, with the tone set from the top Bo x Principles of (ERM) • a comprehensive and holistic approach to risk management AC C A • consideration of a broad range of risks (strategic, financial, operational and compliance) • a focused risk management strategy, led by the board (embedding risk within an organisation’s culture). 110 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 15 COSO ERM Framework matrix ST G C GI IN AT ER OP RE G IN RT O P CO Objective Setting Event Indentification AC C A Risk Assessment Risk Response SUBSIDIARY BUSINESS UNIT DIVISIONS ENTITY-LEVEL G lo ba l Internal Environment CE IAN L MP Bo x TE RA Conrol Activities Information & Communication Monitoring KAPLAN PUBLISHING www.ACCAGlobalBox.com 111 Identification, assessment and measurement of risk Risk identification: strategic and operational risks Operational risks Risks arising from consequences of strategic decisions Losses arising from business operations Arise from strategic positioning of company in its environment Arise from inadequate or failed internal processes Risks include not enhancing old products and producing ‘incorrect’ new products Risks include fraud, quality control failures and lack of production Identified and assessed at senior management level. Managed by risk management strategy Identified at operational level. Managed by internal control systems AC C A G lo ba l Bo x Strategic risks 112 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 15 Risk identification: Business risks Definition Credit Sector trading in Inability to obtain funds required Health and safety, environment G lo ba l Market AC C A Risks per ACCA study guide Bo x Business risks are strategic risks that threaten the health and survival of the whole business. Lack of compliance relevant laws Liquidity Insufficient Legal Technological Reputation Business probity Derivatives Does not follow relevant legislation Products not incorporate latest technology ‘Image’ of company suffers Company appears to act incorrectly Use of financial instruments to improve accounts KAPLAN PUBLISHING Financial www.ACCAGlobalBox.com cash to run business Gearing High amounts of borrowing 113 Identification, assessment and measurement of risk • Related risks – are risks that vary because of the presence of another risk or where two risks have a common cause. Risk correlation is a particular example of related risk. Bo x The concept of related risk factors G lo ba l • Positively correlated – risks that are positively related in that one will fall with the reduction of the other, and increase with the rise of the other. AC C A • Negatively correlated risks are those that if one rose as the other fell. 114 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 15 Risk assessment • Allows risks to be prioritised • Risks with high impact and likelihood of occurrence need urgent attention Note on terminology: Impact = severity = hazard • Likelihood = probability High Low Impact/consequence AC C A • Bo x For each risk, shows impact on organisation and likelihood of risk occurring G lo ba l • Likelihood Low High Risks assessed using ‘risk map’ KAPLAN PUBLISHING www.ACCAGlobalBox.com 115 Identification, assessment and measurement of risk 5 10 15 High 4 8 12 Medium 3 6 Low 2 4 Negligiable 1 Remote 20 25 Bo x Extreme 20 9 12 15 6 8 10 2 3 4 5 Unlikely Possible Likely Probable >50-90% >90-100% G lo ba l 16 AC C A Potential Impact Risk heat map Likelihood % ranges 116 0-10% >10-25% >25-50% www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Managing, monitoring and mitigating risk In this chapter • The role of the board in risk management. • The role of a risk manager. AC C A 16 Bo x chapter • The role of the risk committee. • Embedding risk. • Embedding risk in systems. • Embedding risk in culture. • Risk mapping. • Risk management strategies. • Diversifying risk. • Risk monitoring. www.ACCAGlobalBox.com 117 Managing, monitoring and mitigating risk The role of the board in risk management Framework for board consideration of risk Other roles • Setting risk appetite in terms of attitude and capacity. • Monitoring risk management plans. • Determining residual risk based on costbenefit approach. 118 Risk appetite How much risk the business will accept AC C A • Communicating risk strategy to company. Business strategy What the company will do Bo x • Considering risk at strategic level and defining organisation’s appetite and approach to risk. G lo ba l Main role Risk attitude Overall approach to risk Risk capacity Maximum risk business can accept www.ACCAGlobalBox.com Risk strategy How risks will be managed Residual risk Risk that cannot be managed KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 16 The role of the risk manager Risk manager Risk manager = member of risk management committee who reports direct to the board. Bo x Primary role = implementation of risk management policies. AC C A Work with risk committee and board of company G lo ba l Identify and evaluate risks facing company Implement/ monitor risk mitigation strategies Risk manager other activities Develop and implement risk management programmes KAPLAN PUBLISHING Assisting external auditors with their risk appraisal activities www.ACCAGlobalBox.com Improve risk management practices 119 Managing, monitoring and mitigating risk The role of the risk committee Risk committee Main aims: Bo x • Raise awareness of risk. • Ensure processes in place to identify, report and monitor risks. G lo ba l • Update company’s risk profile. Raise risk awareness AC C A Risk committee Establish policies for risk management Implement processes to monitor and report risk Update company risk profile and appetite • The committee will include both executive and non-executive directors, with the majority being NEDs. 120 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 16 Embedding risk Process of embedding risk: Considered at two levels: • embedding risk in systems 1 Bo x • The aim of embedding risk management is to ensure that it is ‘part of the way we do business’ 2 G lo ba l Embedding risk in systems • = ensuring risk management is included within control systems of an organisation • Not a separate