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F1 - FBT Textbook 2023

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Section A
The business
organization,
its stakeholders
and the external
environment
1
Section A1 Business Organization
Definition. Organization as collective arrangement of people. Specifically: “A social arrangement that:
1) pursues collective goals, 2) controls its own performance, and
3) has a boundary separating it from its environment.”
social’ mean orgns consist of people who act socially;get along with colleagues; respect our boss?, get on with
customers; Collective goals or shared objectives – everyone working same direction toward the goals.
Business organizations means those that has commercial goals
Formal organization – there can be rules and hierarchy
When you start a business, these are the factors that you must consider
Ownership and control. You form business with different features due to what you need and what you can
afford.
Legal status. Different legal status affect your equity interest (your start up capital ad future funding and
exposure to liabilities
Activity. The opportunities and risks that these business activity may give
Profit objectives or not for profit objective. This may affect your ability to raise funds via public donations
or get legal and/or tax exemptions
Source of finance. Bigger projects will normally means you must be able to get loans and/or do joint
venture or raise capital from the general publics (bonds/share issue)
Operating capacity. Need to plan on current capacity and future needs
Level of technology. Balance what you need (can afford) and what you want.
2
Section A1 Business Organization
Systems theory. The definition of an orgn included the terms ‘boundary’ and ‘environment’.
These terms come from systems theory.
•The environment is what the orgn sits or lives in. For .e.g it lives in its national or country
environment and also in the international environment. The boundary separates the
environment from the organisational system. Input normally goes into the orgn and output
comes out of the orgn; some sort of processing takes place within the organisation.
•All organisations or systems can be divided into subsystems. Say, an orgn will have
departments like sales and marketing, accounting , manufacturing and so on. Subsystems can
then be further split down into even smaller subsystems. For e.g, the accounting department
will consist of sub-sections like A/c receivables , A/c payables, Cash & Banking, GL section and
so on.
•Some systems are known as ‘closed systems’: they take no input from the environment and
give no output to it. These are very theoretical and have no long life. It will be difficult to see an
orgn continuing to compete successfully if it ignore technological advances, or the competition
or customers needs.
•Open systems or organisations on the other hand do receive input from the environment and
produce output which is sent to the environment. These are the only ones of any practical
importance.
3
Sect A1 Business Orgn– Classified by control or profit motives
Commercial (Profit seeking)
Limited companies
Partnerships
Sole proprietors
NOT FOR PROFIT
Charities
Clubs/Societies
NGO’s
Commercial organization (Private sector)
Profit objective classification as compared to ownership above.
•Sole proprietor- One owner, Unlimited liability. By definition it is 1 person & not an orgn.
•Partnership -Unlimited liability partnership/Limited liability partnership (LLP)
•Limited Companies–Shareholders, limited liability, Legal person
Unlimited liability Sole proprietor & business entity is same legal entity. In accounting we treat the
owner in sole trader business as different accounting entity but in law they are treated the same or
same legal entity. Personal assets unlimited liability for all debts owned by the business
Limited liability. Liability of shareholders limited to the amount unpaid on the shares
subscribed. For limited partners-normally they get only fixed salary (refer h/outs) .
4
Sole proprietor feature-snapshot
•
•
•
•
•
•
Ownership and control. Sole owner and control. Freedom and flexibility in work life
Legal status. Unlimited liability/May or may not register with ACRA
Activity. Small trading, services. Normally family business start-ups
Source of finance -Low capital. Difficult to raise funds from banks (borrow from spouse
first option, then try siblings). Difficult even to have a good feasibility study done
Operating capacity. Lack resources to innovate which impact competitiveness. The HDB
grocery shops has disappeared and replaced by NTUC/Sheng Siong
Level of technology. Low level or simple to use- the HDB shop use “milk container” with a
pull string for cash register (safety and control). NTUC supermarkets use retail POS . Manual
book-keeping for many sole traders
Sole proprietor-big picture (examples; Hairdresser, shopkeeper, audit firm)
Advantages
• Make decisions quickly
• Sole traders keep all profits
• Easy to set up, enjoy privacy of business affairs
• Can be motivating eg pursue hobbies and work together
Disadvantages
• Limited funds from limited sources
• Unlimited liability-can lose personal assets
• Limited mgmt skills; Not creative or innovative as no one to share ideas
5
Partnership(partnership act (1890) define it as 2 or more people carrying on business with a view to profit”)
• Ownership and control-Equity partners normally control
Salaried partners may have limited liability
Partnership act 1890 (2-20 partners) or no deed (equal profit sharing)
Professional firms form LLP
Legal status-can sue and be sued in own name. Or sue partners jointly and severally / Tax
individually (no corporate tax)
• Professional firms-doctors, lawyers, engineers, acct, etc. Small traders merge to raise
funds/upgrade services. LLP can be huge like 4 accounting heavyweights
• Source of finance & operating capacity. Banks more willing to lend as collaterals increased.
Can also raise from existing or new partners. Still lack resources to innovate (except for mega
LLP like big audit or medical practices)
Advantages
• Maximum of 20 partners allowed, except for partnerships in the professions such as law,
accountancy or medical where huge LLPs have merged
• Can have sleeping partner: invest in the firm but does not take part in day to day matters and
has limited liability. At least one partner must have limited liability
• Share resources/ideas / More sources of finance / Specialist skills like law , audit, engr firms
Disadvantages
• Still have at least one partner unlimited liability (or on project basis)
• Limited source of finance and Profits must be shared among profit-sharing partners
• Slower decision making than sole proprietors
6
Limited companies
Ownership and control. One shares one vote/limited liability for shareholders. The
shareholders (ownership) of big companies normally is separated from management
(the directors and senior managers) who runs the business (control)
Legal status by incorporation
•Separate legal entity (can sue or be sued in own name)
Types of activities
•Primary industries like Extractive (extract minerals)
•Genetic (use genes to improve yields-crops/cow/fish..)
•Secondary industries like manufacturing/construction (value-added)
•Others- Quaternary (IT related) / services - (hotels, food, tourism)
Source of finance. Internal (issue shares/bonds) or external funding (banks loans),
IPO – list on stock exchange (dual listing also can) And then issue bonds later to suck
more monies
Operations are basically market driven–”world in your hands (globalization)”
Use of technology to innovate for competitive edge. Apple #1 Nokia dying! And
copycats Samsung and HTC valuations dropped 30% after Apple suits (US & HTC
pending)
7
Public sector/Government sector
• For the good of the public -Therefore called public sector
• Public goods (for society benefits)-Defence (army not mercenaries)/Education/Infrastructure/Public utilities. No good if in the hands of evil businesses? Why so many privatize?
• Owned, setup and run (directed) by government
• Privatized already like Singapore Power
• Who runs? More efficient now? 100000 SOEs in PRC – in queue to privatize!
• Public sector -therefore public funds (all kind of taxes and government investments). Funding
can also come from customers (like utilities provided by state owned PUB)
• Examples include BBC, Bank of England, armed services, local authority services such as public
schools, parks, public museums and public library.
• Revenue comes from taxpayer as well as customers
• Likely to have social objectives, not just be profit oriented
• Singapore Government: everything profit oriented?
• With increased scrutiny from the public and shareholders, there has been an increasing call for
the public and private (non commercial) sector to demonstrate their accountability and regard
for economy, efficiency and effectiveness in the use of public/shareholders' funds and
resources.
• In the public sector, the key question being asked frequently is whether an agency's vision,
mission and their desired outcomes of activities/programmes are achieved in a cost effective
manner. Value for Money is about providing services that are of the right quality, level and cost
that reflect the needs and priority of stakeholders like customers, donors/fund providers,
taxpayers and the wider community
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NON - COMMERCIAL organizations
Not for profit organizations / Non Governmental Organization NGOs
Goals primarily not for profit (not overriding objective), any surplus not distributed as profits
or dividends. Cultural, social, religious or other benefits
•Mutual clans (members are “laoxiang”)
•Educational (private university-old NU)/social (sports clubs/SAFRA)/”Ornithologist society”
•Religious (churches/temples)
•Charities (Red Cross/Hope Foundation/Oxfam)
Not-for-profit organisation will rely more on value for money and efficiency indicators rather
than information on performance and profitability
•Corporate governance (CG) issues . Recent extreme behavior of exec.
(CHC/NKF/Renci/(Beijing Red Cross).. etc. has led to charities CG act in Singapore)
•Co-operatives . Startup funding and owned by members. A democratic orgn where all
members have one vote and many workers may be members. May have shareholders but one
membder one vote and not one vote per share.Tax exemptions and donations and other
concessions
Types of co-operatives
• Worker co-operative . Owned by employees
• Retail co-operative (CO-OP business). Setup to benefit consumers (NTUC Co-op?) / Surplus
are distributed via lower prices
NGOs (voluntary non-government funded).
like WWF/Greenpeace “pressure groups”
9
MARKET SECTORS
ORGNS MAY OPERATE IN DIFFERENT INDUSTIRAL OR COMMERCIAL SECTORS
This may inckude these:
Agriculture. Agricultural produce. Vegeatbles farms, fruit orchards, poultry farms.
Fishing. Some peoiple will put fisinging industry separately from agriculture. This may include the
fish farms in Ubin or huge operations like Alaska crab fishing or Japanese whalers.
Retail. Those who do trading (buy and sells to consumers. Retail firms like shop outlets,
shopping centres outlets, HDB shop. Wholesalers, franchise operators are also included.
Mining. Mining is the extraction of valuable minerals or other geological materials from the earth,
usually from an orebody, lode, vein, seam, reef or placer deposit. These deposits is of economic
interest to the miner.The mning sector includes all the minerals like gold, diamond, petroleum, tin,
iron etc
Transportation. Include public transport systems like SBS, SMRT and the buseses and ferries,
airlines. shipping. Can be transporting goods or commuters. Logistics is another similar term but it
cover also all the logistics firms including warehosuing and supply chain management.
Finance. This include the banking sector (loan providers like banks, credit companies, insurance
companies, etc)
Service. Service sectors include audit firms, legal firms, doctors, architects, consultancy firms etc.
e governance (CG) issues .
IT, Telecommunications sector
Information technology providers include the Internet
service providers, IT firms and quanterdanry sector,
10
Sect A2 Stakeholders’ issues-Snapshot
A stakeholder is a group or individual, who has a vested interest in what the orgn does, or an
expectation of the orgn. Traditional focus on shareholders as people with vested interests in
the business organization-shareholders’ model。 Now it is stakeholders' model
–Today with corporate governance issues, there are also other stakeholders
–Internal, external and other connected stakeholders
–It is important that an organisation understands the needs of the different
stakeholders (different expectations).Problem is their interests may conflict with each
other (their needs are different)
• Separation of owner and control complicate matters
–The firm must balance their interests -common grounds proposed are:
• Transparency/Accountability(responsibility)/compliance/Fairness
Mendelow suggested how management should balance it based on their power to
influence the organization and interest in doing so – Mendelow Grid mapping.
Internal
*Employees
*Management
External*
local communities
*government
*pressure groupst
next generation
Stakeholders
Connected
*shareholders
*customers
*suppliers
*financial providers
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Different expectations of stakeholders
Internal stakeholders are intimately connected [means direct, close and on-going
relationship normally within the orgn itself] to an orgn, and their objectives are likely to
have a strong influence on how it is run. N.B. non-exec directors are not intimate enough as they
are outsiders
Employees are not likely to have strong power to influence alone unless they have a powerful
trade union although they are intimately connected and have high interest.
Potential conflict : Expect high pay, good working conditions and job security. But more
pay for employees means less profit for shareholders
Key management staff (executive directors and senior managers) have high interest and high
power and may tends to pay themselves more. This will lower the bottom line (profits) which affects
shareholders who expect dividends if profits not ploughed back for business expansion
Potential conflict : Expect high status/pay/performance bonus, and job security. But
more pay for employees means less profit for shareholders. This is even more acute than
junior staff, as directors and senior managers have habit of practising shortermism
(recall F2) at the expense of company profit/share prices.
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Expectations of connected stakeholders
Connected stakeholders have ongoing purely business contractual or binding relationship [means I have business with
you otherwise I am detached from you-don’t love u at all] with the orgn. For e.g customers have sales contracts,
suppliers have supply agreements, bankers have loan contracts. Shareholders have voting rights to remove directors or
pay dividends at AGM (bound by law).
Regulatory bodies like SGX. ACRA are not connected stakeholders because they are
not ongoing business relationship. Traditional focus on shareholders’ needs for steady
income streams (yearly profits), potential capital growth/expansion (add shareholders’
value). A common conflict situation will be the organization need to keep more of the
earned profits for growth but shareholders want to cash out (get paid for their
investments).
E.g of conflict of interests for the other connected stakeholders are shown below:
Customers
Customers expect
value for money
The orgn need to
balance cheap-fastgood services
Suppliers
Loan providers
Suppliers expect to
be paid promptly
Expect ability to repay
regular loan
commitments
The orgn need to balance
cash flows and not risking
upset suppliers who are
not paid
The firm cash flows
may not be regular
risking default
13
Expectations of external stakeholders
External stakeholders do not have direct link with the organizations but are
influenced by the organization’s activities. Therefore they include the government
, local authorities, pressure groups like environmental groups (Greenpeace,
humanitarian orgns) etc. This group will have quite diverse objectives and have varying
ability to ensure that the organisation meets their objectives. Companies respond to
environmental groups like using sustainable developments and other environmental
friendly practices:
Reduce wastage programs (don’t waste water!);
Recycled materials (papers/plastics)
Sustainable sources say you grow plantations to replace the cut trees like APP
Sumatra reforestation (outcry still ongoing as amazon forest illegal loggings continueThe next generation (they are also stakeholders as what the business do affect
their lives) may not see piranhas or other exotic creatures in the Amazon- although they
are also a stakeholder inheriting planet Earth. For fishermen, sustainable practices
include throwing back baby fishes (salmon and crab fishing) are taken to give them a
chance in life!
The main conflict of interests here is:
To keep up with environmental and local communities needs, the firms may
need to sacrifice short term profit objectives which hurt management bonus
and the company bottom line . Example APP group has many stakeholders
canceling their businesses with APP because of lllegal logging issues (destruction of
forests in Sumatra and other countries where it operate –refer to website).
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Summary on conflicting needs/expectations of different stakeholders
Employees vs managers
Employees want jobs or better wages but managers cut jobs by downsizing, outsourcing
and delayering to increase profits by reducing costs (affect working conditions).
Strike remain only option by trade unions to get better wages or work environment eg.
PRC Foxconn strike in last Sept 2012 due to extremely long work hours
Customers vs shareholders
Customers want VFM (including service levels and product quality) but many companies
don’t commit to quality programs or have poor service levels.
Only want to sell or clear stocks
Public (or the local community) vs shareholders
The public is very concerned with environmental pollution like- Sumatra haze (logging
companies deforestation impact); PRC- chemical plants poison lakes etc.
No more Yangtze pink dolphins ;Amazon de-forestation make many species extinct.
Future generations may not see exotic plants, birds or animals
Managers vs shareholders
Managers/directors want career growth and expected huge performance bonus but
shareholders focus on dividends and shareholders want to be independent and let
managers runs the business.
So the orgn need to learn to manage stakeholders.
15
Mendelow’s power-interest matrix
Level of Interest
Low
Minimal effort
Low
Level of
Power
High
High
Keep informed
Stakeholders
Keep satisfied
Key players
• If an orgn is having difficulty deciding who the dominant stakeholder is, they
can use Mendelow’s power-interest matrix. It help orgn decide how to handle
different stakeholders.
• It is important that an orgn meets the needs of the most dominant
stakeholders, but also consider other stakeholders need– nearly every
decision becomes a compromise. (So even Singtel will claim they treat every users as
customers- everyone important!)
• By plotting each stakeholder according to the power they have over the organisation and the interest they
have in a particular decision, the dominant stakeholder(s), i.e. the key player can be identified.
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Snapshot of Mendelow’s Matrix
Mendelow’s matrix provides away of mapping stakeholders based on the
power to influence the orgn and their interest in doing so. It identify the
responses which management needs to make the stakeholders in the different
quadrants. In other words, management categorises the stakeholders according
to their power to influence and their interest to influence:
power to influence/interest to influence
Low+Low: ‘small fry’ stakeholders (small customers/small shareholders), Ever
wonder why small fishes swim in shoals – like small customers you use media
like CASE to air your grievances –group effect
High+Low: Major customers, Central govt, Media
Low+High : Employees,
environmental groups, local communities
High+High : controlling shareholders,
local planning authority, institutional investors
Example: if you are a small subscriber to Singtel- you
are a user, but if you are big co, you are a customer-different response when
you call in to complain!
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Section A3,A6-A9 The Business environment
Macro environment.
Micro environment.
Factors within the industry and the economy at
large (External to firm)
•Includes factors such as:
•Political/Legal - changes in the law and
political environment can affect both costs and
demand (e.g. taxes)
•Economic - changes in interest rates,
exchange rates, inflation, unemployment will
all impact on a firm's competitiveness and
success .
•Social - social trends will affect the workforce
and the customer e.g. willingness to work
under certain conditions, desire for certain
types of products
•Technological - environment will affect the
firm's production process (how things are done)
and products (actually produced)
•Ecological. Environmental factors
•Legal. All levels of laws making bodies like
municipal authorities, national, supra national
etc
Factors within the firm and its
interaction with other players in its
immediate environment. And demand
and supply of factors of production For
example:
•availability & terms of suppliers will
affect costs & quality
•the co-operation of the local
community will affect its recruitment
and planning (e.g. expansion path)
•the nature of distributors and
retailers will affect the price of the
product, where and how it is sold, the
ability to get to the market (placementput products into customers)
•the competition within the market will
affect profitability.