system – part of overall control system AC C A • May be statutory requirement (USA) or code of practice (UK) KAPLAN PUBLISHING Identify controls already operating in organisation Monitor controls to ensure they work 3 Improve/refine controls as required 4 Document how controls recorded and tested (e.g. performance metrics) www.ACCAGlobalBox.com 121 Managing, monitoring and mitigating risk Embedding risk in culture • Risk awareness is a capability of an organisation to be able to recognise risks when they arise, from whatever source they may come. Bo x Embedding risk awareness • Risk management being considered ‘normal’ for organisation therefore all employees follow risk management policies. G lo ba l • Risk management culture starts at ‘top’ of company – provides open culture/better risk management. Align individual and organisational goals AC C A Inform staff of need for risk management Not having a ‘blame’ culture How to embed risk management in culture Publish success stories – show benefit of risk policies 122 Include risk management responsibilities in job description www.ACCAGlobalBox.com Use metrics to provide early warning of risks KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 16 Risk mapping Low Probability / likelihood Accept AC C A Low Reduce G lo ba l High Bo x Impact/consequence KAPLAN PUBLISHING www.ACCAGlobalBox.com High Avoid Transfer 123 Managing, monitoring and mitigating risk Risk management strategies • Strategies for managing risk = TARA Risk decreased to zero by avoiding risky areas e.g. withdrawing from business area. However, risk may be unavoidable – so strategy has limited use Reduction Limit exposure to risk or decrease effects of risk should it crystallise AC C A Avoidance Acceptance 124 Transfer risk to third party e.g. use of insurance Bo x (or sharing) G lo ba l Transference Accept risk may occur and choose to deal with consequences of risk if it does occur. Used where adverse impact of risk is minimal www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 16 Further risk management strategies • Risk avoidance = risk literally avoided. • Risk retention = risk retained within organisation. Bo x Diversifying/spreading risk • Can diversify operations G lo ba l • Aim to reduce total risk. AC C A –– m ake different products or invest in different countries. • Works best where returns are negatively correlated. KAPLAN PUBLISHING www.ACCAGlobalBox.com 125 Managing, monitoring and mitigating risk Diversifying risk Related Development beyond the present product and market, but still within the broad confines of the ‘industry’. AC C A Diversification G lo ba l Bo x Backward integration E.g. Raw materials supplier Unrelated Development beyond the present industry into products and/or markets that may bear no clear relationship to their current products. 126 Horizontal integration E.g. competitor Forward integration E.g. Distribution outlet www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 16 Risk monitoring Risk auditing • May be obligatory (e.g. Sarbanes-Oxley) Bo x • = provision of independent view of risks and controls in organisation G lo ba l • Carried out by internal and/or external audit teams. AC C A Process for carrying out internal risk audit KAPLAN PUBLISHING Identify risks Assess risks Report on inadequately – controlled risks Review controls over risk www.ACCAGlobalBox.com 127 AC C A G lo ba l Bo x Managing, monitoring and mitigating risk 128 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Professionalism, ethical codes and the public interest In this chapter • Profession and professionalism. • The public interest. • Accountants and the public interest – role and influence. AC C A 17 Bo x chapter • Corporate codes of ethics. • Professional codes of ethics. • Benefits and drawbacks of corporate and professional code of ethics. • Ethical threats and safeguards. • Bribery and corruption. • Ethical conflict. • Ethical decision making – Tuckers 5 questions. • Issue and context related factors. www.ACCAGlobalBox.com 129 Professionalism, ethical codes and the public interest Profession and professionalism Professionalism Definition Profession • Taking action to support the public interest. Definition Body of theory and skills 130 AC C A Profession Adherence to common code of values and conduct Views of professionalism Reactive – noting negative aspects of accounting and taking action to remove those aspects e.g. legislation post Enron. G lo ba l • A body of theory and knowlege which is used to support the public interest. Bo x • Acting professionally. Proactive – seeking out new ways for accounting to support the public interest e.g. self-imposed codes of conduct. Acceptance of duty to society www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 17 The public interest That which supports the good of society as a whole (as opposed to what serves the interests of individual members of society or of specific sectional interest groups). G lo ba l • Ethical codes confirm that acting against the public interest is not appropriate for an accountant. Bo x Definition AC C A • When considering whether to disclose information or not the accountant will need to evaluate each situation on its merits. KAPLAN PUBLISHING www.ACCAGlobalBox.com 131 Professionalism, ethical codes and the public interest Accountants and the public interest – role and influence Provision of services 132 AC C A Influence on organisations G lo ba l Bo x Accountancy Influence in society Influence on distribution of power and wealth Act in public interest Use of specialist skills www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 17 Corporate code of ethics Definition Bo x = application of ethical values to business behaviour. Suppliers Wider community Suppliers attempt to provide quality goods on time. Company should pay invoices promptly, select suppliers on known criteria e.g. ‘fair trade’ principles Company affects society as a whole. CSR report explains how company treats wider community G lo ba l Shareholders Expect fair and proper return on their investment. Company should provide this return and information on how shareholders investment managed AC C A