•Monopoly/Monopolistics/Competitive
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The big picture-PEST & SWOT Analysis
PEST (EL). Environment scan of the business environment that the business is going to
operate. Say you want to invest in PRC. Consider market sizes, IP rights, distribution channels,
existing municipal laws, tax concessions (economic zones etc)
SWOT Analysis.`Internal scan -You checklist (benchmark) your corporate health- fit enough to do
the business. You exploit your strengths, identify weakness and convert it to opportunities if
possible Say if you want to enter PRC markets
pocket deep or not? Money no enough must go home after donating monies to mother
China. No connections?....In PRC “connections” is standard business practice!
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PEST Impact on business
Environmental Scan
/
Internal Analysis
/\
Strengths Weaknesses
|
Understand and apply games rules
set by political and government
policy
•Political Laws and regulations
– Think local/national/international
\
laws
– Tax concessions/IP rights/human
rights……
External Analysis
•Economic – market potentials
•Social and demographic impact
/\
– Muslim, racist or male dominance?
Corruption culture?
Opportunities Threat
– demographic structures
s
• Ageing populations? Birth rate?
Male/female mix….
•Technological impact due to innovation
– Globalization and internet impact
– Downsize/Delayering/Outsource
SWOT Matrix
20
PEST(EL) ANALYSIS
Orgns exist within an environment. It’s therefore useful to categorise the environmental influences
that businesses may suffer. The PESTEL model looks at the environmental influences which are
very large: macro-environmental.
PESTEL stands for Political, Economic, Social, Technological, and relatively recently,
Ecological and Legal. It’s easy to see how these will influence how a business gets on.
•Political Factors include political systems, govt regulations and legal issues and define both
formal and informal rules under which the firm must operate. Includes : tax policy, employment
laws, environmental regulations, trade restrictions and tariffs, political stability
•Economic Factors affect the purchasing power of potential customers and the firm's cost of
capital. Includes macro-econ. factors :- economic growth, inflation, employment, interest rates
•Social Factors. Include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Social factors
include: health consciousness, population growth rate, age distribution, career attitudes,
safety matters.
•Technological Factors. Technological factors can lower barriers to entry, reduce minimum
efficient production levels, and influence outsourcing decisions. Include: R&D activity,
automation, technology incentives, etc
•Ecological. This is now a very important influence that it is part of disclosure for environmental
impact by listed companies as part of its corporate governance Legal. Legal is sometimes included
under political influences but obviously new laws, such as consumer protection, safety laws,
employment protection can have profound effects on how businesses operate.
External Opportunities and Threats. The PEST factors combined with external microenvironmental factors can be classified as opportunities and threats in SWOT analysis21
Political systems (and legal systems)
A political systems is a set of political institutions and interest groups (such as lobby groups)
imnteracting and have have rules and norms that govern their functions. These rules and norms are
reflected in the constitutions and election laws)
We may classified it into 3 levels:
Global/Regional. Examples World Trade Organization (WTO), Asia Pacific Economic Cooperation (APEC, European Union (EU), and United Nations (UN).
National. Examples: Individual sovereign nations.
Local. These are local municipal laws, city laws governing local govt depts, councils etc
The laws practised in these political systems (sources of legal authority) include the following:
Supra-national. UN resolutions, Int' Court of Justice, Europ[ean Parliament, European Courts
National. National Govts thru their court systems which typically include Acts of Parliament
(statute), and various level of courts (Supreme court, Court of appeall, Magistrate courts, etc).
Decisions made are called case laws.
Regional/Federal. State Govt (US states), Malaysian states, Welsh Assembly (UK Wales)
Govets will use these institutions to influence socieities theu govenment policies:
Housing/Crime/Defence/Agriculture/Town Planning/Foreign Policy/Education etc
Govts also affect orgns thru ddirect legislation to achieve certain objectives or protect certain
groups:
consumer protection (S'pore-lemon laws)
date proctection (PDPC- singapore
health and safety regulations
pollution (like EU carbon emissions)
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SWOT Analysis-snapshot危机是危险与商机
A scan of the internal environment
plays an important part in the
strategic planning process.
Environmental factors internal to
the firm usually can be classified as
strengths (S) or weaknesses (W),
and those external to the firm can be
classified as opportunities (O) or
threats (T). Such an analysis of the
strategic environment is referred to
as a SWOT analysis.
•SWOT analysis provides information
that helps to match the firm's
resources and capabilities to its’
competitive environment. As such,
it is instrumental in strategy
formulation and selection. The
following diagram shows how a
SWOT
analysis
fits
into
an
environmental scan:
SWOT Analysis Framework (OF A FIRM
(OPPOSITE)
Strengths are its resources and capabilities that can
be used as a basis for developing a competitive
advantage.
Examples: patents, strong brand names; good reputation
among customers, cost advantages from proprietary knowhow, exclusive access to high grade natural resources,
favorable access to distribution networks
Weaknesses. The absence of certain strengths may
be viewed as a weakness.
For eg, each of the following may be considered weaknesses: ,
lack of patent protection, a weak brand name, poor reputation
among customers, high cost structure, lack of access to the
best natural resources, lack of access to key distribution
channels
Opportunities. The external environmental analysis
may reveal certain new opportunities for profit and
growth.
include: an unfulfilled customer need, arrival of new
technologies, loosening of regulations say removal of
international trade barriers
Threats. Changes in the external environmental also
may present threats to the firm. Includes: shifts in
consumer tastes away from the firm's products, new substitute
products, new regulations, increased trade barriers
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The SWOT Matrix
We use the SWOT profile to develop strategies by constructing a matrix of the
factors that we have analyzed. This is called SWOT matrix (also known as
a TOWS Matrix) is shown below:
•S-O strategies pursue opportunities that are a good fit to the company's
strengths.
•W-O strategies overcome weaknesses to pursue opportunities.
•S-T strategies identify ways that the firm can use its strengths to reduce its
vulnerability to external threats.
•W-T strategies establish a defensive plan to prevent the firm's weaknesses from
making it highly susceptible to external threats.
Strengths
Threats
Strengths
Weaknesses
S-O strategies
W-O strategies
S-T strategies
W-T strategies
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Porter 5 forces-Snapshot
Porter’s competitive analysis framework identifies 5 fundamental competitive forces that
determine the relative attractiveness of an industry.
•Industry attractiveness refers to how easy a business will find it to make reasonable
profits. And by reasonable profits we mean profits large enough to compensate
investors for their risk, and also to make enough money to reinvest to keep the company
successful.
•Say if you want to do “Starbuck” type of business, you use these 5 forces to analyze how well
attractive the industry or in other words how well your firm can compete against other players (like
coffebean, mccafe) in terms of each of these 5 forces.
•This competitive analysis will give you insights into the industry to make strategic decisions as to
how to play along (to survive long term)
•Understand your industry better and apply correct strategy using your core competencies by using
Porter analysis-’know your enemy and yourself-100 battles no die’
Apply the 5 forces of internal and external threats
•Threat of new competition- if you reap abnormal profits, many new entrants if
barriers to entry low
•Threat of substitute products – how many and how strong are substitutes compared
to your product?
•Bargaining powers of buyers- does buyers (customers) have strong influence on
you? Customer base and concentration
• If your customers are all in PRC or India, then you must follow
•Bargaining powers of suppliers (Supplier’s command of industry)- how dependent
are you on existing ones & new sources? Especially where the industry is controlled by
key players
•Intensity of competitive rivalry (Existing competitors) – identify your potential
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threats rivals among the existing competitors and your market shares
Porter’s value chain
• Porter’s value chain is used to examine how a
business makes profits or margin or “value added”.
26
Porter’s value chain
•
•
•
•
•
•
Across the bottom of the diagram, are set out inbound logistics, operations, outbound logistics,
marketing and sales, and service. These are the primary activities. More or less these
activities will equate to direct costs.
At the top of the diagram are firm infrastructure, technology development, human resource
management, and procurement. These are the support activities. By and large they equate to
indirect costs.
It has to be stressed that activities are shown in the diagram. However, every activity has an
associated cost, and if all activities are represented there, so should all costs, and these could
be allocated and apportioned, and so mapped to somewhere on to this diagram. Rent, for
example could be apportioned over the operations that is the factory, the warehouse, head
office, and the marketing and sales dept. Similarly with depreciation, heating costs, wages and
salaries.
So, all the orgn’s costs can appear on this diagram. Let’s say these amounted to $10 million.
The goods and services produced by the organization will be sold, let’s say for $15 million. How come
therefore buyers are willing to spend $15 million on what cost the organization only $10 million? For what
possible reasons are customers willing to spend an extra $5 million over and above what the goods or
services cost to produce? Porter’s value chain is used to examine how a business makes profits or margin.
The extra $5 million has to be explained somehow. It is known as ‘value-added’, and it is explained by
arguing that the orgn accomplishes more for its customers than simply carrying out the activities and incurring
the costs that can be spread over the sections of the value chain. The orgn must be doing something else “the
vlue added”: For e.g,
– it could be bringing skills & know-how to the process to be more effetive and competent.
– It could bring convenience to the buyer, allowing the buyer to keep everything bought from the orgn as a
variable cost rather than taking on board many of the fixed costs.
– It may bring economies of scale and the buyer is willing to pay for this because it will be impossible for
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the buyer to replicate these on a smaller scale.
Porter’s value chain
The organization must understand what it is that adds value, as this is the reason it can make profits.
Furthermore, the orgn must understand how the different sections of the value chain are linked.
– It could be, says, that if more were spent on human resource management perhaps less would need to be
spent on operations because employees are better trained. If more were spent on technology development
perhaps less could be spend on after sales service because the quality of the finish goods was higher.
Understanding the value chain is essential for organizations so that they know how their profit is generated. It
has to be said, however, that sometimes organizations make mistakes identifying what it is about their activities that
adds, value for the customer and they make changes which reduce their ability to make profits.
•
PORTER'S GENERIC STRATEGIES (ways of competing)
• Porter also argued that businesses could adopt one of 3 strategies to gain competitive advantage:
1. Cost leadership
a firm sets out to become the low cost producer in its industry
Here you can apply Porter value chain concept- all functions work towards the cutting cost goal
2. Differentiation a firm seeks to be unique in its industry along some dimensions that are widely
valued by buyers. ...
3. Focus.
Here a business seeks a lower-cost advantage in just one or a small number of market
segments. The product will be basic - perhaps a similar product to the higher-priced and
featured market leader, but acceptable to sufficient consumers. Such products are often called
"me-too's".
• Each business can adopt the strategy that best fir their indiidual circumstances
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Impact of PEST changes
Reshaping/restructure (also an impact of globalization)
Outsourcing- firms sub-contract work to concentrate on core activities. Benefits from expertise of
specialists (menial non-strategic tasks)
Delayering– remove layers of management. Quicker decision making, greater responsibility, lower
costs
Downsizing-(new word for redundancy)- firms increase their efficiency by reducing staffing levels
say be re-engineering-redesign business process (FYI only)
• Environmental pressures create opportunities for new products/processes/markets for
environmentally friendly firms. Business s/be environmentally sustainbable. External stakeholders
are getting more and more important in today globalized business. Asia Paper and Pulp faced
boycott for its paper products by both its customers and NGOs and recently got “blamed’ by
Singapore authorities for THE HAZE”. Reduced waste and pollution also make workers and local
community happier with more pleasant and clean healthy environment. .
• In earlier years, you just need to keep shareholders happy- NOW this is not enough. Internet help
to spread info like wildfire – “like and don’t like” and not easy to hide things anymore even political
information-cannot bluff people easily now- look at Najib 1MBD
• Virtual organization and virtual team-working
• Globalization means also oversea markets and Trumpism pprotectionism?
• Resource management (sustainable products) may involve
Re-using / Re-cycling/Designing products that use less plastics/
packaging
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Impact of technology-globalization/shamrock/Internet/
1980’s. Theodore Levitt believe that one of the major consequences of developments in
technology is that countries all over the world are
becoming increasingly similar.
People all over the world can see what is available elsewhere and
want it for themselves. As a result Levitt argues that markets have become increasingly
globalised. Companies which appreciate this 'new commercial reality can benefit from huge
economies of scale in production and marketing. These economies of scale can then enable
them to cut prices and destroy the competition who have not yet realized how much the world
has changed.
1990’s. In the late 1980s Handy suggested that orgns would increasingly become Shamrock
organisation.
They, would have three types of employees:
•(and 4 types of culture in Sect C)
1. core workers - qualified professionals providing
2. the main source of knowledge. These are full time, long term employees. contract workers employed for a specific task; used on short term basis to complete set work eg. IT
programmers, construction workers.
3. peripheral workers - flexible workers employed on a part time basis. This pattern does seem
to have occurred and the implication is that there will be less long term, full time
employment in the future.
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Impact of technology-globalization/shamrock/Internet/
2000’s and forward. The internet has made business using Broadband technology critical.
Many transactions are done online.
Eventually both personal and business transactions will be thru mobile phones. We see this
evolution in SCM/JIT (order processing-salesmen used to place orders thru Ipad and then now
mobiles). And Singapore banks are encouraging people to use mobiles for ALL bank transactions
(e-transactions/Applepay,..).
Prudential agents get upset and mass write-in to
UK HQ to complain they no hasppy with online
insurwance platform where customers directly
buy insurance-no need them!
(ST report July17, 2018)
BUT concern for online security is still
a big issue for end consumers despite
using one time password (OTP) etc.
The amount of E-commerce has amplified
over the last 2 decades.
Fintech is the new direction for firms in the finance
industry. Heard of internet of things
IOT and 3D printing?
in future you just print new physical goods!
Already used by our ST Engineering Group!
Look at the supermarkets in Singapore-all
the payment counters are being replaced by
self service POS a/or DIY pay-in machines and
collect your own changes. COVERED IN Section C
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Impact of political changes
• Political changes • - the rise of trade unions in former communist PRC has mplications for investment there. In
developed countries, trade unions have
strong political connections.
Minimum wages in PRC and Batam has also increased production costs.
After 2000 with PRC joined WTO, many sectors were opened up
to foreign investors. In 2018, Trump is causing trade wars between
PRC & US and even the EU countiries.
• Economic changes- the last 2 decades has seen the emergence of major trading blocs: EU
with common borders/ASEAN/BRICS/etc
• These has major implications as compliance with supra-national laws required major changes to
the way the business operates. For example. The emission of gas was started as Euro 3 and
progress to Euro 5. Engine manufacturers throughout the way must comply with EU new
requirements or else fade away
• Business must comply with both national laws & supra-national body regulations
• Legal factors-the laws changes very fast and can impact your business especially when it
concern your licence to operate and affect bottom line. Tax rates/GST etc. Particularly the IP and
patents laws enforcement in Thailand, PRC. wef 1/9/12, Singapore introduce overdue “lemon
law” to protect consumers
• Cross border migration—migrants from Africa and the Indian continent to EU has caused
considerable social problems. In china, migrants from rural areas to the cities continue to drain on
the cities of its resources and infrastructure . Recently PRC announced reform to its “hukou”
policy
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Impact of economic changes-global market
• Indian IT business has conquered the known English speaking world, from UK to Singapore to
US because it is “competitively priced” or low costs. Beside India, Philippines is also cheap
source of telemarketing services. For the developed economies, normally moving overseas relates
to product life cycle or new emerging markets like PRC, Russia and East Europe. Blangadeshi now
is major garment manufacturing base
• Vietnam has taken over some of the sports shoes and apparel production
Reasons wny go overseas:
As local markets become saturated, global markets
Provide opportunity to extend your product life cycle (F2)
Also, maybe local markets too competitive- so LV and
Luxury brands go Moscow, Beijing
Outsource manaufactruing to PRC/India etc
– cheap labour etc
Entering overseas markets via different channels:
Exports/Franchising/Licence/Joint ventures (with local firms to tap their expertise)
• Direct investment yourself
Offshoring.
Offshore outsourcing is the practice of hiring an external organization to perform
some business functions in a country other than the one where the products or services are
actually developed or manufactured. Says you outsource the telemarketing services to India/Php by
Singtel.
It can be contrasted with offshoring, in which a company moves itself entirely to another country,
or where functions are performed in a foreign country by a foreign subsidiary. Opponents point out
that the practice of sending work overseas by countries with higher wages reduces their own
domestic employment and domestic investment. Many customer service jobs as well as jobs in the
IT sectors in countries such as the US & UK have been or are potentially affected.
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Impact of economic changes-global market
• Downsizing , reducing employee number but not work, has been necessary to keep
costs down.
• Delayering, we have discussed recently, moving towards wider, flatter organisations,
both to save costs and to achieve flexibility.
• Outsourcing means getting an outside firm to perform some of your operations.
These operations will generally be your support operations. Therefore, it is relatively
common to outsource your IT and perhaps your receivables ledger. Most businesses
don’t make money from the receivables ledger or from their IT. These are to them
necessary evils. (DBS outsource some of their IT functions to IBM).
• Question: what kind of tasks will be outsourced?
• They may make their money from clever engineering or thinking up clever adverts if
they are an advertising agency. The thought behind outsourcing is that firms should
concentrate on what they are good at, their core activities, and try to outsource
everything else, because those functions are liable to be management distractions.
• Management should concentrate on where it adds value: where the organisation can
makes its money.
Transfer pricing/international tax avoidance
Many companies like Starbucks in UK and Singtel in Australia make US$billions in sales
per year but report only token profit (near zero) in the countries they operate. These
widespread practices has caused the inland revenue authorities worldwide to come up
with new transfer pricing guidelines and reporting requirements to nab tax
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avoidance/evasion.