How business ethics affects stakeholders Business values Mission statement mentions • products/services provided • financial objectives • role of business in society KAPLAN PUBLISHING Employees Customer relations How business relates to employees. Company recognises employee rights in areas such as working conditions, training, health and safety Company has responsibility to produce quality goods/ services at reasonable price www.ACCAGlobalBox.com 133 Professionalism, ethical codes and the public interest Professional code of ethics Contents of code: Fundamental principles Conceptual framework Detailed application States who code affects, how enforced Key principles all members must follow Explains how ‘spirit’ of principles applied Principles applied to specific situations G lo ba l Bo x Introduction Integrity Members should be straightforward and honest in all professional/ business relationships 134 AC C A Fundamental ethical principles Objectivity Members do not allow bias or conflict of interest in business judgements Competence Duty to maintain professional knowledge and skill at appropriate level Confidentiality Information on clients not disclosed without appropriate specific authority www.ACCAGlobalBox.com Professional behaviour Members must comply with relevant laws and avoid actions discrediting the profession KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 17 Benefits and drawbacks of corporate and professional code of ethics Drawbacks Provides framework for conflict resolution It is only a code – may not fit the precise ethical issue Provides guidelines for similar ethical disputes and methods of resolution Can be interpreted in different ways which may appear ethically incorrect to two different people Provides boundaries across which it is ethically incorrect to pass May be no clear or effective punishment for breaching the code AC C A G lo ba l Bo x Benefits KAPLAN PUBLISHING www.ACCAGlobalBox.com 135 Professionalism, ethical codes and the public interest Ethical theats and safeguards Ethical threats and safeguards Threats = situation where person tempted not to follow code of ethics Bo x Safeguards = guidance or course of action aimed at reducing or eliminating threats Main safeguards include: Work environment Individual • Education and training • Internal control systems • Compliance with standards • CPD • Review procedures • Mentoring • Monitoring of work • Codes of ethics • Recording contentious issues • Disciplinary proceedings • Disciplinary procedures • Assistance from professional body AC C A G lo ba l Profession 136 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 17 Bribery and corruption Relevant legislation • Corruption is bribery and any other behaviour in relation to persons entrusted with responsibilities in the public or private sector which violates their duties and is aimed at obtaining undue advantages of any kind for themselves or for others UK Bribery Act (2010) • Examples: –– excessive ‘hospitality’ –– facilitation payments • it increases risk Bo x –– Offering, promising or giving bribe. –– Requesting, agreeing to receive or accepting a bribe. –– Bribing a foreign public official. –– A corporate offence of failing to prevent bribery. G lo ba l Corruption and bribery • 4 offences AC C A • it is inherently unethical. KAPLAN PUBLISHING www.ACCAGlobalBox.com 137 Professionalism, ethical codes and the public interest Ethical conflict Factors to take into account in dealing with ethical conflict: Bo x Relevant fundamental principles G lo ba l Ethical issues involved Obtain detail on ethical conflict AC C A Relevant facts 138 Established internal procedures Alternative courses of action Consider consequences of each course of action Decide action Consider withdraw from engagement/ assignment Consult with those charged with governance Consult with appropriate persons in firm Advice from professional institute www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 17 Ethical decision making – Tuckers 5 questions 5 questions against which ethical decisions can be tested. • Profitable? • Legal? • Fair? • Right? G lo ba l Is decision: Bo x Tucker’s 5 questions AC C A • Sustainable or environmentally sound? KAPLAN PUBLISHING www.ACCAGlobalBox.com 139 Professionalism, ethical codes and the public interest Issue and context related factors Ability to make ethical decision depends on: Bo x • issue related factors – how important decision is to decision-maker – factors affect moral intensity and moral framing. • context-related factors – how factors relating to issue are viewed. Fewer people increases moral intensity G lo ba l How many people affected by action PROXIMITY Nearness of decision maker to people affected by decision ‘closer’ increases moral intensity AC C A CONCENTRATION OF EFFECT TEMPORAL IMMEDIACY How soon effects of decision occur Short time increases moral intensity Factors affecting moral intensity MAGNITUDE OF CONSEQUENCE Extent of harm caused by poor advice More harm increases moral intensity 140 SOCIAL CONSEQUENCES Extent of agreement ethics of an action More agreement increases moral intensity www.ACCAGlobalBox.com PROBABILITY OF EFFECT Likelihood harm/ benefit occurs More likelihood increases moral intensity KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 17 Context-related factors: behaviour rewarded by superiors – even though dubious – will it be continued. • co-workers take same action – will it be continued. Authority Senior manager unethical means junior likely to be also G lo ba l System of reward Rewards based on achievement may encourage unethical decisions Bo x • Bureaucracy Follow rules – not normally consider ethics of decisions made AC C A Key contextual factors Cultural context Cultures have different ideas of ‘ethics’ KAPLAN PUBLISHING Group norms Follow what peer-group think is ethical www.ACCAGlobalBox.com Work roles Provides ethical context e.g. accountants normally behave ethically 141 AC C A G lo ba l Bo x Professionalism, ethical codes and the public interest 142 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Organising for success In this chapter • The link between structure and strategy. • Main structural types. • Mintzberg’s building blocks. AC C A 18 Bo x chapter • Boundaryless organisations. • Business process outsourcing. • Harmon’s process strategy matrix. • Business process redesign. www.ACCAGlobalBox.com 143 Organising for success The link between structure and strategy How structure changes as strategy changes Bo x • More specialisation • More specialists • More bureaucracy How structure can impact on strategy G lo ba l • More levels of authority • The degree of organisational flexibility AC C A • The level of specialist skills and associated decision making • The degree of innovation and knowledge management • Developing and supporting CSFs • The degree of market focus 144 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 18 Main structural types Functional • groups together employees that undertake similar task AC C A Entrepreneurial • structure is built around the owner manager G lo ba l Bo x Types of structure Divisional • splits organisation into several divisions • either product based or geographical based Small organisation KAPLAN PUBLISHING Matrix • a combination of a functional and a divisional structure Large organisation www.ACCAGlobalBox.com 145 Organising for success Mintzberg building blocks As the business and its structure grows, different building blocks develop and can become more important: Structure in which they dominate Direction Supervision Simple Efficiency Procedures and standards Machine bureaucracy Strategic apex Technostructure G lo ba l What they want Bo x What they provide Building block Proficiency Expertise and skills Professional bureaucracy Middle line Concentration Focus and control Divisional Support staff Learning Help and training None AC C A Operating core Boundaryless organisations 146 • The hollow structure – where non-core activities are outsourced. • The modular structure – where some parts of product production are outsourced. • The virtual structure – where the organisation is made up of a collaboration of other organisational parts. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 18 Business process outsourcing Advantages Disadvantages • Improved customer care. • Allows management to focus on core activities. • Problems finding a single supplier for complex processes, resulting in fragmentation. • Firms are unwilling to outsource whole processes due to the strategic significance or security implications of certain elements. • • • Inflexible contracts and other problems managing suppliers. Difficult to reverse and bring in-house again. Problems measuring performance. Data security. AC C A • Bo x Cost savings (currently the main decision-making factor). G lo ba l • KAPLAN PUBLISHING www.ACCAGlobalBox.com 147 Organising for success Harmon’s process-strategy matrix 148 High Bo x High • Outsource Low • Use minimum resources Undertake process improvement G lo ba l • AC C A Process complexity dynamics Strategic importance Low Must be done but adds little value to products or services • Automate to gain efficiency Very important to success, high value added to products or services www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 18 Business process redesign activities are unnecessary • activities are in the wrong order • activities are in the wrong swim lane • activities are missing • activities take too long. Typical solutions in processes G lo ba l • removing swim lanes • removing unnecessary activities • combining job roles • combining activities • reducing handovers between swim lanes • changing the order of activities • outsourcing activities. AC C A • KAPLAN PUBLISHING Bo x Typical causes of problems in processes www.ACCAGlobalBox.com 149 AC C A G lo ba l Bo x Organising for success 150 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l e-Business In this chapter • IT – the strategic context. • Types of e-Business. • IT Risks. AC C A 19 Bo x chapter • IT Controls. • Promoting cyber security. www.ACCAGlobalBox.com 151 e-Business In the modern environment IT plays a role at all stages of the strategic planning process. For example, • Strategic analysis: IT can help create business strengths or overcome existing weaknesses • New businesses might become possible. For example, auction sites and photo-album sites. • The industry structure can be changed. For example, in the music business it can be argued that the large CD publishers have less power because music can be self-published on the internet. G lo ba l • Strategic choice: IT can help create a competitive advantage or give access to new markets Porter suggests 3 ways IS/IT can affect industries Bo x IT – the strategic context AC C A • Strategic implementation: we’ve already seen how IT plays a role in BPR, for example. Therefore we should consider IT at all stages of the syllabus. For example, we should incorporate IT influences within the PESTEL, 5 Forces, value chain etc. 152 • IS/IT can provide an organisation with competitive advantage by providing new ways of operating. For example, airlines save money by encouraging internet bookings. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 19 Types of e-Business C2B Business models, e.g. Priceline.com C2C Business models, e.g. eBay.com Bo x B2C Business models, e.g. Amazon.com G lo ba l B2B Business models, e.g. VerticalNet AC C A Exchange initiated by Consumer Business Delivery by Business Consumer Stages of e-business 1 Web presence 2 E-commerce 3 Integrated e-commerce 4 E-business KAPLAN PUBLISHING www.ACCAGlobalBox.com 153 e-Business Barriers to e-business • Cost reduction • Technophobia • Increased revenue • Security concerns • Better information for control • Set-up costs • Increased visibility • • Enhanced customer service • • Improved marketing • • Market penetration • Enhanced competitive advantage Bo x Benefits of e-business Running costs Limited opportunities – type of business G lo ba l Limited resources Customer aversion AC C A • 154 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 19 IT Risks Unauthorised access to systems KAPLAN PUBLISHING Viruses AC C A Hacking G lo ba l Bo x IT Risks Code capable of corrupting data Hardware Input errors Either from failure or loss