Impact of Social and demographic factors
Recent trends -Social factors
• Society changes over time- so change occurs in spcial values, attitudes, tastes and social structure
Cultural- Muslim societies have opportunity for Halal foods but not for porky items. Try selling Nike running shoes
to Masai tribe in Kenya. More Indian movies in Singapore
Demographics-means the composition or makeup of a population (can be a town or a country.
Therefore the dmographic issues business neeed to monitor include:
1) population size 2) population location 3) population composition 4) wealth 5) Health
6) Education
Demographic factors (birth rate and ageing and racial mix) can influence public policies:
Ageing population-In Singapore falling birth rate and ageing population has made immigration
policies very liberal and seen as goldmines by foreign talents especially from India/PRC/SEA.
In Australia, the boom last 2 decades and falling local population has led to influx of Asians (This has caused
social problems in 2014- terrorist attacks). This also creates health and social issues-how to take care of an
ageing population and provide enough workers for the economy
Population movement- people moved from countryside to city c/w -high social costs as `the
cities are crammed – with poor amenities, high crime rates etc
Growth service sector- service sector has proliferated due to consumerism socieities
Child bearing age has gone up- average age of women giving birth has increased as women defer giving birth
for various reasons- “enjoy life first-go tours”; “career first”; “cost of child care expensive-wait until finance
ok’;”medical care very advanced- can take egg out and put back anytime!’
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Demographic factors
Social economic characteristics of a population expressed statistically, such as;
Age. People in developed countries tends to have older population because of medical
facilities and falling birth rate (no time for pro-creation? Busy making monies!)
Sex. Certain societies can be more feminine like the Luku tribe where the females rule
and in some Islamic societies women are fighting for their rights . In Norway, the laws
say you must have 50% framle directors- if no have advertise for it!. In post war
Vietnam, too many young women (most young people all gone heaven) create a
lucrative bride markets for lucky fellows in Taiwan and South Korea and even Singapore
men hehehehe!!!
Education level. High education level means skilled workforce. Today problem with
many countries is that there are too many graduates who cannot find work- but many
employers looking for workers with particular skills like plumbing, programming,
construction engineering. This is why the Singapore government leaders encouraging
the young NOT to go university roads. Be a cook?
Income level. High income level means consumption power like PRC moving towards
middle class and rich class. This impact consumption for such goods instead of
necessities.
Marital status. Singaporeans not getting married or later add to foreign talents problem
Occupation.
People in agricultural countries tend to be farmers and affect their
lifestyles etc. Migrant workers to the cities bring many problems in countries like PRC.
Others: Religion, birth rate, death rate, average family size, average age of marriage
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Impact of Social and demographic factors
RELECTED IN CHANGES IN CONSUMER VALUES AND BEHAVIOUR
LIFESTYLE CHANGES:
• Increase in rate of obesity in a number of countries -PRC, US, Singaporethe rise and rise of health-foods firms.
• Travel - people tends to travel more now given the advancement in air travel
Social mobility. Movement of individuals or households thin or between social statsa in a society
Growth in consumerism (protecting or promoting the interests of consumers) has led
many orgns to improve their services to customers.
Increased awareness of health issues (and insurance coverage),
exercising and eating healthy (though reluctant to implemen
this knowledge) .Organic foods good for you?
The rise and rise of medical services and pharmaceutical
companies including “health resorts- enjoy holidays cum
medical checkups” like Singapore or Bangkok
Wealth distribution (social inequality)- the social reforms in PRC and former Soviet Union has
created a super rich class which crave on luxury brands- LV, B&O , :Luxury
cars etc. Moscow and Beijing are the top cities for luxury brands today.
In Singapore, the middle class has thinned down with more income inequality.
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Impact of Social and demographic factors
Also migrants to the cities create economic issues in PRC and
newly industrrialised countries.
In European Union, the many members are on the verge of exit from the union as
“forced migration” from Middle East and African “refugees” imposed heavy social costs .
UK exited in 2016 as it have to take in about 300,000 immigarnts annually”. These are
refugees or terrorists (refugees in sheep clothing) or perverts (many of therm become
jobless gang-rapists in Germany after they are 'resettled in Germany!)
Increase use of internet & IT has changed the social
behavior some people cannot talk anymore!-only SMS
The increase in single person
households
(people marry late now and focus
more on career or go holidays?
Single households got more buying
power?
The graph on the right shows the
US single houeseholds increase
from 1940 to 2011
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Impact of legal changes/political changes
Existing political systems and constant changes in politics
•Organizations need to be aware of various levels of political systems (various level of
authority) including:
•Supra-national bodies: Global eg EU laws, money laundering laws , UN etc
•Accounting rules- globalization has also resulted in the need of accounting rules (for
standardization) (eg IFRS) and more countries become members of IASB.
•National laws –e.g. government policy/federal laws
– Local municipal laws e.g. local councils/state laws
Compliance issues – with all types of legal authorities
•They need to comply with certain legislations;
– Employee rights, health and safety, consumer protection
– Failure to comply means fines, bad publicity loss of current and future customers
e.g APP lost many customers thru illegal logging practices
Impact of employment legislation on firms
1) May increase costs, e.g. minimum wage.
2) May affect the way production is scheduled or organized. (Say in Singapore many
firms depend on “foreign talents” and outsourcing)
BUT
1. may make employees feel more secure (e.g. provide hygiene factors (Herzberg)).
2. May improve employees' welfare and motivation.
Depends on how the firm was behaving before the impact of the law on other firms 39
Employment rights
Employment rights protect employees from unfair treatment by employers
Employment rights Redundancy Payments Act 1965.
Fair dismissal
To be “fair”, employers can only dismiss an employee for the following “fair” reasons:
•
the employee lack capability or qualifications to do the job
•
the employee is guilty of misconduct or dishonesty (such as molest, theft or CBT)
•
the emplyee is now redundant
•
the employee is dismissed for legal reasons (for example, he did not disclose his previous jail record or
health conditions ions and the job require no criminbal records or heqalth issues)
If the employer is unnable to provce that the dismissal was fair, they may be accused of unfair dismissal.
In Uk, reasons for unfair dismissal includes when
•
an employee take pregnancy leave or parental leave
•
an emplyee joins a trade union
•
discriminatioon over employee's gender, sexuality or religion
In the case of redundancy employees are entitled to:
• pay (based on how many years they have worked for the business) ; notice ; • time off work to attend interviews
for a new job
Wrongful dismissal (an unfair dismissal)
A dismissal is wrongful when an employer breach the terms of the employee contract when it dismisses
or terminates an employee like without giving the employee notice of that termination because the
employer wrongfully feels that there is cause for termination.
Constructive dismissal (a wrongful dismissal).
When employees resigned because the emplyers breached the terms of the employment contract.
Examples:
– orgn creates a situation to harass employee to resign,
– employer, without the consent or agreement of the employee, changes a fundamental term of
employment such as wages or salary and then forces the employee to either accept this change or quit.
In each of these cases an employee may be able to sue the employer for the wrongful dismissal. However,
a
40
lawyer should be consulted first.
Important issues for employees/employers
Legal issues on data protection & security.
Data protection is concerned with protecting individuals against the misuse of info about them
Business must not misuse confidential employees’ info
•It cannot pass on certain information on its employees without their prior consent
Data Protection Act, 1984. (Singapore have PDPC act.)
To 'regulate the use of automatically processed info relating to an individual'.
Main principles include:
Personal data should be obtained and processed fairly and lawfully
Personal data should be adequate, relevant and not excessive in relation to the purpose for which it bs processed
Personal data should be accurqate and kept up-to-date
Personal data s be held for one or more specified and lawful purposes
Personal data shall be processed in accordance with the rights of the data subjects
A data user is responsible for the security and protection of data against unauthorised access, alteration,
destruction, disclosure or accidental loss
estic-
Social Chapter.
An attempt by European Union (EU) countries which are part of it to agree on terms and conditions of employment
across states. The agreement covers areas such as:
1)hours of work 2)health and safety 3) equal opportunities 4) access to training
5) workers' involvement in decision making
Under the Social Chapter workers are guaranteed :
•the right to join a trade union / the right to take industrial action / » the right to be consulted and informed about
company plans/ the right to equal treatment for men and women
•the right to a minimum wage and a maximum week of 48 hours' work
•the right to a healthy and safe workplace.
The organization has a duty to provide its employees with a healthy and safe work environment. In Singapore, this
is seen from the requirement that all units in a building must get safety licence, not just the building management.
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Important issues for employees/employers
Health and safety in the workplace
Both the emplyer and the emplyees have the responsibility to make the workplace healty and safe
Employers' responsibilty
provide safe working enviroment; prevents/minimize risks to health ; inform staff of potential health hazards ;
set up emergency plans; provide adequate first aid facilities; ensure right equipment and it is maintained regualry
Employee responsibilty
take care of their own health; take reasonable care not to put other people at risks ; co-operate with emplyer on
adequate training; familiar with company healty and safety policies; report any injuries on the job; inform employer
of anything that may affect their ability to work safely; ensure right equipment and it is maintained regualry
Employers breaching health and safety regulations may allow employees to file civil claims against
them. They may also be guilty of a criminal offence and face prosecution
CONSUMER PROTECTION- SALES OF GOOD ACT (1979)
Main principles:
Seller have legalle to item they selling
Goods nust be satisfactorily and fir for intended purpose
Buyers make purpose or specifications on purchase, the goods must match the purpose or specifications
In 1982, the ACT INCLUDE PROVISION OF SERVICES
Main principles:
services must be:
carried out with reasonable skill and care
completed within a reasonable length of time
complated at a reasonable price
Simple contracts are contracts that are legally enforceable between 2 or more parties
•
parties need to agree on the terms
•
intention to create legal relations
•
there must be some considerations from both parties
•
each parties must have the capbility to enter into contract (says minor under 16 cannot enter into
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contact)
Important issues for employees/employers
Under the Sex Discrimination Act 1976 and Race Relations Act 1976 it is unlawful to
discriminate on the basis on sex, marital status, race, colour or ethnic origin.
•Direct discrimination - relates to how people are treated e.g. not interviewing applicants because
of their gender, paying people less because of their marital status or ethnic origin.
•Indirect discrimination - relates to terms or conditions which certain groups are less likely to fulfil
than others.In other words, the policy look fair in appearance but actually discriminate against
some.
Examples: insisting applicants must not have a beard or having a dress code which would have an
adverse effect on some groups. Or you go for interview and The HR manager says “co policy- no
get pregnant in 3 yrs”. Look fair to everyone but can men get pregnant?.
Positive discrimination. This is where a policy give preference to a protected person regardless
of whether this person meets he requirements for the job. This is illegal under employment law In
English law, protected person is someone who is an inhabitant of a protectorate of the UK. In Malysia- this
is legal Bumiputras policy!
FYI
Positive action is the process of taking active steps to encourage
people from disadvantaged groups to apply for jobs and training and
to compete for vacancies.
In Europe, positive action, or affirmative
action, is the promotion of people based on belonging to non
majority identity groups in the workplace, educational institutions
and positions in society, purportedly without prejudicing the criteria
of selection by merit.
In the UK in Harriet Harman's Equality Act 2010 ,the term
is used in the context of employment to allow
selection of a candidate from an "under-represented“
group, so long as he or she is no less than equally
qualified compared to another potential candidate
that is not from the under-represented group.
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Protection of individual rights
Legal protection for employees.
Potential health and safety issues are present in all
businesses. Business must provide a safe and healthy work environment. Employees are covered
under workman’s compensation insurance but employees must conduct themselves in a
responsible manner
Genuine occupational qualifications. Choosing another candidates based on “blood or love”
may…
Situations where it is possible to discriminate include:
•roles in a play which require specific gender or ethnic group
•serving in a restaurant where people of a particular racial group are required for authenticity (e.g. a
Chinese restaurant)
•because of decency or privacy (e.g. working as a toilet attendant!)
Need to be aware of possible discrimination in all areas of human resource management
including: 1) Job description 2) person specification 3) interviews 4) selection 5) selecting for
training
Equal opportunities policy. An Equal Opportunities policy means employees are treated
equally regardless of e.g. gender, marital status or ethnic origin in areas such as
recruitment, payment and promotion Equal opportunities could involve:
•Equal chance, i.e. when applying for a job everyone has the same opportunities and is considered
equally.
•Equal access, i.e. everyone has the same access to training promotion and staff development
Benefits of an equal opportunities policy may include:
1) acting legally
2) more people to choose from -can recruit better quality staff
3) more motivated staff 4) positive corporate image
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Section A4 Macro-Economics
Study how all individual firms behave collectively together to become an economy
Basic shallow ideas on :
GDP and the 6 factors affecting GDP
Economics objectives of government
Economic welfare and business cycle
Monetary and fiscal policy
(interest rate affect bank lending)
(fiscal- taxation, quotas, controls etc.)
Refer to the attachment diagram (fiscal transmission mechanism –vey important concept)
Economies are often classified by the way resources are allocated by market forces of
supply and demand
Free Market .(or laissez-faire economy); it is one of the guiding principles of capitalism,
it claims that an economic system should be free from government intervention, and be
driven only by the market forces of supply and demand;
Command or planned economy. Government or the state allocates resources
Mixed economy
•Mixture of free market and command economy
•Have public and private sector
Regardless of types of economy, all governments want to achieve the 4 macroeconomic objectives
45
Macro-Economics objectives
1) Economic growth -Steady growth rate
• Increase income or GDP steadily at say 5%-10%
2) Full employment
• Near zero unemployment rate
• High unemployment rate affect political stability
3) No inflation/price stability (i.e. control inflation to ensure stable prices)
• Very low rate of inflation
• High inflation rates increase cost of living (social welfare)
4) Balance of payment equilibrium (or a healthy balance of payments)
• No surplus or deficit (tendency for people to consume make govt tendency to
increase exports)
• Very little surplus or deficit
• Too high surplus you reach default
• Too high deficit you risk runaway inflation
46
Key terms -Inflation-snapshot
Definition - a sustained, rapid increase in prices, as measured by some broad index (such
as Consumer Price index (CPI) over months or years, and mirrored in the correspondingly decreasing
purchasing power of the currency. It has its worst effect on the fixed-wage earners, and is a disincentive to
save. There is no one single, universally accepted cause of inflation.
And general economic theory describes three types of inflation:
(1) Cost-push inflation.
Due to increases in wages or labour costs which in turn force businesses to raise prices, which leads to
demand for even higher wages (the wage-price spiral)
(2) Demand-pull inflation. This comes from increasing demand financed by easier credit made available (say
reduce in interest rates may tempt you to owe more in credit cards because you spend more)
(3) Monetary inflation is caused by the expansion in money supply (due to central banks printing more
money to cover the government deficits)
•Hyperinflation –Ruinously high increase (50% or more per month) in prices due to near collapse of a country’s
monetary system, making its currency almost worthless as a medium of exchange
•(imagine buy a banana needs a basket of currencies) caused mainly
by excessive deficit spending (financed by printing more money) by
a government (central bank). Some economists believe that social
breakdown cause hyperinflation (not vice versa), and that its roots lie
in political rather than economic causes. The longest lasting (15 months)
hyperinflation occurred in Germany between Aug 1922 and Nov 1923
where prices rose at an average rate of 322% per month.
Stagflation –situation where you have unacceptable high inflation
and unacceptable high unemployment rate coming together. This seems to be the situation in Singapore.
Look at NTUC prices- going up very high year on year (20-30%) and more and more people un-employed despite
the official figure of full employment? Agree?.
47
Deflation, stagflation, hyperinflation
Deflation –refer to downturn in an economic cycle caused by circumstances, or
brought about by government policies. Deflation (opposite of inflation) is characterized
by
(1) increase in its citizen/locals purchasing power to the falling prices
(2) decrease in labour costs (wages) or slowdown in pay rise,
due to falling employment levels
(3) decrease in credit availability
due to higher interest rates and/or
restrictions in money supply
(4) decrease in imports due to lack of demand
Governments cause deflation usually to
improve their balance of payments position
and/or to prevent the economy from being
“overheating” by accelerated rate of inflation
Deflation is caused either by increasing taxes and/or interest rates, or by cutting down
on government spending. Although effects of deflation are opposite to that of inflation,
certain costs (such as minimum pay) generally do not fall. And, whereas inflation may or
may not result in higher levels of production or output and employment,
significant deflation always results in lower output and employment..
On 2016, PRC tried to counter deflation by the PBOC charging commercial banks
interest for deposits.
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Government influence
To achieve the 4 macro economic objectives (especially steady growth GDP),
the government may use:
OVERVIEW
1) fiscal policy
•Changes in taxation. Higher tax reduce consumption
•Changes in government spending
2) monetary policy
•Control of its money supply. Increase in credit means more spending power.
•Changes in the interest rate. Increase in interest rates means more difficult to borrow
which means less spending
3) direct controls
•Legislation on prices (price controls, tariffs , ERP, COE etc)
4) direct intervention
•In provision of essential services like healthcare (compulsory medisave) and social matter
(says workfare supplements to motivate low income people to work).