Either deliberate or accidental www.ACCAGlobalBox.com 155 e-Business IT Controls • personnel • logical access • access logging • physical controls • hardware security Application Software Network • authorisation • supplier selection • firewalls • pre-numbered forms • retain original disks • data encryption • license checking • virus protection AC C A General G lo ba l Bo x IT Controls • control totals • output checking • flow • back-ups 156 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 19 Promoting cyber security • Have a written policy. • Provide ongoing training and assessment. Bo x • Have a dedicated cyber security staff. • Limit systems access. AC C A • Automate systems. G lo ba l • Limit data volume. KAPLAN PUBLISHING www.ACCAGlobalBox.com 157 AC C A G lo ba l Bo x e-Business 158 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Using IT successfully In this chapter • Supply chain management. • Upstream supply chain management. • Downstream supply chain management. AC C A 20 Bo x chapter • Big data. • Disruptive technology – Fintech. • Cloud technology. www.ACCAGlobalBox.com 159 Using IT successfully Supply chain management (SCM) • re-organisation of processes • greater use of IT systems G lo ba l • providing more information to suppliers and customers Bo x Supply chain management typically involves: • more efficient inventory replenishment • better co-ordination of new product development AC C A • promotional activity integrated along the supply chain • greater use of outsourcing. 160 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 20 Role of IT in SCM Pull model • facilitated a move from push systems towards pull systems • products are made to order • facilitated better interaction with customers Push model • production design, quality and volume are led by the manufacturer • little product personalisation AC C A • aims to reduce set-up costs and gain economies of scale. KAPLAN PUBLISHING • often relies on e-commerce (and e-procurement). It is now common for companies to use a combination of push and pull systems. G lo ba l • encouraged virtual integration. • aims to reduce inventory levels and be more responsive to customer needs Bo x • E-procurement has become a vital part of SCM • customers have a greater say E-commerce creates a much more efficient supply chain that benefits both customers and manufacturers. Companies can: • better serve customer needs • carry fewer inventories • send products to market more quickly. www.ACCAGlobalBox.com 161 Using IT successfully Upstream supply chain management E-procurement Risks • Reduced labour costs • Technology risks • Lower inventories • Organisational risks – especially staff resistance • Better control over product development • Requires new skills • Greater choice of supplier • It can be difficult to integrate different systems • Reduced admin AC C A • Better transaction history 162 • Costs savings fail to materialise G lo ba l • Higher sales due to fewer inventory stock outs Bo x Benefits • Expensive to set up www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 20 Downstream supply chain management Benefits Problems • Relies on supplier willingness • Tie-in • Reaction of distributors/ retailers • Continual updates • Move to product orientation • Differentiation • Extra admin costs • Two way communication • Easily copied G lo ba l Bo x • Disintermediation • Users must be representative • User communities • Become reactive rather than proactive • Better market research • Can increase business risk and exit barriers • Easier e-marketing AC C A • Reduced product failure rates • Customers can define specifications KAPLAN PUBLISHING www.ACCAGlobalBox.com 163 Using IT successfully Big data Characteristics of big data • velocity • variety • better knowledge of customers • ability to spot trends earlier • react before rivals • proactively meet changing needs AC C A • identify unsatisfied needs G lo ba l Strategic advantages from exploiting big data Bo x • volume • better market research and e-marketing • better competitive advantages. 164 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 20 Disruptive technology – Fintech Potential defences – against Fintech • Better use of data • Differentiating • A frictionless customer experience • Improving flexibility • More personalisation of products/services • Promoting physical presence • Lack of physical presence costs • Take legal action • Access to cheap capital • Relying on technophobia G lo ba l Bo x Advantages • Reacting sooner AC C A • Launch own disruptive tech KAPLAN PUBLISHING www.ACCAGlobalBox.com 165 Using IT successfully Cloud technology Advantages Potential defences • Reliance on the provider • Regulatory risks • Flexibility • Unauthorised access of data Bo x • Sharing data • On-demand self service • More competitive • Easier scaling • Back-ups • Disaster recovery • Better security 166 AC C A • Reduced maintenance G lo ba l • Collaboration www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l e-Marketing In this chapter • Marketing mix (7P’s). • The 6I’s. • e-Branding. AC C A 21 Bo x chapter • Using marketing in e-business. www.ACCAGlobalBox.com 167 e-Marketing Marketing mix (7P’s) Traditional marketing involves finding the correct mix of the following elements: Bo x • Product. • Price. • Place. G lo ba l • Promotion. • People. • Physical evidence. • Processes. 