5) Exchange rate policy
•Increase/decrease value of currency
Reflationary policy. When economy is slow, government try to stimulate it (stimuli) by
increasing AD or G or lower interest rates to increase demand
Deflationary policy. When economy is overheating (fear of hyperinflation), government
want to reduce AD by cutting G, interest rates to decrease AD
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GDP (National income)
• National income. The income in an economy is usually measured by GDP (Gross
Domestic Product). It is the value of final goods and services produced in an
economy. In other words, how much the country has earned over a period of time
• Gross Domestic product GDP=AD=C+I+G+(Ex-Im)
• Aggregate Demand (AD) means total consumptions by all firms and household in an
economy
• Consumption (C) of durables, non-durables, services
• Investment (I)– in plant and machinery (capital goods) and investment in technology
• Government expenditure (G). Government spending on infrastructures include social
security, health , education, public order and security, general public service, housing,
transport and increase in skills of the workforce (also improvement in management
skills/entrepreneurship)
• Export (Ex)
• Imports (Im)
• Economic policy means using monetary and fiscal policy to influence these
determinants to achieve steady growth
• Therefore these determinants are considered the causes of economic growth 50
Fiscal policy & Non fiscal policy
FISCAL POLICY
• Government spending adjustments
– Cut government spending to reduce aggregate demand AG
– In times of low AD, spend more on infrastructure to spur AG as in Singapore growth is basically
due to government spending on infrastructure?
• More jobs for people/Household disposable income go up/Firms demand go up
• Taxation adjustments
• Cut corporate tax rates to induce investment spending by firms
• Cut in individual tax rate encourage consumption
• Higher tax increases costs, selling prices (e.g. VAT/GST) and may reduce demand
• Direct taxes include income tax or corporate tax. Indirect taxes include VAT
Non-fiscal (not relating to public expenditure)
• Quotas & licence to control import, export, property prices (capital gains tax). Introduce GST or
increase its rates
• Incentive schemes – grants/subsidies/concessions
• Free trade agreements FTA/bilateral-trilateral- government enter into such arrangements to increase
trade (exports opportunities)
• Subsidies. Say in the US corn subsidies is used to encourage farmers o grow corn. In Malaysia and
Indonesia, petrol subsidies are considered a part of life. If government try to stop the subsidies it will
cause huge backlash
• In Thailand, the govt buy rice at igh prices from the farmers (maybe not real eonomic logic!
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Monetary policy
Increase or decrease the supply of money (credit control).
•
•
Increase money supply by reducing the reserve ratios (r/r) of commercial banks. Banks has more to lend
and this multiplier effect money supply based on r/r. Firms borrow more but inflationary pressure.
Print more monies can also increase money supply but risk run-away inflation
Increase or decrease interest rates.
If central bank (MAS) reduce it’s interest rate for loans to commercial bank, banks reduce interest rates to
firms which in turn find investment more attractive and hence invest more. It may increase demand as it is
cheaper for firms and households to borrow (lower interest costs). It can also reduce the exchange rate due to
lesser demand from overseas
•
If interest rates increases, it induce households to save therefore lower demand (especially on income elastic
goods compared to inelastic convenience goods)
•
If inflation is rising too fast, central bank raise interest rates and reverse impact to slow down inflation
•
Government need to balance this act as saving benefits but borrowing become expensive
Government and the exchange rate (NORMALLY NOT CONSIDERED MONETARY POLICY)
Foreign exchange (Forex) adjustments-Central banks can influence exchange rate by buying major
currencies (like US$ or STG Pounds, Yen). Say if S$ to US$, MAS can increase the rate of exchange for S$ to
US$ by buying more S$ or selling more US$. It can also increase interest rates to make S$ more attractive to
savers overseas .Overseas investors park their monies here for higher interest than their home country. A strong
S$ means imports appear cheaper. Means S$ is more expensive i.e. it cost more in terms of foreign currency. This
makes Singapore goods more expensive in foreign currencies. But S$ can be exchanged for more foreign
currency it become cheaper to imports in S$
A weak S$ means exports is cheaper now that selling overseas for lower price in foreign currency (or you can
maintain price and earn higher profit margins). Demand for S$ will go up if there are;
1) more demand for Singapore goods 2) More tourist arrivals 3)Speculators who believe S$ will go up further
2) Greater desire to save in S$ if interest rate is high. High S'pore interest rates will attract funds from overseas
which in turn leads to higher exchange rate. In late 2014 the oil supply glut has caused the Malaysian ringgit
52 to fall
sharply as was most of the major oil producer like Russia and Indonesia.
Business cycle and the 4 determinants
• The economic environment is very much influenced by market sentiment (or business confidence) in addition to
underlying fundamentals of supply & demand
• Market sentiment (expectations) affect supply and demand of supply of durable and non-durable goods. Market
sentiment (historical) reflected in business cycle
• Over time an economy usually goes thru booms &s lumps called trade cycle or business cycle
Business cycle and investment. Investment can fluctuate greatly in an economy depending on market
sentiments (expectation of investors, consumers and producers) which cause the booms and the bumps. For
example:
• If the economy has been slow some firms will invest if they think it will pick up(means economy will grow faster
in the future), they invest, which stimulate demand and bring about the expected growth
• If economy ids overheated 9growing too fast), the government may increase interest rates to slow it down. This
decrease investments (higher cost of borrowings) which leads to a decline in he growth of the economy
Recessionary if situation continue for another one or quarters it might be recessionary (2 continuous quarters of
downturn is technical recession) Depression means ultimate lost hope. Some countries already recession. Govt
use expansionary policy. Printing more monies is common now to use for say as in 1998 market crisis.
Boom means the reverse. Firms are optimistic and put demand (or expected) on resources. Inflation may spiral if
not managed. Government use contractionary policies if overheating occur
• Government watch these trends to intervene with their policies.
They do not want wide or extreme
fluctuations (due to their
4 macro-economic objectives).
• In 2016, the market is deflationary.
• Market contractions in PRC has
repercussions throughout the world.
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Business cycle and the 4 determinants
Demand for durable goods
•Consumer durables are those that can be used more than once like electronic goods. Non-durables
include food items like canned foods. Demand for durables are more sensitive to changes in the business
as compared to demand for non durables
•An increase in demand for durables increases output and GDP and may help to promote a boom
• When demand grows, firm use up stocks. If demand persists, then firms will raise production capabilities
•If demand falls, firm may build up stocks . But if the demand continue to slide, firm cutback on production
•Cutting back on production may extend to lay-offs causing unemployment
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Summary of fiscal policy mechanism
Expansionary policy
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Macro-objective -Stable prices/Low near zero inflation
• Macro-objective- Price stability equal very low rate of inflation
Inflation cause uncertainties, impacts business & erode savings
Causes of inflation & Methods to control inflation
Demand pull -Increases in demand for goods and services lead to higher prices
Cost push means increases in prices of factors of production like labour and raw
materials. In a boom, demand for factors of production will push prices up leading to
inflationary pressure
Import cost inflation. eg prices of imported oil go up in 2008 other items prices to go
up. In S’pore price of sugar go up 10 cents/kilo “kopitiam” kopi up 10 cents/cup!
Expectation. Say people expect inflation and union demand more pay….
Increase in money supply stimulate demand but have inflationary pressure
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Macro-objective Full employment
Macro-objective- Full employment where anybody wants to work can find work .
Cannot be zero as there are temporary un-employment due to time lags for time on searching
for work
Types of un-employment
•Frictional –temporary as when people change job. “Friction” in the labour market as people
looking for job cannot be match with the job openings with their skills fast enough
•Seasonal – unemployment patterns in some industries like agriculture and fishing. Crab fishing
in Alaska – only 2 seasons per year. Winter melon? Fruits pickers will be unemployed say when
apples not ripe for picking
•Structural- more permanent due to changes in industry or economy structure
•coal mines in UK/US closed due to cheaper coal imports Texas oil firms closed due to oil prices
too low to extract locally. Miners are un-employed as they cannot find alternative jobs like
programmers as they lack the skills
•Accounts department use to have high headcounts (one section alone 5-20 staff) but now due
to IT, only 1-2 staff per section
Technological changes – changes in technology due to old skills not required
•Cyclical unemployment – Due to business cycle
• At end 2008, world recession causes huge unemployment for some time. People are
unemployed because of lack of demand; that’s why it is also called demand deficient
unemployment
(not in syllabus- residual unemployment due to dis-abilities)
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Implications of high unemployment
• Less demand for goods and services
• Employers’ market- more choice of labour or workers
• More co-operative workforce as people are scared to lose their jobs
• Political impact: protests/strike/vote WP?
Government intervene by:
• Demand side policies. Increase demand AD
to remove cyclical unemployment by lowering
interest rates, cut taxes or
increased government spending or all 3
• Supply side policies.
Stimulate supply of labour by inducing
people to work with workfare/
training subsidies,
change tax deductions (S'pore 2013 budget)
• Flexible work schemes- housewife/
paternity/maternity leave
• Employ more foreign talents?
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Balance of payments
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Section A5 Micro-economics
• You are expected to understand following key concepts- on a shallow basis
• Supply and demand factors; Firms behavior in different market conditions
• Elasticity (price, income and cross)
• Cost behavior - Short run as period where some costs are fixed、In the long run all costs are variable
Factors influencing a firm behavior
Type of market structure influences how a firm behaves (as they influence these factprs) :
1.
Pricing
2. Supply
3.
Barriers to Entry
4.
Efficiency
5.
Competition
Degree of competition in the industry
High levels of competition – Perfect competition
1. Limited competition – Monopoly
2. Degrees of competition in between-Monopolistic competition
Determinants of market structure
– Freedom of entry and exit
– Nature of the product – homogenous (identical), differentiated?
– Control over supply/output
– Control over price
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– Barriers to entry
Market Structures-Perfect competition & Competitive environment
Perfect Competition:
– Free entry and exit to industry
– Homogenous product – identical so no consumer preference
– Large number of buyers and sellers – no individual seller can influence price
– Sellers are price takers – have to accept the market price
– Perfect information available to buyers and sellers
• Examples of perfect competition: Financial markets – stock exchange, currency markets, bond
markets? Agriculture? To what extent? No real perfect competition becasuse there is always
govt internvention
• Advantages of Perfect Competition:
• High degree of competition helps allocate resources to most efficient use
• Price = marginal costs
• Normal profit made in the long run & Firms operate at maximum efficiency
• Consumers benefit
What happens in a competitive environment?
– New idea? – firm makes short term abnormal profit
– Other firms enter the industry to take advantage of abnormal profit
– Supply increases – price falls
– Long run – normal profit made
– Choice for consumer
– Price sufficient for normal profit to be made but no more!
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Market Structures-Imperfect competition & Oligopoly
Imperfect or Monopolistic Competition
– Many buyers and sellers
– Products differentiated
– Relatively free entry and exit
– Each firm may have a tiny ‘monopoly’ because of the differentiation of their product
– Firm has some control over price
– Examples – restaurants, professions – solicitors, etc., building firms – plasterers,
plumbers, etc.
Oligopoly – Competition amongst the few
– Industry dominated by small number of large firms
– Many firms may make up the industry
– High barriers to entry
– Products could be highly differentiated – branding or homogenous
– Non–price competition
– Price stability within the market - kinked demand curve?
– Potential for collusion?
– Abnormal profits
– High degree of interdependence between firms
• Examples of oligopolistic structures:
– Supermarkets /Banking industry /Chemicals /Oil /Medicinal drugs/Broadcasting
• Measuring Oligopoly:
• Concentration ratio – the proportion of market share accounted for by top X number of firms:
– E.g. 5 firm concentration ratio of 80% - means top 5 five firms account for 80% of market share
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– 3 firm CR of 72% - top 3 firms account for 72% of market share
Market Structures-Duopoly & Monopoly
•
•
•
•
•
•
•
•
•
Duopoly:
Industry dominated by two large firms
Possibility of price leader emerging – rival will follow price leaders pricing decisions
High barriers to entry
Abnormal profits likely
Monopoly:
Pure monopoly – industry is the firm!
Actual monopoly – where firm has >25% market share
Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications,
rail
• Monopoly:
– High barriers to entry
– Firm controls price OR output/supply
– Acxcess to distribution channels
– Abnormal profits in long run
– Possibility of price discrimination
– Consumer choice limited
– Prices in excess of MC
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Market Structures-Monopoly & Unfair competition
Advantages and disadvantages of monopoly:
• Advantages:
–
–
–
–
May be appropriate if natural monopoly
Encourages R&D
Encourages innovation
Development of some products not likely without some guarantee of monopoly in
production
– Economies of scale can be gained – consumer may benefit
• Disadvantages:
– Exploitation of consumer – higher prices
– Potential for supply to be limited - less choice
– Potential for inefficiency –
X-inefficiency – complacency over controls on costs
Unfair competition (Anti-competitive behaviour)
1. Predatory pr- pricing aim at removing competitiors
2. Restricitng supply - limiting the choice for suppliers
3. Market sharing agreement - to fix prices
• Greater competion may means lower prices for consumers, more choice, more innovation.
more incentive to be efficinet, better quality, more product diffrerentiaion
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demand and supply curve
Demand means what consumers want or desire to consume
•Factors affecting demand:
1)
Price f the goods
2)
Prices of other goods like substitute & complements
3)
Income/Tastes and preferences/Expectations
Demand curve represent law of demand and supply
• the higher the price the lower quantity desired and vice versa (law of demand)..
Demand curve/Graph curve that normally slopes downward towards the right of the chart (except
for a Giffen good, where it slopes toward the left), showing quantity of a product (good or service)
demanded at different price levels.
•Customarily, the price is plotted on vertical ('Y') axis and quantity on the horizontal ('X') axis, and it
is assumed that (in the short run) income levels, price of substitutes, and customer preferences,
remain unchanged.
•Demand curves of the individual products are aggregated to give a marker demand curve &, when
drawn together with the supply curve, show the equilibrium price at the intersection of the 2 curves.
Supply means what suppliers want or desire to supply
Supply curve represents at various prices the qty producers want or desire to supply
Factors affecting supply:
1) Price of the goods/Prices of other goods like substitute & complements
2) Relative revenue and cost of making the product (cont. margin in accounting)
3) Objective of producers and 4) their future expectations
Say if prices are not high enough, but producers may have political agenda- promote organic
healthy crop? Technology c-In oil exploration- technology make it possible to go deeper or
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further inlands, Genetic farming has increased farm yields in quantity and size
Market conditions-supply & demand
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Supply and demand-cont’d
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Price determination and market equilibrium
• Price determination. Price is determined at the intersection of the supply & demand curves
• Say if supply has decreased due to say weather,
• supply curve will shift to the left meaning producers want to supply
at all quantities at higher prices than before. New price equilibrium higher
• Say if demand has increased due to new research• say soya cure cancer. means demand quantities increase at all
prices than before. We say demand curve shift right.
• New price equilibrium higher
• Market equilibrium and market forces of supply and demand
• A situation in which the supply of an item is exactly equal to its demand. Since there is
neither surplus nor shortage in the market, price tends to remain stable in this situation.
• Economic forces fundamental to the price mechanism in a free market system determine the price of a good or
service offered, and are in turn determined by the price obtainable. It is a largely self-regulatory mechanism
generally resulting in market equilibrium where products demanded at a price are equalled by products
supplied at that price.
Some terms relating to demand & supply
Scarce resources
Resources are scare. You must make a choice. Choice has consequence-opportunity
foregone. You money no enough-buy car means no Alaska cruise (lifetime dream holiday opportunity foregone)
Law of diminishing returns If we continue to produce with variable costs, but due to fixed costs (FC)
limitation, output per VC will diminish. Say if FC-factory rent 10,000 sqm will have output per input VC diminish
Opportunity costs: A benefit, profit, or value of something foregone or must be given up to acquire or
achieve something else.
Since every resource (land, labour, capital (money), time, etc.) can be put to alternative uses, every action, choice,
or decision has an associated opportunity cost.
Opportunity costs are fundamental (basic) costs in economics, and are used in computing cost benefit analysis of
a project. Such costs, however, are not recorded in the account books (for financial reporting purposes) but are
recognized in decision making (in management accounting) by computing the cash outlays and their resulting
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profit or loss.
Price elasticity of demand
Definition Price elasticity of demand
The degree to which demand for a good or service varies with its price.
Normally, sales increase with drop in prices and decrease with rise in prices.
As a general rule, non-essentials like appliances, cars, confectionary show elasticity of
demand whereas most necessities (food, medicine, basic clothing) show inelasticity of
demand (do not sell significantly more or less with changes in price). Also called price
demand elasticity.
.Elasticity
•Means how quantity demanded or supplied changes due to change in price
•Represented by steepness of demand or supply curve
•This concept determine pricing strategies for producers and VAT/GST departmentsany increase in GST means incr. in price
•Highly elastic means small price change cause huge quantity changes say change in
price of kailan will cause consumers to switch to chye sim
•Highly inelastic means change in prices has little impact on quantity demanded or
supplied say LV Berkins collection- regardless of how much you change the price,
women still die for it
•Range of elasticity index <1 inelastic >1 elastic
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Measuring price elasticity
Change in quantity demanded/changes due to change in price
PED = Infinity Change in quantity demanded/changes due to change in price = X/0% =
infinity elasticity where x = percentage change in demand
Extreme changes even for very small change in price
PED = zero = 0%/y% = zero elasticity where y = %change in price
Regardless of how price change, there is no change in quantity
PED = 1 (one) (unit or standard elasticity)
= z%/z% = proportionate change in quantity due to same change in price
Use as benchmark to say product elastic or not elastic
PED > 1 Elastic Change in quantity demanded/changes due to change in price = A%/B% where
A>B more % change in quantity than % change in price For eg 10% change in pirce of kailan cause
say 30% change in quantity
PED < 1 Inelastic = 5%/50% = 0.1 very inelastic for Berkins collection (that is why they can charge
what they want-pricing strategy)
= F%/G% & F%<G F% change in quantity less than G% change in price For eg. 50% change in
pirce of LV Berkin cause say 5% change in quantity (incr. price from US$20k to $30k see demand
fall from 200k units to only 190k units
The price elastictiy will usually be given a negative number (because when price go up demand
usually go down and vice versa)
When considering price elasticity for our purpose, the sign is not important and s.be ignored:
The size of the no. (>1 or <1) regardless of the sign represent whether it is elastic or
70
inelastic
Income elasticity.
Income elasticity and cross elasticity
How much quantity demanded or supplied change in response to change in income eg
Kailan- income increase a lot of kailan. Chances are you will buy more durable goods like iPhone,
LED TVs
•Goods are likely to be price inelastic if:
• consumers spent only a small percentage of income is spent on them, e.g. salt, milk
• there are few substitutes, e.g. innovative products, protected by IP or patents
• they are addictive goods, e.g. cigarettes
• someone else pay for it, e.g. business travel expenses like business hotel paid by company
• they are heavily branded like LV
Cross elasticity
It shows how responsive the price of another good (say Y to X); how quantity demanded or
supplied for good X changes due to change in price of good Y
•Say butter price go up may affect demand or supply for margarine (substitute products) Say price
of car go up may affect demand and supply for car accessories (complementary goods)
The larger the value of the cross elasticity, the greater the relationship between the two goods, e.g.
demand for butter is likely to be more sensitive to changes in the price of margarine compared to
changes in the price of apple jam as the first two are more similar.
If the cross elasticity has a positive sign, the goods are SUBSTITUTES. An increase in the price of
one good leads to an increase in demand for the other and consumers switch, e.g. HP and Acer
If the cross elasticity is negative the two goods are COMPLEMENTS. An increase in the price of
one good leads to a decrease in demand for it and a decrease in demand for the other good,
71 e.g.
personal computers and computer disks.
Applying elasticity concept
Elasticity, revenues and profits. If demand is price elastic a price fall will increase revenue; whether profit
increases depends on what happens to unit costs. If unit costs increase (perhaps because the firm has had to
expand capacity-or because material costs increased) the profit margin and indeed overall profits may fall. If
income increases and the good is a 'normal' good then demand will rise. This will increase revenue (assuming
price is unchanged); profits may rise but this again depends on unit costs.
How useful is the concept of elasticity? Helps with planning; can estimate the impact of changes in price and
income on demand. This will allow the firm to plan for: Sales/Staffing/Cash flow/Production and stock levels (the
budgeting process). Say if you sells something like LV a very inelastic goods- you can estimate your sales if you
increase selling price by say forecast increase of 30% for next year and you can probably sell same quantity
demanded and enjoy increase in revenue and staffing may not change much……
Income Elasticity of Demand YED and types of goods
•Inferior Good: An inferior good means an increase in income causes a fall in demand. It has a negative YED.
An example, of an inferior good is Tesco value bread. When your income rises you buy less Tesco value bread
and more high quality, organic bread.
•Normal Good. This means an increase in income causes an increase in demand. It has a positive YED. Note a
normal good can be income elastic or income inelastic.
•Luxury Good. A luxury good means an increase in income causes a bigger % increase in demand. It means that
the YED is greater than one. For example, high definition TV’s would be luxury. When income rises, people
spend a higher % of their income on the luxury good. (Note: a luxury good is also a normal good, but a normal
good isn’t necessarily a luxury good)
• Complementary Goods. Goods which are used together, e.g. TV and DVD player.
•Substitute Goods. Goods which are alternatives, e.g. Pepsi and Coca-cola.
•Giffen Good. A rare type of good, where an increase in price causes an increase in demand. The reason is that
the income effect of a rise in the price causes you to buy more of this cheap good because you can’t afford more
expensive goods. For example, if the price of wheat rises, a poor peasant may not be able to afford meat
anymore, so has to buy more wheat.
•Veblen / Snob Good. A good where an increase in price encourages people to buy more of it. This is because
72
they think more expensive goods are better.
Economies of scale
The reduction in long-run average and marginal costs arising from an increase in size of
an operating unit (a factory or plant, for example).
Causes of economies and diseconomies of scale
Economies and diseconomies of scale may occur due to:
•internal growth, e.g. a firm increases its output levels
•external growth, e.g. horizontal integration: one firm acquires another firm in the same
industry
Benefits of economies of scale.
1)A firm can keep its prices the same and benefit from higher profit margins.
2)Reduce its prices due to the lower unit cost and still maintain profit marginsTypes of economy or scale
•Technological (or technical): as a firm expands it can use different processes which
increase scale and reduce unit cost, e.g. mass production vs job production.
•Managerial: as a firm grows it can employ specialists in particular business areas;
better decision making in these areas can reduce unit cost.
•Bulk purchasing: e.g. of materials and media space. A big buyer is more important to
suppliers and is usually able to negotiat a lower cost per unit.
•unit cost. this is the average cost or cost per unit. To calculate it use the equation
•Total cost TC / Qty. e.g. if total costs are £20,000, output is 2000 units, unit cost is £10.
Economies of scale occur when a firm expands and unit costs fall. TCs will still be
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increasing.
Cost behavior
• Short term average costs (STAC) -Tends to be u shaped
say if you start a garment factory on 1/1/11
Say after 3 months, your average unit cost (AC) will fall because you learn to take
advantage of discounts and cost cutting measures like lower costs due to supplier
switching. Say after 6 months- you have enough sales to buy in bulk then your AC falls
further until law of diminishing returns set in and AC start to rise
Long term average unit costs (LTAC) Tends to be u shaped over the years
Say after one year you decide to expand production due to much higher demand level (new export markets etc).
To increase your production capacity you automate or open another plants. Because of economies of scale, your exploits bulk discounts and
lower costs of production ;location etc, your AC will fall lower than before.
If will continue until it hit lowest point of u-shaped and go up again due to diminishing returns (due to diseconomies of scale).
This is due to overstressed resources and market constraints in your industry.
Marginal costs refer to additional costs for producing an additional units.
•The increase or decrease in the total cost of a production run for making one additional unit of an
item. Computed in situations where the breakeven point has been reached: fixed costs have already
been absorbed by the already produced items & only direct (variable) costs have to be accounted for.
•MC are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs
(such as admin overheads and selling expenses)
•In companies where average costs are fairly constant, MC is usually equal to average cost But, in
industries that require heavy capital investment (car plants, airlines, mines) & have high average costs,
it is comparatively very low
•Concept of marginal cost is important in resource allocation because because, for optimum results,
management must concentrate its resources where the excess of marginal revenue over the marginal
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cost is maximum. In other words, the marginal profit is maximum on next marginal units produced
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Monopolistic competition is the economic market model with many sellers selling
similar, but not identical, products. The demand curve of monopolistic competition is
elastic because although the firms are selling differentiated products, many are still
close substitutes, so if one firm raises its price too high, many of its customers will
switch to products made by other firms. This elasticity of demand makes it similar to
pure competition where elasticity is perfect. Demand is not perfectly elastic because a
monopolistic competitor has fewer rivals then would be the case for perfect competition,
and because the products are differentiated to some degree, so they are not perfect
substitutes.
Monopolistic competition has a downward sloping demand curve.
Thus, just as for a pure monopoly, its marginal revenue will always be less than the
market price, because it can only increase demand by lowering prices, but by doing so,
it must lower the prices of all units of its product.
Hence, monopolistically competitive firms maximize
profits or minimize losses by producing that quantity
where marginal revenue equals marginal cost, both
over the short run and the long run.
In the short run, a monopolistically competitive firm
maximizes profit or minimizes losses by producing
that quantity that corresponds to when marginal
revenue equals marginal cost.
If average total cost is below the market price,
then the firm will earn an economic profit.
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Monopolistic competition-short run
However, if the average total cost is above the market price, then the firm will incur losses, which will be equal to
the average total cost minus the market price multiplied by the quantity produced. It will still minimize losses by
producing that quantity where marginal revenue equals marginal cost, but eventually the firm will either have to
reverse the losses, or it will have to exit the industry.
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Monopolistic competition in the long run
Equilibrium:
•Long-Run
Normal Profits
If the competitive firms in an industry
earn an economic profit, then other
firms will enter the same industry,
which will reduce the profits of the
other firms. More firms will continue
to enter the industry until the firms
are earning only a normal profit.
However, if there are too many firms,
then firms will start to incur
losses, especially the inefficient
ones, which will cause them to
leave the industry.
Consequently, the remaining
firms will return to normal
profitability. Hence, the
long-run equilibrium for
monopolistic competition will
equate the market price to
the average total cost, where
marginal revenue equals
marginal cost, as shown in
the diagram below.
Remember, in economics,
average total cost includes
a normal profit.
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Cost curves for a firm under perfect competition
Short-Run Supply Curve
A perfectly competitive firm's marginal cost curve that lies above the minimum of the average variable cost
curve is its supply curve. This is highlighted in the exhibit to the right.
Because a perfectly competitive firm maximizes profit by producing the quantity of output that equates price and
marginal cost it moves along its marginal cost curve in response to alternative prices. This conclusion holds only
if the firm is a perfectly competitive price taker. The marginal cost curve is a supply curve only because a perfectly
competitive firm equates price and marginal cost. This occurs only because price is equal to marginal revenue for
a perfectly competitive firm.
Should price and marginal revenue NOT be equal,
then a profit-maximizing firm does NOT equate price
to marginal cost.
As such, the marginal cost curve is NOT the
firm's supply curve.
Efficiency
Because a perfectly competitive firm equates price
and marginal cost, it efficiently allocates resources.
Price represents the value of goods produced and
marginal cost represents the value of goods not
produced. When both are equal, satisfaction cannot
be increased by changing production.
For example, if the going market price of zucchinis
is $4, then the economy receives $4 worth satisfaction
from consumption. Moreover, if the marginal cost is also $4, then the value of foregone production, the
satisfaction given up, is also $4. Satisfaction
cannot be increased by producing more zucchinis
or more of other goods.
Suppose that price and marginal cost are not equal.
•If the marginal cost of zucchini production ($3) is less than the zucchini price ($4), then the economy gives up
less satisfaction from other goods not produced than it receives from the zucchinis that are produced. The 79
economy can gain satisfaction by producing
Cost curves for a firm under perfect competition
A perfectly competitive firm faces three short-run production alternatives based on a comparison of price,
average total cost, and average variable cost.P > ATC: Total revenue exceeds total cost and firm receives a
positive economic profit. In this case, firm maximizes profit by producing the quantity of output that equates
marginal revenue and marginal cost. This is the initial situation displayed in the graph.
ATC > P > AVC: Total revenue falls short of total cost, meaning
Firm incurs an economic loss (or negative economic profit).
In spite of the loss, because the price exceeds
average variable cost, Firm can maximize profit
(minimize loss) by producing the quantity of
output that equates marginal revenue and
marginal cost.
Firm receives enough revenue to cover ALL variable
cost plus a portion of fixed cost.
• The loss from production is less than the loss from
•NOT producing, which is total fixed cost.
•This can be displayed by clicking the [$2.60] button.
P < AVC: Total revenue also falls short of total cost,
and firm incurs an economic loss
(or negative economic profit).
•In this case firm maximizes profit
•(that is, minimizes loss) by reducing the quantity of
output to zero, or producing no output
in the short run. By producing a positive quantity,
Firm does not receive enough revenue to cover
variable cost, let alone any fixed cost.
The economic loss from producing is greater than
the economic loss of NOT producing, which is
total fixed cost.
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Market intervention
Free markets and government intervention
•Market operate freely without government intervention
•In the real world, governments intervene for various reasons:
•1) public goods for society benefits cannot be left in the hand of private sector – armed forces
outsourced to mercenary?
•2) Unfair competition (anti-trust laws)
•3) Basic commodities and essentials – government intervene to protect consumers
• Recently Thai government fixed the price of rice at higher than market for farmers to sell to the
government which release at subsidised prices and rice exports fall substantially
• Indonesia and Malaysia have protest over diesel prices increases Due tlo removal of subsidies
Economic system-an organized way in which a state or nation allocate its resources and
apportions goods and services in the national community.
•Free market system in which decisions regarding resource allocation, production,
and consumption, and price levels and competition are made by the collective actions of individuals
or organizations seeking their own advantage. In all market economies, however, freedom of the
markets is limited and governments intervene occasionally to encourage or dampen demand or
to promote competition to thwart the emergence of monopolies. Also called free market economy.
Socialist economy/command economy
•A national financial system based on the public or co-operative ownership and
administration of primary production capabilities.
•In a socialist economy, production involves the goal of creating useful services or goods of value.
Such economic systems typically employ central planning and use accounting systems based on
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the labour hours expended in production.
Section B
• Organizational structure
• Business functions
• (How people carry out
• their jobs)
• Corporate Governance
• (Process of getting
structure and controls in
place to make sure people
Behave- compliance)
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Sect B1,B2 Organization structure and design
• The structure framework, typically shows:
1) hierarchical, within which an organization
2) its lines of authority and communications
3) allocates rights and duties.
Organizational structure with hierarchy determines the manner and extent to which roles,
power, and responsibilities are delegated, controlled, and coordinated, and different levels of
management communicates (how information flows ) What information can one staff receive
and who report to.
An structure depends entirely on the
objectives of the organization and the
strategy chosen to achieve them.
• In a centralized structure, the decision
making power is concentrated in the top
layer of the management and tight
control is exercised over departments
and divisions.
In a decentralized structure, the decision
making power is distributed and the
departments and divisions have varying
degrees of autonomy.
An organizational chart illustrates (left)
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the orgn structure.
Formal and informal business organization
Formal: means commissioned by orgn with orgn structure- eg Finance dept, audit committee…. They
have rigid rules and procedures and policy…which don’t change quickly over time....
Informal orgns may be formed spontaneously by employees. No rules & can change or evolve very fast over time .
It helps to complement those formal organizations or functions.
Its’ main functions are
1. Perpetuate cultural and social values
2. Provide social status and satisfaction
3. Promote
communication among members
T
4. Promote social control
Benefits of Informal organizations
1)Blend with formal system (or complement the formal systems) (those that don’t blend in say illegal type will not be
allowed! Or fade away)
2)Lighten management workload/Fill gap in management abilities
say if you want to resolve s problems due to many employee
triad behaviors (Sichuan gang, Henan gang etc) and trade unions
(term for organized gangsters in Australia, etc) you may need lobby of informal groups
3) Encourage improved management practice.
Informal groups can act as self-help when you introduce changes to operations. Say after computerizing, you get more efficient
and chances of job rotation, or job enlargement while the organization benefit even more from synergistic effects
4) Understand and deal with environmental crisis
Ornithology (see birds people) let members understand environment better . The Sumatran haze has many
informal groups playing a part with the problem
Disadvantage of informal groups
1.Resistance to change (e.g. computerization in esrly 1980s)
2.Role conflict (who is leader)
3.Rumour (may be non work related and poisonous)
4.Conformity (want members to be same mindset)
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Organization structure- key terms
Authority: legitimate power.
Responsibility: obligation to completed task effectively.
Chain of command: line of command from top to bottom of organization.
Hierarchy: level of responsibility.
Span of control: number of subordinates directly responsible to a superior.
•A narrow span enables managers to keep control and reduces risk.
•A wide span develops subordinates and enables them to have greater freedom; allows for
fewer levels of management.
Scalar chain - vertical line of command top down
Authority and direction flow down
Size of span: depends on ability of subordinates to complete the task, whether the task is simple
or complex; the ability of the superior to oversee employees; and the quality of communication.
Organization chart: represents the organization structure. It shows reporting relationships (“who
report to who”)
Formal organization: deliberately planned authority relationships and channels of
communication.
Informal organization: network of relationship and informal; communication established by
employees themselves. Not reflected in the organization chart
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Tall vs flat organization
Flat organization-An organization structure in which most middle mgmt levels and
their functions have been eliminated, thus bringing the top mgmt in direct contact with
the frontline salespeople, shop floor employees, and customers.
Despite their breadth, flat organizations can benefit from most of the advantages enjoyed by
small firms
such as faster response time to changing
conditions and customer preferences.
•In summary
•Flat organization
– Few layers of managers with span
of control around the boss
– Wide span of control for the boss or the leader
– Eg. a bus route supervisor controls say 20 bus drivers
– on one particular route. Tasks are routine and repetitive
•Tall organization
–
–
–
–
–
–
Many layers of managers
Means managers has a narrow span
Large number means wide span
Response time (communication) may take longer and have more problems
Eg audit firms normally only have one supervisor
supervising 2 or 3 auditors. Tasks are not routine as specialized audit skills required.
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Centralization vs decentralization
Centralization
Decision making centralized means
head office/few persons have authority
for it (top management)
Advantages
fast, efficient decision making
cost/time savings
Disadvantages
Not innovative
Wait for supermen in HO
(CYA)
Therefore rigid, slow moving
Decentralization
Decision making at business units or teams.
This means more accountability at lower levels
(the business units) rather than decisions at
the HQ
Advantage;
innovative team work
Fast moving and flexible as they are near local
markets/customer base
HO focus on strategic planning/treasury
Disadvantages
co-ordination and control problem
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Types of organisational structures
Structure affect control. Control require due to separation of ownership and management function
Types of structures
• It may evolve from entrepreneurial (entrepreneurial type)
• It became more functional (departmental) type as more division of labour required
• It can became more divisional (product/region/customer type) each one overseeing a product, or geographic areas or
customer types ad they have the departmental functions reporting to them
• Special type like matrix organizations are required when you have specialized projects with many professionals who can
work independently but are dependent on each other for the project success
• Diagram 1 shows u the common types
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Departmentalisation
• By function- all these functional departments sit on top of the business segments (divisionalised into
products, regions or customers
• By division - all these functional departments sit below the business segments (*divisionalised into
products, regions or customers
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Matrix organization
•
•
•
An organization structure that facilitates the horizontal flow of skills and
information.