168 AC C A E-marketing expands this into three more areas: www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 21 Integration Intelligence Individualisation Industry structure Bo x Interactivity G lo ba l The 6I’s AC C A E-marketing Independence of location KAPLAN PUBLISHING www.ACCAGlobalBox.com 169 e-Marketing e-Branding Potential e-branding strategies: • modify an existing brand • create a new brand • form a partnership with an existing brand Bo x • match an existing brand G lo ba l Differences from traditional branding • The information needs to be delivered in a more efficient manner • It requires a more visual identity AC C A • It needs to be easier to find • It can be more interactive • It can more easily evolve 170 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 21 Using marketing in e-business Managing customers Ensuring that customers keep returning to a website relies upon: Acquiring customers • tangibles • search engine marketing Bo x • reliability • online PR • responsiveness • online partnerships G lo ba l • assurance • interactive adverts • empathy • opt-in emails Empathy can be improved through: • viral marketing • evaluating online behaviour • personalisation AC C A • opt-in emails KAPLAN PUBLISHING • supporting online communities • storing and using past transactions www.ACCAGlobalBox.com 171 AC C A G lo ba l Bo x e-Marketing 172 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Project management In this chapter • The project life cycle. • The business case document. • Risk analysis. AC C A 22 Bo x chapter • The project plan. • The project initiation document. • Key project staff. • Project control. • Project review. www.ACCAGlobalBox.com 173 Project management The project life cycle AC C A Completion G lo ba l Bo x Project life cycle Control Initiation Planning Execution 174 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 22 The business case document Reason: • Strategic analysis • Explains why project is needed • Project benefits and costs • Provides a financial rationale • Project constraints • Provides clear boundaries • Risk analysis • Managers can be more proactive to risks Why have a formal document? • to obtain funding for the project G lo ba l Bo x Typical contents: • to compete with other projects for resources AC C A • to improve planning • to improve project management. KAPLAN PUBLISHING www.ACCAGlobalBox.com 175 Project management Risk analysis 3 stages: • Identify risks Bo x • Assess risks • Manage risks Likelihood L Accept Reduce H Transfer Avoid G lo ba l H AC C A Impact L 176 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 22 The project plan AC C A Exit plans G lo ba l Bo x Project Plan Communication Resources Detailed schedules Targets and measures KAPLAN PUBLISHING www.ACCAGlobalBox.com 177 Project management The project initiation document Benefits of having this Clear responsibilities Lines of authority for decision making Facilitates responsibility accounting Detailed schedules Clear path Improved efficiency Targets and measures Clear control points Early identification of problems G lo ba l More efficient handover Easier exit for the project team AC C A Exit plans Bo x What it contains 178 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 22 Key project staff Project roles Project sponsor Providing resources Approving changes Communicating organisational goals Project manager Building the business case Executing the plan Exercising control Managing team members G lo ba l Make business and enabling changes Follow the plan AC C A Team members Bo x Project staff KAPLAN PUBLISHING www.ACCAGlobalBox.com 179 Project management Project control This has 3 stages: • Test performance at project gateways • Take control actions if targets aren’t met. • Fast tracking • Crashing • Adding additional resources • Scope reduction G lo ba l Potential control actions: Bo x • Create performance measures and targets AC C A • Adopting higher risk but potentially more efficient approaches • Employee motivation. 180 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 22 Project review AC C A G lo ba l Post implementation review (PIR) – reviews the output from the project. Bo x Post project review (PPR) – reviews the performance of the project team. KAPLAN PUBLISHING www.ACCAGlobalBox.com 181 AC C A G lo ba l Bo x Project management 182 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Financial decision making In this chapter • Options for raising finance. • Other sources. • Cost accounting. AC C A 23 Bo x chapter • Break even analysis. • Marginal decision making. • Investment appraisal. • Dealing with risk in decision making. • Budgeting. • Variance analysis. www.ACCAGlobalBox.com 183 Financial decision making Options for raising finance AC C A Equity G lo ba l Internal Bo x Retained cash Working capital Existing shareholders External New share issue 184 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 23 Debentures Mortgages Leasing Medium Term AC C A Debt G lo ba l Bo x Long term Bank loans Overdrafts Short term Payables KAPLAN PUBLISHING www.ACCAGlobalBox.com 185 Financial decision making Other sources • Government grants • Business angels/venture capitalists • Initial Coin Offering (ICO) • Availability • Control • Cash flow • Security • Gearing • Exit routes 186 AC C A • Cost G lo ba l Factors to consider when choosing a source of finance Bo x • Selling spare assets. www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 23 Cost accounting • Based on standard costing systems Key areas: • Break even analysis • Project appraisal • Decision making • Budgeting • Variance analysis KAPLAN PUBLISHING AC C A • Risk and uncertainty G lo ba l • Becoming increasingly out-of-date in modern manufacturing environments Bo x • May be based on absorption, marginal or activity based systems www.ACCAGlobalBox.com 187 Financial decision making Break even analysis Margin of safety = Contribution/unit Total Fixed Costs Contribution margin Budgeted Sales – Break even sales Key limitations • Assumes a constant selling price AC C A • Ignores (dis)economies of scale Bo x Break even revenue = Total Fixed Costs G lo ba l Break even point = • Difficult to cope with stepped fixed costs • Only relevant in the short term. 188 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 23 Marginal decision making • Accepting/rejecting special orders • Closing a business unit • Future • Incremental • Cash Key problems: G lo ba l Relevant costs and revenues must satisfy three criteria: Bo x • Abandoning a project AC C A • May need to consider opportunity costs • The accounting (and tax) impact will be different KAPLAN PUBLISHING www.ACCAGlobalBox.com 189 Financial decision making Investment appraisal 190 Net Present Value (NPV) How to calculate: Use a cost of capital and discount factors to discount future cash flows to give the present value Best used when: The project is long and the cost of capital is known Key advantage: Gives an absolute