It is a hybrid of different structures- functional structure hybrid with
project/product/customer. Say in the diagram below it shows people with skills
drawn from the functional structure and product structure. The first node on the top
left will have people drawn from the marketing function and the apparel product
It is used mainly in the management of large projects or product development
processes, drawing employees from different functional disciplines for assignment to
a team without removing them from their respective positions.
Developed at the
US National Aeronautics &
Space dministration (NASA)
in association with suppliers,
this structure gets its name
from its resemblance to
A table (matrix) where
every element is included
in a row as well as a column
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Matrix organization
•
•
•
Employees in a matrix organization report on day to day performance to the project
or product mansger (in our diagram it is product) whose authority flows sideways
(horizontally) across departmental boundaries. They also continue to report on their
overall performance to the head of their department whose authority flows
downwards (vertically) within his or her department.
In our e.g, the marketing staff for Apparel may report to the Apparel mgr and the
marketing mgr. The Marketing staff for Equipment (can also be same or not same person).
In addition to a multiple command and control structure a matrix organization
necessitates new support mechanisms, organization culture,
and behaviour
patterns.
Advantages
Encourage teamwork and free flows of opinions and expertise exchange
• more flexibility (flexible to more customisation accrding to the job)
• therefore increased customer satisfactionn
it is a hybrid of different structures- functional structure hybrid with project/product/customer
therefore it has advantages of both functional and divisional structure
Disadvantages
Dual/Multiple comand and conflict (means may report to 2 or more managers and may
have conflicts)
Increased administration expenses
Time-consuing mettings and discussions
Dilution of functional authority (means each functions serves so many projects or 91
jobs
BOUNDARYLESS STRUCTURE
Boundaryless Organization definition
•
Traditional organizational structures have defined vertical and horizontal borders and hierarchies. Traditionally,
organisations bring people together in one or more physical locations in order to process inputs and create
outputs, all within a formally defined structure.
•
Advances in information communications technology have resulted in new approaches that have redefined
where, when and how people work. The most obvious evidence of this is the reduction in reliance on the
9.00am to 5.00pm working day, the emergence of flexible working arrangements and increases in
work sharing and home working. Organisations have also adopted new ways of configuring relationships.
•
Boundaryless organisations are defined specifically
by a lack of structures and an approach to business
that is based on the free flow of information and
ideas to drive innovation, efficiency and growth
in a world that’s constantly changing.
•
The concept was pioneered by well-known
mmgt thinker and former General Electric
chairman Jack Welch, who wanted to break down
existing barriers between different parts.
Adaptability and flexibility are important criteria of
boundaryless organisations.
•
It often use latest technology and tools
to facilitate the breaking down of traditional borders,
such as virtual collaboration and flexible working.
•
With regard to employees, they may have
more responsibility for their own projects and targets
and be more able to achieve results in a way that’s appropriate
for the project at hand.
•
Because many boundaryless organizations are dispersed across geographic borders, employees may be
from different cultures and countries but must work together. Because of this, boundaryless organizations
require a strong set of core values and a strong vision (otherwise, no teamwork and trust). 92
TYPES OF BOUNDARYLESS STRUCTURE
(extract from acca article)
Virtual organisation
A virtual organization is an organization that works in a moving network of outside alliances that are
engaged using information technology and the Internet. In this type of organization, the barriers that divide
a company from its suppliers, customers, and even competitors are gotten rid of.
•
•
•
•
•
It operates primarily through electronic communications, taking advantage of the efficiencies made possible by
information technology. It removes many of the features of the working environment that were once taken for granted, such as
bringing managers and staff together at a defined location.
People work together remotely, with little or no dependence on physical premises. Instead, communications take place
through media such as emails, e-conferencing, extranet and intranet. This virtual aspect of the operation sometimes
extends to links with suppliers (upstream), and customers (downstream).
By extending the virtual concept to customer relationships, the dependence on retail premises and customer-facing staff is
eliminated. Amazon is often cited as the first major virtual business in this respect.
The virtual organisation model can be adopted wholly or in just certain parts of the business. For example, one major insurance
company maintains a large head office which serves as a base for functional departments, but many of the staff working for
certain departments work from home and rarely if ever need to visit the office.
Some service organisations can adopt the virtual approach in its entirety, with a token physical presence at a registered office to
satisfy statutory registration requirements.
The advantages of virtual organisations are:
•
Costs can be greatly reduced, as there is less dependence on premises. This can result in significant
reductions in overheads, such as electricity, water, mortgage or rent, and service staff.
•
The adoption of e-business solutions can create efficiencies, such as automated re-ordering and
seamless transaction processing. In fact, while the virtual organisation is a relatively new business concept,
many of the technologies deployed have been available for many years. For example, electronic data
interchange (EDI) was first developed in the 1960s.
•
Jobs with the organisation may be more attractive, as the need for daily commuting is removed. This can
be particularly appealing to those with family commitments at certain times of day, and those who would be
deterred from working due to the cost of transport and car parking.
•
The virtual organisation has a modern image which may appeal to several stakeholder groups,
including customers, suppliers and distributors. Increasingly, this approach to business aligns with the
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expectations of such groups.
BOUNDARYLESS STRUCTURE
The disadvantages of virtual organisations are:
•
There is heavy reliance on information technology, so if things go wrong this can have a catastrophic effect.
Problems can arise from lack of connectivity, hardware and software failures, malware and
security breaches.
•
Those who lack basic IT skills, or are unprepared to use information technology equipment, have no
prospect of doing business with virtual organisations or working for them.
•
In some cultures, there remains a preference for the ‘personal touch’, so virtual organisations may find it difficult to
achieve a foothold. Try buying LV products online or Piaget watches online?
•
Some of those who work for virtual organisations feel isolated as direct human interaction on a face-to-face basis is minimal.
Feeling personally connected to a work group can be motivational, and this effect is lost when members of
teams do not meet on a regular basis.
Hollow organisation
•
A hollow organisation is one which
relies heavily on outsourcing, enabling it to
maintain low staffing levels while capitalising
on the competences of partner organisations.
•
The most common application of this model is
orgns identifies their core competences
and retain it. retained. These are then kept in-house, while all
non-core operations are contracted out (outsourced).
•
The hollow organisation must forge
strong strategic links with trusted partners.
An example of this organisational form is Nike, a sports goods
manufacturer, which sub-contracts production activities whilst
maintaining total control over design and quality specifications.
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BOUNDARYLESS STRUCTURE
Modular organisation
•
A modular organisation extends the hollow concept by breaking down production processes into modules.
Production is outsourced, but each external organisation is responsible for only one element of the process.
For example, in producing the Dreamliner aircraft, Boeing enters into contracts with many suppliers, each of
which is responsible for one component or assembly. The outputs of these suppliers can then be integrated.
(like lego toys, you integrate all the parts (or modules) to become the product desired .
•
The modular organisation is a more efficient, contemporary version of the model previously used by many car
manufacturers, who often owned the subsidiaries which produced components that make up the final product.
The modular organisation removes the need for complex ownership structures through holding companies
and subsidiaries, and also creates forced efficiencies, as those responsible for each module have to compete
with organisations in the same marketplace for their services.
SHARED SERVICES ORGANISATIONS
•
•
•
•
The shared services organisation is a medium through which defined services can be provided across the
organisation by a dedicated unit. This differs from outsourcing, in that the shared services provider is actually
a part of the organisation.
Shared services organisations reduce the level of duplication of tasks. For example, instead of each part of
the organisation employing human resources or information technology specialists, these services can be
provided centrally, through a single team. In this way, they can reduce costs significantly and also standardise
the policies and processes across the business. Management and operational support can be delivered
through facilities such as hotlines or helpdesks.
An example of a very effective use of the shared services concept is the provision of professional training
courses and support across large consultancy firms operating on a regional or multinational basis.
While the use of shared services orgns is increasing, the model is not suitable for all. For example, if the
business units are very diverse, a centralised model may not be appropriate. It has also been suggested that
potential cost reductions should not be over-estimated, as many organisations will still rely on local provision
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to meet the idiosyncratic needs of each business function or locality.
Separation of direction & management
Structure affect control
Control require due to separation of ownership and management function
Agency theory is concerned with resolving problems that can exist in agency relationships;
that is, between principals (such as shareholders) and agents of the principals (for e.g,
company directors). It is part of the bigger topic of corporate governance. It involves the
problem of directors controlling a company whilst shareholders own the company. In
the past, a problem was identified whereby the directors might not act in the shareholders
(or other stakeholders) best interests.
Shareholders and control
• Directors - elected by shareholders; oversee managers to ensure they are working in the
interests of the shareholders; the directors are the 'watchdogs' of the shareholders; the directors
arc responsible for the overall strategy of the company, subject to approval by the shareholders;
their conditions of appointment and powers are stated in articles of association. Non-executive
directors are part-timers who have no day-today involvement) in the organization.
• Cadbury Committee - government body that reported on the role of directors. It
recommended more non-executive directors to keep an independent eye on the
business. Public limited companies must state the extent to which they comply with the
Cadbury Codes of Best Practice in their annual report.
Shareholders elect Directors who oversee managers
• Corporate governance - issue of who really controls companies, e.g. do the
institutional investors exercise too much power?
• How do shareholders ensure that managers act on their behalf? Do the directors96act in
the shareholder best interests?
ROLES AND FUNCTIONS OF MAIN DEPTS IN ORGN
All the functions in the business are inter-related:
• Finance -Concerned with raising finance, cash flows, maintain records, fin. planning.
Separate treasury functions if co big
• Production – convert raw materials into finished products
• Procurement/purchasing -Procure stocks for production/sales.- lowest price & right
timing (fast lead time), and no compromise of technical specifications (like tensile
strength for fabric, meet Euro4 for emission standards for engines..).
• Marketing -Identify customer needs, market opportunities (market research), and 4ps
with focus on customer needs
• Human resources management/administration.
identify HR requirements,
recruit and select employees, training and development. Also the contact dept for
miscellaneus tasks like stationery, security etc
• Researchanddevelopment(R&D). improve exisitng products and develope new
products
• Direct service provision provide services to clients e.g audit firms
•
Our focus is how these functions work together with accounting to achieve the organization
objectives . These inter-related functions affect each other- say an increase in sales means HR
needs to employ more people, production need to do planning, marketing need to do more
advertising or focus on new customers, finance need to look at credit cotrol and warehouse need
to look into storage and delivery. Acounting will need to look at more processing requirements
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Marketing concept
•
Management idea according to which a business's goals can be best achieved
through identification and satisfaction of customers' stated and unstated needs and wants
• This concept reflects management philosophy according to how to achieve the
business goals through customer focus.
1) Identify and satisfy customer needs and wants (“marketing functions”). It should be mutually beneficial
to both parties, meeting the organization objectives as well as the customers.
2) The needs refer to current requirements and
wants imply future wish lists
• Therefore it can be stated (like their requests
based on you marketing people communication) or
unstated (their potential wish lists in the future which
your innovative products may satisfy)
1) Marketing mix (next slide).
The combination of these 4 elements influence
the customer decisions to buy from the organization.
• All these elements must complement each other say: if you are given exclusive rights
or distribution for a product, you can charge higher prices (say you have exclusive
rights for LV brands or Rolex watches). On the other hand, if you distributive Casio
(no exclusive rights but you enjoy mass market and wide distribution to make up for
the lower prices-economic concept of revenue = selling prices * quantity sold).
For Rolex you need to sells as high end products in Orchard road type of
malls/locations but Casio you can sells anywhere (placement of the products to
different target customers)
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Marketing mix
Marketing mix as combination of 4 factors which influence a customer decision to buy a good or
service- price, placement, promotion and people.
An integrated mix.
It is a set of controllable vartiables that the firm blends to get the desired results from its
chosen market(s).
The 4 elements must complement each other:
Say a high price is associated with exclusive distribution, strong brand names or specialty like LV or
Ferrari or Rolex watches
•A lower price may be complemented with mass appeal,
standardized products and more intense promotions.
Examples include Casio watches and Korean cars
•For the marketing to be effective, it must involves
the 4 elements working together to provide
customer satisfaction (or value for money)
An effective marketing team must be able to
complement these 4 elements to get customer
satisfaction but the organiza
tion also maximise
revenue. Win-win situation.
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Marketing mix
Price (VFM for customers)
What does it cost the consumers?
Are there easy payment terms or discounts?
Customers-3E’s VFM concept- economical, effective, efficient
Coproate objective. MNCs- standard pricing policy in SGP and overseas?
Competition- how does our price compete in our markets?
Pricing tactics after considering these 4 issues include cost plus pricing.,
perceived quality pricing, price skimming etc
Product (features and functionalities)
What does it do? What does it look like? What exactly the product should be
How does our products compare to our competitors (the functionality)
Place (placement or distribution)
How to place it in the hands of customers? Sell direct or thru middlemen
Distribution methods? Direct from manufacturer/retailing distribution/
direct selling/franchise/strategic alliance
Promotion (get customers to know and buy)
How does customer find about it?
How can we communiocate to them i.e.
Create customer awareness- tell them amount
features, prices, PWP, samples, etc
Thru various online and offline media
ADD-ON FOR THE SERVICE INDUSTRY.
Some people add on 3 more Ps
People.
The orgn people need to understand customers' (also people) needs.
Processes.
How you sell your services. An auditor do interim and final audit and must deliver the services in
professional manner. A salesgirl selling says LV bags must know how to handle “high class rich
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idiots”.
101
Functional v matrix management
Functional management:
managers are organised according to their function, e.g. all the marketing managers are grouped together, all the
finance managers work together and so on.
The advantage of this approach is that it keeps specialists working together so they can share their expertise.
Matrix management:
brings together employees who can help solve a particular problem, e.g. someone to deal with the marketing,
someone to focus on the finance and so on. This brings together people from different functions who can benefit
from each other's skills and experiences (more flexibility for the orgn to deploy skills).
The disadvantage is that employees have two bosses lone is the project leader, the other is their functional
manager),'This can cause comm. problems because there can be confusion over who is in charge.
Multi-disciplinary team (or multifunctional team) is a group composed of members with varied but
complimentary experience, qualifications, and skills that contribute to the achievement of the
organization’s specific objectives.
When you go to the hospital, a multidisciplinary team consisting of doctors, nurses, cooks, lab techs,
housekeepers and others, work together to care for you. They may come from two or more depts or functional
areas worki together to solve a problem (MRT pronblems?) or handle a situation (terroroist attack) that requires
capabilties and knowledge not available from any one person or source.
A cross-functional team is a group of people with different functional expertise working toward a common
goal.[1] It may include people from finance, marketing, operations, and human resources departments. Typically, it
includes employees from all levels of an organization. Members may also come from outside an organization (in
particular, from suppliers, key customers, or consultants).
Cross-functional teams often function as self-directed teams assigned to a specific task which calls for the input
and expertise of numerous departments. Assigning a task to a team composed of multi-disciplinary individuals
increases the level of creativity and out of the box thinking. Each member offers an alternative perspective to the
problem and potential solution to the task. In business today, innovation is a leading competitive advantage and
cross-functional teams promote innovation through a creative collaboration process. Members of a crossfunctional team must be well versed in multi-tasking as they are simultaneously responsible for their102crossfunctional team duties as well as their normal day-to-day work tasks. Example: IPO Listing team
Mintzberg’s structure
According to Mintzberg organizations are formed of 5 main parts.
•The strategic apex is equivalent to top management or the Board of Directors. The middle line
is the middle managers, sometimes called the scalar chain. This is the hierarchy as it passes
down through the organisation. The operating core are the people near the bottom who for the
most part do the day-to- day work.
•Support staff would include the accounting staff and IT staff.
•The technostructure. This is
perhaps the hardest to understand
and is the part of the organisation
responsible for devising and
enforcing standards and procedures.
It is the technostructure that would
write the quality control manual,
the employee handbook, the healt
and safety manual,
the finance manual.
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Mintzberg 5 parts
•
Strategic apex. Charged with ensuring that the organisation serve its mission in an effective
way, and also that it serve the needs of those people who control or otherwise have power
over the organisation
• Middle-line managers
• Form a chain joining the strategic apex to the operating core by the use of delegated formal
authority
• Operating core. Those who perform the basic work related directly to the production of
products and services
• Technostructure
• The analysts who serve the organisation by affecting the work of others. They may design it,
plan it, change it, or train the people who do it, but they do not do it themselves
• Support staff
• Composed of specialised units that exist to provide support to the organisation outside the
operating work flow
Pressures
• Each of these five parts has a tendency
to pull the organisation in a particular direction
favourable to them
•Strategic Apexes – centralization
•Support Staff - collaboration
•Technostructures - standardisation
•Operating Core – professionalisation
104
•Middle Line – balkanization
Anthony Hierarchy
105
Sect B3 Culture
•
The values and behaviors that contribute to the unique social and psychological
environment of an organization.
• Organizational culture is ‘the ways we do things” or the sum total of an organization's past
and current assumptions, experiences, philosophy, and values that hold it together, and is
expressed in its self-image, inner workings, interactions with the outside world, and future
expectations
• It is based on shared attitudes, beliefs,
customs, express or implied contracts, and
written and unwritten rules that the orgn
Develops over time and that have worked
well enough to be considered valid. Also
called corporate culture, it manifests in:
(1) the ways the orgn conducts its business
treats its employees, customers, and the
wider community,
(2) the extent to which autonomy& freedom
is allowed in decision making, developing
new ideas, and personal expression,
(3) how power and information flow through its hierarchy,
(4) the strength of employee commitment towards collective objectives.
It affects the organization's productivity and performance, and provides guidelines on customer
care and service; product quality and safety; attendance and punctuality; and concern
for
106
the environment.
Sect B3 Culture
Culture as “the ways we do things”
•Basic assumptions and values all employees share and developed over time (in ther
words all these things add together- also called culture web or paradigms):
•
•
•
•
•
•
Shared values based on long-term objectives and beliefs of employees-their views and feelings
Set of business norms or behavior as how they behave in day to day operations
Paradigms are what employees assume
Symbols like dress code “Apple T-shits and jeans”
Symbolic actions and rituals like sing company song (Jap culture)
What is the Google famous culture and values?
Culture influence management styles and decision
making and also the way the firm deals with stakeholders
Factors impacting culture
•Size and nature of the orgn. Big companies’ employees behave differently from small ones one travel business
class another forever by trains. Offshore people behave different from teachers.
•Age of the organization .Young organization still on growth path, product life cycle
– Matured organization reached critical mass
•Product or services/types of customers . Serving PRC customers-must behave like Chinamen!
– Sell wine must know wine cultures
•Geographic diversity/diversity of the workforce. Orgns that have high diversity (various type of
employee nationalities and religions can make the place a cultural meeting pot).
•Ownership. Listed firms (innovation culture) and sole proprietorships (boss culture) very different corporate culture
•Technology. High tech online companies (Google) may have different styles from tradional transport companies.
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3 writes on culture
Schein determinants of culture as “residue of success” created by first leaders. He
argued that the first leaders of an orgn create its culture. Therefore future leaders will
be supported if they understand or support the orgn culture.
•Just evolved (or adapted) along the way as the organization overcome obstacles (say
prepare for IPO), cope with basic assumptions (say expect stock options), assumptions
prove true (co listed and every employees become fat) and accept the listed co styles
(more reporting and corporate governance issue) as the correct way of doing things
(perceive, think and feel). All new employees now are taught their corporate culture
•Artifacts (things easily seen) FIRST LEVEL
Norms of behavior/Behaviour artifacts and attitudes that can be easily seen as:
Office buildings built under Geomancy (say Sunrider HQ); Furniture (red wood “high
taste”;& Picasso paintings); conference room display Awards (ISO13000, Rotary
ASME..) Staff dressings /corporate communication styles etc
•Espoused values (strategies and goals) SECOND LEVEL
Shown in the mission statements, vision core values a also slogans used by the orns.
•Basic assumptions (unseen things taken for granted OR unconscious beliefs/perceived)
THIRD LEVEL
-diificult to identify because they are unseen, says:
at emplyees' unconscious level (perceived)-all banks pay at least 3 months bonus
(but not written in contracts); work only 4 days week (one day sports day);
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Ideally, go to Executive MBA program with NUS after achieving senior position
3 writers on culture -Schein
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3 writers on culture
Hotstede – concluded five cultural dimensions as national and regional cultural groupings affect the way an
organization and employees behave (after studying differences between over 100k of IBM employees across the
world to see which aspects of culture affect business behaviour)
Hofstede look from international perspectives on culture and identified 5 aspects or characteristics
1.Power distance (PD) index. To what extent to which less powerful members of orgns accept and
exepctr that power is distibuted unequally. Do cultures accept inferior positions? Says Hindu culture has
“untouchable class” - Many Indians ? accept it although treating fellow humans as non-humans dirty low class and
not allowed to live decently in indian sociey! High PD cultures expect to obey powerful managers and do not
exepct anydemocratic behaviour.
2. Individualism (vs Collectivism). Do people work individually or collectively (or how far are they integrated
into groups). High individualism means the employees expect to be assessed on their own achievements.
3. Masculinity (vs femininity). How different the focus on gender roles?
A masculine culture is one where the distinction between the roles and values of the genders is large and the
lales focus on work, power or success. Musim societies more masculine or USA?
4. Uncertainty avoidance index .
Do culture try to reduce uncertainty; in other words
how does the culture handle uncertainty and ammbiguity;
High UA socieites, employees will not like to do more than
their jobs' descriptions or play new roles.
5. Long term orientation (vs short term).
•What is the attitude to change over time?
•Socities with long term orientation focus on future
rewards, save and plan for the future and can adapt
to change
Additonal dimension added:
Indulgence (vs restraint). Indulgent societies allow free gratification ol basic human lusts like enjoy life
110and
have fun. No or little restraint. Siong bei si song gao si sua. Eat drink and be merry for tomorrow I die!
Charles Handy
4 stereotypes of Handy He identified 4 cultural stereotypes based on Greek gods
•Power culture Zeus (Power) Culture as one major source of power.
•Often in small start up firms, Power is centralized in one major source, as in small entrepreneurial firms with decisions
made by the founder or major power brokers.
Fast paced decision making and work culture
May demotivate staff who feel lack of challenge
Cannot maintain such culture as organization grow big
•Role Culture Apollo (Role) Emphasis on structured hierarchy and bureaucratic
Bureaucratic , layers of hierarchy-power depend which layer you are
Organization divided into functions-accounting/marketing…clear
channels of comm. Work of a predictable, unchanging nature.
Clear rules & procedures & job description (roles), limited
initiatives/innovation (everybody just follow rules)
•Task Culture
Athena (Task) Based around teams and project oriented
•Goddess of wisdom Job or project orientated,
Your power or status depends on your ability to contribute
to the task Employees have freedom and initiative
•Person Culture (Existential Culture) Dionysus (Person)
•Exists to satisfy the needs of individuals. god of wine
Individuals in the organization most important
Orgns exists to serves the needs of individuals, eg cults , partnerships
Work tends to be of a unique nature and micro level
Therefore such organization also depends on the talents of the individuals.
Say you are a religious cult leader-unique nature work, special talent.
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Iceberg Culture
Surface Culture
(Visible part of culture)
•What people can see, smell, touch,
feel
•They have learnt explicitly
•They are conscious of it and have
objective knowledge
•Such activities can be easily
changed
Deep Culture
(Invisible part of culture)
•What people believe, think or value
•They have learnt implicitly
•May not be conscious of it
•Difficult to change such culture
•Subjective knowledge
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B4 Committee
What is a committee? What purpose?
•Team with an objective of solving problems or control situations
•Pull (members) from different divisions or departments; Need meetings to discuss and solve issues
•Example – IPO steering committee
•Purpose is to deal with problems of listing
•All departments have representative
•A chairperson (usually CEO/CFO) to lead (IPO is considered very serious-less serious issues- normal manager can be
appointed); Platform for discussion, exchange of ideas, innovative solutions
•Employees must accept changes due to re-structuring
•Solutions to jobs changes, duties changes Higher level of internal controls and corporate governance
A committee is a group of people with certain responsibilities. They differ from the term "team" in that they normally:
•
Have a permanent role. ; •
•Have clearly defined rules and procedures.
To be successful a committee should be:
•
An appropriate size for the task (i.e. not too many or too few committee members).
•
Have a Chairperson with appropriate skills to run a committee (e.g. to guide the meeting).
•
Have a Secretary (i.e. to assist the Chairperson and take minutes). A committee can be involved in:
•
Decision making •
Providing advice. •
Generating ideas.
An example of a type of committee is a board of directors.
Standing committees, They don’t fade away- “standing” on going basis
•Serve particular function
•Eg Budget Committee for annual budgeting exercises
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•See other examples in reading materials
Types of committee
Ad-hoc committee. Formed in response to particular situation or problem
•Dissolved once solved (that is why “non-standing”)
•Eg. Education committee (80s) to look at S’pore education systems in 80s to meet the needs of the nation
•Eg investigation committee formed to report why huge fraud happened and report to BOD, led by CFO
Role of the chair
•Head of committee and chair meetings. Ensure meetings in order and on track
•Seek and ensure solutions. Means must come up with recommendations
•Ensure all members equal opportunities to talk and they follow set duties
•Ensure recommendations represent consensus of group
Secretary
•Support Chair; Schedule and prepare agendas for all meeting
•Record minutes of meeting; Follow up work on discussion at meeting
Advantages of committee
•Greater consensus on decisions Greater acceptance/credibility
• Committee to investigate why SMRT “scr..up” – so must get “ang moh” to be in it for more credibility
• Improved quality of decisions * Greater productivity as new ideas crop up; All members learn- “personal growth”
Disadvantages
•Need time and costs ; Big gangster members bully other non domineering members “leveling effects”
•Members compromised “late-need to go home see kids”
•Lack of accountability as there are other members doing collective decision
•May take unnecessary risks – “no worry- I am not gangster member”
•All these disadvantages can be seen in political committees which are often commissioned by Big bully and run by114
chaired
by small bullies
Sect B5 Why do business orgn need corporate governance?
1)
Primarily responsibility to shareholders. Many other stakeholders also claim
rights
2) Corporate social responsibility
3) Separation of ownership. (the shareholders own the nets assets of business)
from control (the management are custodian of the net assets) may make the orgn
susceptible to more risks). Managers may take short term view (short terminism)
thus sacrificing long term interests of the orgn.
4) Financial risks -fraud & commercial breach of trusts.
Economic and legal risks.
economy and laws keep changing
Environmental risks and social accountability.Sustainable products? Risks to
local community?
Ensure effective & efficient operations.
Internal controls/check & balances
in place?
Compliance with laws and regulations
5) Organization needs to manage risks. Risks cannot be eliminated 100%
Need to manage it or risk management. Business manage risks with updated*
policies and procedures (*business change) covering:
1) internal controls including admin. Controls
2) risks management
3) ethical behavior
4) seen as complying with the laws and the 4 rules of common grounds in relation to
corporate governance in dealing with stakeholders or Corporate social responsibility
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Corporate social responsibility
Legal position (“the shareholders’ model”)
Shareholders own the companies & appoint directors to run the co’s for the benefit of the shareholders
The stakeholders’ model. Recently issue of whether running co’s purely for benefit of shareholders
or the interests of stakeholders should be taken into account i.e. co’s owe corporate social responsibility
to all stakeholders and to what extent (especially compliance means reducing profit):
Issues;
1)Employees’ interests- minimum
wages, max. working hours weeks,
job security
2) Do directors have rights to make
non-essential payments?
• what is considered excessive?
– Ferrari? Mercedes? Volvo..
3) Customers have a rights to quality
Products (lemon law)
4) Suppliers have a right to payment
for goods supplied
5) Public and local community have a
right to live safely
6) Next generation have rights to enjoy planet Earth All these stakeholders have vested interests
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How to carry out corporate governance?
The typical common grounds identified are :
Transparency -Full transparency of financial & non fin. info (means sufficient disclosure
of materials info)
Accountability/compliance
Compliance
with
rules
and
regulations/Public
oversight
committee/LSE
regulations/National laws
Fairness/Integrity
Equal treatment and protection for all investors means increased role of public relations
Responsibility
Responsibility to the stakeholders not just shareholders
Sustainable development means business must leave something from Mother Earth for
next generation. Imagine half of Amazon gone by one generation (40 years) due to
illegal logging like Sabah/Employees want fair pay/Customers want VFM (warranty, QC
& it works) Suppliers want to get paid/Shareholders assured value creation/ Investors
not conned –Stanford/DBS derivatives/Enron…..
THe stock exchanges have considered all these grounds and have published their code
of corporte governance.
You may want to download SGX manual.
For our purpose for illustration, we use UK
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Case study- Transparency
118
UK Best practices (UK combined code of corp govrernance)
1)
2)
3)
4)
5)
6)
7)
Independent directors NED (transparent/effective BOD)
Board composition of NEDs at least 50% of BOD and Exec. Directors
1)
strong enough to hold management accountable
2)
Appropriate balance of skills, experience and independence
3)
Running the board and exec. responsibility for operations separate
Non-executive means appointed to BOD but part time position, only attend board meetings
Meaning of independence? No conflict of interest issues
1)
No relatives or influential former employees
2)
No dominant supplier or customer (recall Enron case which kick start Sabarnes Oxley Act)
Audit committee of majority with at least 3 independent NEDs- purpose is to assist BOD in ensuring
accuracy of financial statements without bias. SGX- member s/be financial savvy
Remuneration committee of 100% NEDs to decide top mgt pay/perks- eg court case-former NYSE perks
US$29m! Therefore key role to avoid directors setting their own pay or excessive
Public oversight committee - Independent com.to oversee corporate governance issues include investors’
interests and public interests. Act as an interface between public and the corp. They are entrusted with the
task of ensurirng the company comply with the laws and other standards (like environmental regulations and
other corporate governance standards)
The Code can be used as an example of best practice. The code states that the purpose of corporate
governance is to facilitate effective entrepreneurial and prudent management that can deliver long-term success of
the company. It then goes on to list the main principles of the code:
Main principles
Leadership/Effectiveness/Accountability/Remuneration/ Relations with shareholders
•
Comply or explain. The code has no force in law and is enforced on listed companies through the
Stock Exchange. Listed companies are expected ‘‘comply or explain’’ and this approach is the
trademark of corporate governance in the UK. Listed firms have to state that they have complied with
the code or else explain to shareholders why they haven’t. This allows some flexibility and noncompliance might be acceptable in some circumstances.
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UK Best practices (UK combined code of corp governance)
•
Leadership thru Board of Directors. Every co should be headed by an effective board which is collectively
responsible for the long-term success of the company. There should be a clear division … between the
running of the board and the executive responsibility for the running of the co’s business. No one individual
should have unfettered powers of decision. This means that the roles of CEO and Chairman should not
be performed by one person as that concentrates too much power in that person.
•
๏ The chairman is responsible for leadership of the board ๏ Non-executive directors (NEDs) must be appointed
to the board and they should constructively challenge and help develop proposals on strategy. NEDs sit in at
board
•
meeting and have full voting rights, but do not have day-to day executive or managerial responsibility. Their
function is to monitor, advise and warn the executive directors.
•
Effectiveness
•
The board should have an appropriate balance of skills, experience, independence and knowledge. In large
companies NEDS should be at least 50% of the board; in small companies there should be at least 2
NEDS.
•
New directors should be appointed by a Nomination Committee to ensure a formal, rigorous and transparent
procedure for their appointment. The Nomination Committee consists of NEDs. This provision is to prevent directors
appointing their friends and colleagues to the board and ensures that the best people for the job are considered and
appointed.
•
All directors should be able to allocate sufficient time to company business.
•
There should be induction on joining the board and a programme to update and refresh directors’ skills and
knowledge.
•
The board should be supplied in a timely manner with necessary information
•
The board should undertake a formal & rigorous annual evaluation of its own performance & that of its committees
and individual directors. ๏ All directors s/be submitted for re-election at regular intervals
•
Accountability. The board should present a balanced and understandable assessment of the company’s position and
prospects. ๏ The board is responsible for determining the … significant risks …and should maintain sound risk management
and internal control systems.
•
The board should establish formal and transparent arrangements for applying the corporate reporting, risk
120
management and internal control principles, and for maintaining an appropriate relationship with the company’s auditor.
UK Best practices (UK combined code of corp govrernance)
•
This means that an Audit Committee (NEDs again) should be established to liaise with both internal
and external auditors. Before audit committees, the finance director liaised with auditors, but this was not satisfactory
because the finance director was often the person responsible for accounting problems. Therefore auditors were often
reporting problems to the person who caused them. The directors are responsible for establishing an internal control
system and must review the need for internal audit.
•
Remuneration
•
Levels of remuneration should be sufficient to attract, retain and motivate directors of sufficient
quality… but avoid paying more than is necessary.
•
A significant proportion of executive directors’ remuneration should be structured so as to link rewards to
corporate and individual performance. In other words, profit related pay is encouraged. Directors should not
receive high pay irrespective of company performance. ๏ There should be a formal and transparent procedure for
developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No
director should be involved in deciding his or her own remuneration. This means that a Remuneration
Committee (NEDs) should be formed to fix directors’ remuneration.
•
Relations with shareholders
•
One of the problems with achieving good corporate was encouraging shareholders to take an active interest
in the company. Too often they did not fully participate at AGMs and would wave through motions. This passive
attitude might well have been encouraged by directors to move power towards them and away from members.
•
The code therefore specifies:
•
There should be a dialogue with shareholders based on the mutual understanding
•
of objectives. The board as a whole has responsibility for ensuring that a satisfactory
•
dialogue with shareholders takes place.
•
The board should use the AGM to communicate with investors and to encourage their
participation.
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Section C
Accounting and
reporting systems
Controls
Compliance
122
Sect. C Accounting & reporting systems, controls and compliance
Systems
Recall system means a conduit for
input, processing and output
Input. record transactions
• manual or IT (data files) or both ;
• (basically capture source documents data into
ledgers)
Processing
Code and update GL (or database)
Use accounting applications like MYOB
Output. Print audit trails for compliance (directors
must keep full accounting records)
• Report on business performance for decision
making and control actions
• Financial reporting- For external parties
• Management reporting
– For internal users
Controls and compliance
Internal. Control procedures to explain
on exceptions or deviations from planned targets
and take corrective actions
•Many applications has inbuilt controls so that no
GIGO (garbage in garbage out)
External. Comply with a) The laws (Co’s Act, LSE,
EU environmental laws.. ) ; Corporate governance
regulations; Accounting standards
•Communications with stakeholders
Receivables’ statements;Payroll/GST reporting
online;Supply chain management (ERP systems)
Accounting environment- the laws and
regulations governing it
Regulatory Bodies.