estimate of the impact on shareholder wealth Key disadvantage: Relies on a reliable cost of capital estimate Method: Payback period How to calculate: Determine how quickly the original cash injection is recovered Best used when: The project is short and/or cash is in short supply Key advantage: Provides a minimum target for protect Iife Key disadvantage: Requires a target/benchmark AC C A G lo ba l Bo x Method: www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 23 Accounting Rate of Return (ARR) How to calculate: Divide average profits by the initial investment Best used when: The project has profit targets to meet Key advantage: A simple calculation based on readily available Information Key disadvantage: Profits are easily manipulated Method: Internal Rate of Return (IRR) How to calculate: Determine the cost of capital that provides a zero NPV Best used when: The project is long and the cost of capital has not yet be determined Key advantage: Tells us the highest acceptable cost of capital Key disadvantage: It is not useful for comparing protects AC C A G lo ba l Bo x Method: KAPLAN PUBLISHING www.ACCAGlobalBox.com 191 Financial decision making An expected value summarises all the different possible outcomes by calculating a single weighted average. It is the long run average (though not necessarily the most likely result). Bo x Dealing with risk in decision making G lo ba l Complicated scenarios could be represented as a decision tree. Decision trees force the decision maker to consider the logical sequence of events. AC C A Key limitations: • Only useful for one-off decisions • Based on subjective information • Ignores attitudes to risk • Does not provide an actual outcome 192 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 23 Budgeting Effective budgetary control requires: • clear demarcation between areas of managerial responsibility G lo ba l • budget targets that are challenging yet achievable Bo x • a serious attitude is taken to the system • established data collection, analysis and reporting techniques • reports aimed at individual managers • fairly short reporting periods AC C A • timely variance reports • action being taken to get operations back under control if they are shown to be out of control. KAPLAN PUBLISHING www.ACCAGlobalBox.com 193 Financial decision making Variance analysis Key components of effective variance analysis: • flexing budgets for variable costs • linking causes to the variance G lo ba l • strong procedures for determining whether to investigate Bo x • allocating responsibility • keeping up-to-date standards • including feedforward control to improve future performance AC C A • identifying trends which can be incorporated into strategic plans. 194 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" G lo ba l Managing strategic change In this chapter • Types of change. • Influence of culture on change. • Preparing for change – Lewin. AC C A 24 Bo x chapter • Change management styles. • The change kaleidoscope. • POPIT Model. www.ACCAGlobalBox.com 195 Managing strategic change Types of change Extent of change 196 Realignment Bo x Adaptation: Change undertaken to realign the way in which the organisation operates; implemented in a series of steps G lo ba l Evolution: Transformational change implemented gradually through inter-related initiatives; likely to be proactive change undertaken in participation of the need for future change Revolution: Transformational change that occurs via simultaneous initiatives on many fronts: • more likely to be forced and reactive because of the changing competitive conditions that the organisation is facing AC C A Speed of change Big bang Incremental Transformation Reconstruction: Change undertaken to realign the way in which the organisation operates with many initiatives implemented simultaneously: • often forced and reactive because of a changing competitive context www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 24 Influence of culture on change Preparing for change – Lewin Lewin suggests that change is achieved in three stages: The Cultural Web • Routines and rituals • Organisational structures • Control systems • Power structures • Symbols Create the initial motivation to change by convincing staff of the undesirability of the present situation. G lo ba l Stories Bo x • Unfreeze • • Change Make the necessary changes to strategy, processes, culture etc. AC C A • Refreeze KAPLAN PUBLISHING Reinforcement of the new pattern of work or behaviour through rewards, praise, etc. www.ACCAGlobalBox.com 197 Managing strategic change Change management styles Facilitation and support G lo ba l Methods of overcoming resistance AC C A Education and communication Bo x Participation Power/ coercion 198 www.ACCAGlobalBox.com Manipulation and co-optation Negotiation KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Chapter 24 The change kaleidoscope (Balogun and Hope Hailey) Contextual features: Bo x • time • scope • diversity • capability • capacity • readiness AC C A • power G lo ba l • preservation KAPLAN PUBLISHING www.ACCAGlobalBox.com 199 Managing strategic change Bo x POPIT Model G lo ba l Organisation Information technology Process AC C A People The business system can only be a success if all work together and changes are co-ordinated. 200 www.ACCAGlobalBox.com KAPLAN PUBLISHING G lo ba l AC C A Index Bo x Downloaded From "http://www.ACCAGlobalBox.com" www.ACCAGlobalBox.com I.1 Index B A AC C A G lo ba l Acceptability 29 Accountability 40 Accountants and the public interest 132 Acquisition 32 Advocacy 101 Agency theory 42 Ansoff matrix 28 Ashridge portfolio display 34 As Low As Reasonably Practicable Principle (ALARP) 109 Audit committee 106 Audit committee and external auditors 105 Audit committee and internal audit 104 Audit committee and internal controls 103 Audit committee roles 102 Auditor independence 100 Baldrige performance excellence 24 Balogun and Hope Hailey 199 BCG matrix 33 Behavioural/style theories 57 Benchmarking 23 Benefits and drawbacks of corporate and professional code of ethics 135 Benefits and drawbacks of social and environmental reporting 79 Big data 164 Board committees 65 Board of directors 62 Break even analysis 188 Bribery and corruption 137 Budgeting 193 Business case document 175 Business process outsourcing 147 Business process redesign 149 Business risks 113 Bo x 5 Forces analysis 15 6Is 169 I.2 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Index D Dealing with risk in decision making 192 Direct claims 45 Disclosure general principles 76 Disruptive technology 165 Downside risks 108 Downstream supply chain management 163 AC C A G lo ba l CEO’s responsibilities 64 Chairman and CEO 64 Chairman’s responsibilities 64 Change kaleidoscope 199 Change management styles 198 Cloud technology 166 Competence 134 Competitive strategies 26 Comply or explain 48 Components of directors’ remuneration package 69 Concentration of effect 140 Conceptual framework 134 Confidentiality 134 Constructed capital 77 Context-related factors 141 Contextual features 199 Contingency/contextual theories 58 Corporate citizen 54 Corporate citizenship 54 Corporate code of ethics 133 COSO ERM framework 111 Cost accounting 187 Coverage of governance 38 CSR Strategy 52 Cultural web 197 Bo x C KAPLAN PUBLISHING E e-Branding 170 Economy 41 Effective internal control systems 92 Effectiveness 41 Efficiency 41 Elements of an internal control system 92 Embedding risk 121 Embedding risk awareness 122 Embedding risk in culture 122 www.ACCAGlobalBox.com I.3 Index AC C A Factors affecting the need for internal audit 99 Fairness 39 Familiarity 101 Family structures 49 Feasibility 29 Fintech 165 Franchise 32 Fraud detection 96 Fraud prevention 96 Fraud response 96 Fraud risk management strategy 96 Function and importance of internal audit 98 Fundamental principles 134 I.4 Goal 56 Growth strategies 28 H Bo x F G Harmon’s process-strategy matrix 148 How to prepare an integrated report 82 Human capital 77, 81 G lo ba l Enterprise risk management (ERM) 110 Entre and intrapreneurship 60 Environmental footprint 77 E-procurement 162 Ethical conflict 138 Ethical decision making 139 Ethical theats and safeguards 136 I Importance of committees 65 Independence 39 Indirect claims 45 Influence 56 Information characteristics and quality 95 Information flows for management 93 Initial coin offering (ICO) 186 Innovation 40 Insider-dominated structures 50 Institutional investors 74 Institutional shareholder intervention 75 Integrated reporting 80 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Index K Bo x Key concepts 39 Key concepts of Agency Theory 43 Key project staff 179 L Leadership and culture 59 Leadership and management 59 J AC C A G lo ba l Integrity 39, 134 Intellectual capital 81 Internal audit 98 Internal control definitions 89 Internal control objectives and benefits 90 Internal control roles and responsibilities 87 Internal control systems 86 Interpersonal 56 Intimidation 101 Investment appraisal 190 Issue and context related factors 140 IT 152 IT Controls 156 IT Risks 155 Johnson, Scholes, Whittington 29 Joint venture 32 Judgement 40 KAPLAN PUBLISHING M Magnitude of consequence 140 Main structural types 145 Manufactured capital 81 Marginal decision making 189 Marketing mix (7P’s) 168 Mendelow 53 Mendelow’s stakeholder mapping matrix 53 Mintzberg building blocks 146 Moral framing 140 Moral intensity 140 www.ACCAGlobalBox.com I.5 Index O P AC C A Objectives for integrated reporting 80 Objectivity 134 Operational risks 112 Options for raising finance 184 Organic growth 32 PESTEL analysis 14 POPIT Model 200 Porter’s diamond 16 Portfolio analysis 33 Potential ethical threats 101 Preparing for change – Lewin 197 I.6 G lo ba l Natural capital 81 Nature and importance of leadership 56 NEDs on the board 63 Nominations committee 65 Non-executive directors 63 Non-executive directors’ remuneration 71 Probability of effect 140 Probity/honesty 39 Process of embedding risk 121 Process of risk management 109 Profession 130 Professional behaviour 134 Professional code of ethics 134 Professionalism 130 Profession and professionalism 130 Project control 180 Project initiation document 178 Project life cycle 174 Project plan 177 Project review 181 Promoting cyber security 157 Proximity 140 Public interest 131 Public sector portfolio matrix 34 Purpose and scope of governance 41 Bo x N Q Quantitative analysis 22 www.ACCAGlobalBox.com KAPLAN PUBLISHING Downloaded From "http://www.ACCAGlobalBox.com" Index AC C A G lo ba l Related risks 114 Remuneration committee 67 Reporting on internal controls to shareholders 106 Reputation 39 Responsibilities of the remuneration committee 68 Responsibility 40 Risk appetite 118 Risk assessment 115 Risk attitude 118 Risk auditing 127 Risk capacity 118 Risk committee 120 Risk definition 108 Risk heat map 116 Risk identification 112 Risk management 109 Risk management strategies 124 Risk management strategies diversifying risk 126 Risk manager 119 Risk map 115 Risk mapping 123 Risk monitoring 127 Role of the board in risk management 118 Roles and responsibilities in risk management and internal control 88 Roles of internal audit department 98 Rules and principles based approaches to corporate governance 48 Bo x R KAPLAN PUBLISHING S Scepticism 40 Self-interest 101 Self-review 101 Social and environmental reporting 78 Social capital 77, 81 Social consequences 140 Social footprint 77 Social responsibility 52 Social responsiveness 52 Sound control systems 91 Stakeholder 53 www.ACCAGlobalBox.com I.7 Index T U Bo x UK Corporate Governance Code 105 Upside risks 108 Upstream supply chain management 162 V Value chain analysis 18 Value creation process 83 Variance analysis 194 G lo ba l AC C A Stakeholder claim 45 Stakeholder claims 53 Stakeholder theory 44, 53 Strategic alliance partnering 32 Strategic capabilities 17 Strategic drift 10 Strategic planning 8 Strategic planning process 9 Strategic risks 112 Strategy evaluation 29 Suitability 29 Supply chain management 160 Sustainability 77 Sustainable development 77 SWOT Analysis 19 W What makes an effective leader? 57 Why incur risk 108 Why manage risk 108 Temporal Immediacy 140 Trait theories 57 Transparency 39 Tucker’s 5 questions 139 Types of change 196 Types of e-Business 153 I.8 www.ACCAGlobalBox.com KAPLAN PUBLISHING