Businesses have to comply with the
regulatory bodies in their country. For e.g, UK companies have a
regulatory body of the Companies House. In S‘pore we called it
ACRA. In PRC, it is called Industry & Commercial Bureau. You
also have IRAS (tax authorities), MAS (the central bank), SGX
(the stock exchange) etc.
•Information such as financial statements and Register of
Directors has to be submitted to the regulatory body.
•The main financial statements for annual returns are
•(1)
Statement of Financial Position
•(2)
Statement of Comprehensive Income
•(3)
Cash flows statement
•(4)
Statement of changes in equity (or reserves)
Integrated reporting.
This is the long term trend many companies will adopt in the
future (now already some co’s adopted) to include any other
relevant information that would be of interest to the users and
may include the following:
major risks that trhe companies may face and what actions
they have taken to mitigate or manage the risks.
how did the companies perform as to ethics and corporate
social responsibility
the companies' performance with regard to sustainable
development
Company Legislation.
Companies have to comply with
applicable legislation (UK-Co’s Act, S’pore ACRA). There are
numerous requirements of the Co’s Act including submitting
accounts which are "true and fair".
•The responsibility for preparing accounts lies with the
directors but they can delegate to a suitable person.
Others
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International Regulation (of the accountancy profession)
Despite having the Co's Act, tax laws (IRAS rules), and SGX regulations as well as
professional bodies such as ISCA/ACCA that regulate their members, the accountancy
profession is keen to be “self-regulating”.
The role of the IFRS foundation.
It was formed to try to harmonise accounting
standards throughout the world
IFRS foundation
ifrsac-ADVISORY
COUNCIL
ifrsic-
INTERPRETATION
COMITTEE
IASB
The role of the International Accounting Standard Board (IASB)
It is an independent standard-setting body based in London;0
it has 14 members from 9 countries
It aims to:
develop a single set of high quality, understandable and enforceable global accounting
standards; and
co-operate with national accounting standard setting bodies to achieve convergence in
accounting standards aroud the world.
INTERNATIONAL ACCOUNTING STANDARDS
Standeards produced by IASB are called International Financial Reporting Standards
(IFRS) and the earlier standards produced by IASB predecessor (Inrternational Accounting
Standard Comittere) IASC are called International Accounting Standards like IAS1... 124
Accountant role
As a watchdog to safeguard assets by
•design & implement internal control
systems to:
(1) Ensure efficient & effective
operations
(2) Financial reporting needs
Timely/Reliable/accurate
Do financial reporting-Sufficient disclosure
Comply with applicable laws & regulations
(3) Operational controls
•Work with management to ensure smooth
operations of the organization to achieve its’
long term objectives. Here the accountant play
the key role in “planning and control” of
business financial operations.
•Although it is the directors’;
responsibility
to
ensure
companies
maintain
proper
records and books of accounts, it is
always the accountant who
ensure
directors behave on this matter.
•Q: if your boss consistently cheapskate
and don’t want to do it properly what
must you do?
Ensure compliance
in policies and
procedures on various financial systems
• Eg payment systems
• Authorization. Say payment trans (PV) are
authorized by a responsible officer for approval
limit set
• Reduce exposure to risks of frauds
• Segregation of duties. Cheques issued with 2
or more signatories/Separate recording function
(AP) & payment function (CB clerk) and regulator
bank reconciliation. Ensure goods are received
(GRN duly attached)
• Eg Budgeting exercise
• Work with management on the annual budget
and the reward systems for planning and control
purposes
• All managers must explain variances (exception
reporting)
• Reward systems like key performance indices
(KPI) are set for performance measurement
• Many also use Balance Scorecard
• Recall MIS systems which cater for budgeting
that c/w sensitivity analysis for decision making
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Need for Internal Controls
Ensure policies and procedures are in place and are
properly carried out
It also must be updated to reflect business changes
Internal controls can be designed. Updates
s/be made whenever there are material changes
due to PEST
1) To find errors or irregularities after they have occurred
(detective controls)
Report on inappropriate purchasing as no PO
was issued – urgent and rush excuse! Forensic
follow up
2) To fix errors or irregularities (corrective controls)
Variances or exception reporting
3) To prevent or reduce errors or irregularities
(preventive controls)
Travel authorization signatures on travel
request form
Policies and procedures: Example
CAPEX policies and procedures
(approval & control limits)
1)Capitalization policy : all expenditure above $300k
2)Approval by CAPEX forms for all amts not budgeted
3)Only budgeted items with amts > $100,000 needs
submission of CAPEX and HQ approval
4)For amounts > US$1m require a feasibility study
report
Separation of ownership and
management
Management delegate responsibilities to
subordinates. Shareholders
entrust
custodian of assets to directors
Main objective is to minimize and
mange risk exposure of the business
(remember we cannot eliminate risks
100% due to uncertainties) which can
be:
(1)
Financial risks
(2)
Operational risks
(3)
Economic risks
In recent years, many frauds and
mismanagement
from
many
senior
executives have made internal controls as
one of the corporate government policies.
This has been known today as “white collar
crimes”. (akan datang Section F). You may
want to download this hit Hollywood TV
series to learn more about crimes committed
by profeesional in sheep clothing and ties!)
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Accounting & reporting systems
Manual systems- Recording
• Sales journal/ledger
• Purchase jnl/ledger
• GL/Stock ledger
• Fixed asset ledger
• Manual costing
• Extract reports
• (financial statements) SOFP/SOCI/SOCF/SOCE
• These are that are required for annual
filing (external reporting purposes). They
are done by the financial accountant on a
yearly basis.
• Contrast these reporting requirement of
the management accountant who duties are
focused on reporting for internal decision
making purposes like budgets, variance
reports, forecasting demands and returns on
investments. They are needed to help
management run their business.
Accounting software
•Data input of source documents
•Database contains master files and
transactions records
•Reports extracted from computer files
•All sizes according to need
–Small-MYOB
–Quickbooks
–Accpac
–Medium
–Navigation/Pegasus/Cheap ERP
–Large ERP like SAP/Oracle
Most computerized systems catered for both
financial accounting and management
accounting needs.
You can always buy the basic modules for your
financial reporting and then add on other
modules like payroll, material requisition
planning, consolidation modules etc
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Accounting & reporting systems
Most organizations would have major parts of their business functions computerized. This is because
computer systems (especially accounting c/w business applications like POS/Consolidation/Payroll).
Furthermore, the S’pore Government give you monies (PIC grant/ICV) so much so that many SMES
“shows huge profit under other incomes”.
Whether the orgns is big or small, it will need to consider the business needs and understand the basic
characteristics of an information systems:
• It should be based on a long-term planning. Systems should be saclable
• It should provide a holistic view of the dynamics and the structure of the organization.
• It should work as a complete and comprehensive system covering all interconnecting sub-systems
within the organization.
• It should be planned in a top-down way, as the decision makers or the management should actively
take part and provide clear direction at the development stage of the MIS.
• It should be based on need of strategic, operational and tactical information of
managers of an organization.
• Stategic needs - info from internal and external sources to perform long term strategies
• Internal information has to be both quantitative ad qualitative
• Tactical level managers need info flows down from top managers and routine and
quantitative info from operational levels. Says they need to perepare annual budget, they need
strategic assumptions from the top and detailed operational budgets from their functional units.
• Operational managers need info from tactical level and carry out their day to day
performance of tasks. Says the production supervisor receive info on forecast sales for next
quarter, he plan his production schedules accordingly.
It should also take care of exceptional situations by reporting such situations.
• It should be able to make forecasts and estimates, and generate advanced information, thus providing a
competitive advantage. Decision makers can take actions on the basis of such predictions.
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Accounting & reporting systems
In the following slides we will discuss the main business functions:
Procurement/Production & Prod.planning/Marketing/Direct services provision
Main financial systems. Purchasing (and ordering) /Sales invoicing / Credit control /Payroll/Cash book /
Treasury (separate Dept for those ith spare cash)
Meaning of procurement (we use the term interchangeably with purchase in FIA)Sourcing of the materials or products. Right pricing (may not be lowest prices according to BPP). If lowest and
right specs ok. Sometimes lowest quote but supplier not reliable!. Quickest lead time (assume enough storage space).
Meet quality & technical specs-no compromise. Just in time systems are often used by procurement manager. An
inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are
needed in the production process, thereby reducing inventory costs. Diagram shows a structure based on business
functions.
129
Procurement
Purchasing & selection decision is made viatender process etc
Approval procedure- control policies normally
require 3 departments to work closely
Finance dept on pricing, payment (credit
terms, approval limit and capital expenditure
CAPEX procedures) and budget.
Requisition dept should know the technical
specifications of their products
Purchase dept advise AP clerk on P.O.
Purchase dept also signed off for validity of
supplier invoices before payment
Purchasing procedures
Purchase requisition raised and
authorised by requisition deptsupervisor
(who check against the purchasing budget)
Confirmed purchase order are issued
by purchasing dept once confirmed by
supplier on availability
Goods received by warehouse
(checked for quality and specifications)
Copy of GRNs and supplier invoice are used
for recording in the books
Payment section may pay after
“3 ways matching”<invoices-GRN vs-PO>
(1) Supplier invoice, purchase order and
GRN are matched to check pricing
and extension, confirm goods are received
and supplier invoiced properly.
(2) Approval normally by requisition dept mgr
and finance before the supplier invoice
will be sent for payment processing
The co make re-order again
•
•
Purchasing cycle from order and back to re-order (Documents flow)
Purchase/Order Requisition ..confirmed p.o..received goods..payment
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Production
Production function
Production procedures
•
•
•
•
•
•
•
•
•
Production dept produce according to
availability of raw materials; priority of
customers; quality of raw materials (after QC
checks)
Some company use MRP (c/w BOM)
software. Production department make use of
scare resources to make goods .they
consider machinery usage, labour usage,
overheads/consumables, storage space until
the current batch finished. Therefore it need
to do planning
Production planning/scheduling include
Overall production level (taking into a/c safety
stocks)
What to produce- which products?
– based on sales order which production
has a copy
When to produce? Batch priorities
How much to produce? Bill of materials BOM
– Quantity to produce depends on capacity
per batch and safety stocks and balance
in store
Production budget and purchase budget set
Exception variances (usage & prices) need to
be reported (vs production budget)
•
•
•
•
•
Pre-order to store/warehouse the
materials required for current
production batch using material
requisition notes. Production planning
will decide the priorities of which sales
order to be fulfilled first.
Store issue material issue notes which
shows the materials being issued to
production department
Production produce according to Bill of
Materials (BOM) as specified in
materials resource planning. Every type
of finished goods will have its own
BOM.
For costing purposes, work in progress
are often valued at end of each
accounting period
Finished goods are then transferred to
store using good received notes (GRN)
Store prepare picking lists/GIN and/or
delivery notes for despatch to
customers (copy Finance for
billing/Sales department for follow up)
131
Sales cycle systems
The flowchart diagram depicts the steps of the sales cycle say a coffee trader
Customer PO received/issue sales order/Order processed (check stocks available? Credit
worthy? Etc/goods delivered <GIN>/Invoice raised c/w copy to a/cs/Payment received.
Point of sales (POS)
For retailing business, POS systems are used to capture the cash sales (nets/visa/paypal) and
inventory status are also updated real-time online. Very often now a customer relationship
132
management systems (CRM) module can be added.
Financial issues on marketing
We have discussed the marketing mix and the marketing functions in Section B . Pls refer to it if
you have forgotten (as usual!) ,here we do a fast recall.
Marketing as link between customers and company
–
–
Communicate to them updates and new products and provide channel for them to provide
feedbacks on quality, services, pricing and competitors’ products
Anticipate their future needs
Due to this focus on customer needs, marketing will integrate the 4Ps of marketing mix:
–
–
Be creative & find out from them their future wish lists and current needs
Have pricing strategy (different prices for different customers and bulk disc, credit terms (with
Finance)
We now consider the following issues:
•Prepare sales and marketing budgets
•Motivating factor as marketing need to commit themselves to next year sales
•Help CEO set production , purchase , advertising targets for next year. If they don’t budget the
advertising, unlikely to get justified approval next year
•Obtain funds for marketing activities
•Advertising, promotion activities
•Budgeted sales figure may require new outlets, innovation R&D funding..
•Determine the product prices
•Cost of products come from finance department
•Company pricing policy–markup and discounts and approved prices
•Determine credit terms for customers
•Use track records (ageing debtors’ analysis) –freeze or revise limits
– Freeze an account means set systems to stop goods liftings
– Approval required for increase in credit limit or period increase
– Credit review and setting for new customers –background checks
•Follow up on customer payment
Non-financial issues-marketing can decide on their advertising media, design etc
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Direct serving / client serving
Companies must ensure customers needs are met:
•Current needs -Existing products serving and warranties – manage technical support and complaints
properly
•Follow up for new orders and ensure customer loyalty
•Have a sweet voice (make customers happy) on hotline. Transfer you to right departments- serving,
support or payment enquiries. Outsourcing reduce costs but India/Filipino call centre- “sir please call
again- no understand”!...
•Technical support now online 24/7 for major products
•Future needs -Have feedback from major customers their future needs- new features or operations.
Need to grow with them – many companies move to PRC because there customer base move there
•Therefore this department serve as single point contact instead of calling different departments. Of
course if you are a big-fish, they dedicate special person for you only
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Information Technology (CIO)
Information Technology IT. Refer to the collection, storage, processing and communication
of information by electronic means.
•The key advantage of IT is that it enables large volume of information to be handled quickly
and economically (means cost-effective)
•Can be outsourced to IBM or other cloud computing providers like Quickbooks/Singtel. Still
require key employee to manage
•IT deals with managing info requirements for whole organization
•IS more specific to users getting right & relevant info
Meaning of information.
Data are raw items, info are processed meaningful data
•Good info have “ACCURATE” features characteristic
•It is important that you provide management reports based on accuracy, completeness, cost
beneficial (not to costly to extract information), relevant (to the users like CEO focus and
departmental focus no same), authoritative (data are reliable), and timely (give info to CEO
after he have finished contract negotiation!)
•Accuracy and completeness require no material items missed out- many big co’s do reports in
thousands or millions (rupiahs, won, etc)
•Sources -internal and external information
•Internal sources.- Employees details/stock info/customer info
•External sources-tailored marked research like GFK electronics survey; available public
information (like company websites. SGX etc..)
The Internet.
This is basically hundreds of millions of computers hooked up together via link www.
(worldwideweb). Once you linked say via wifi you are part of the internet network.
When you use the Internet you must be aware of the potential risks of viruses, malicious
software, hackings, phising and all the new vices of the online services and scams. You can
use all the firewalls and anti-virus, passwords protection, encryption, decrption you want
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hackers lurk….
IT Networks / Servers (FYI)
IT systems can also be categorised by their hardware.
Standalone systems are single computers not connected to any other computers.
LANs or local area networks is a number of computers connected to other computers.
Local area network means that the group of computers are in a relatively confined area, perhaps within a hospital, a
school, a university or a single office block. Local area networks use a special cable link to allow the different
computers to communicate with each other. The immediate benefit is that information can be shared between all
users on the network. It also facilitates the transmission of e-mails. Usually one of the computers on the network is
what’s known as a file server. This is a computer with a large capacity disk, where much information is held centrally
and then accessed by the various users of other computers.
Wide area networks are somewhat similar to local
area networks except that their geographical spread
is much greater, typically over a number of different
cities or perhaps over a number of different
countries.
This means that special cabling can’t be used for
all communications and use has to be made of
commercial telecommunication networks
(or ISP Internet Service Providers) such
as the ordinary phone system (or the fibre optics
super fast cables).
Typically, you might have a local area network,
a LAN in London, another LAN in New York
and these are connected over the satellite system
to produce a WAN so that the London and
Euro offices can be connected and share information.
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Pros outweigh cons of using IT
We may say that the computers or automated systems allows:
Standardization- use coding
Ease of processing- just input source documents
Ease of monitoring- with codes and interactive online enquiry and reporting features
Benefits of IT
•
•
•
•
•
Fast processing of data
Easier access to info
Simulation scenarios
Increased productivity – multi tasking possible
Complex issues can be broken down into smaller subsystems make computer more relaible
thsan humans
Problems with IT
• Cost of selection, installalion and maintenance
• Training and retraining and updates/upgrades <portable/scalable>
• Information may not be interpreted or used correctly or accessed by right people
Impact of IT
It has helped to transform the world economies (globalization as we studied under Sect. A).
Everybody is now connected. We recall that with globalization come the impact of outsourcing,
delayering and re-structuring. IT make globalization faster and the world smaller.
Information have impacted the way we work
New industry quaternary meaning IT related services
Productivity and Competitiveness
Internet banking like we pay for purchases with all kinds of electronic payment systems such
as (1) paypal (2)visa (3) POS/NETS etc?
Information and Communication tools
Media for office communication (email)/online marketing -Alibaba
Search for information –Google/ Networking like Facebook/Google/Tweeters
VOIP (voice over internet protocol) – make telephone calls over internet like SKPE
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Impact of IT and applications
Office automation –increase productivity. Huge labour-saving that can be obtained from a simple
spreadsheet, or from being able to look up a database, or from being able to enter an order which then
initiates the dispatch and the invoicing of goods without further human involvement.
Home working (and flexi hours)- Housewives/part-timers can work from home. Good communication
means that many people to work from home, at least some days of the week, or if not at home, at least
from locations away from the main office. For eg., sales personnel can communicate with the HO at the
end of the day and transmit new orders, make inquiries, and so on.
IT security issues: has created a new wave of high tech criminals and new type of criminal activity:
(1) online scam/frauds (2) hacking etc (3) create jobs?
IT has also been used to fight criminal activities:
•
biometric systems for access
•
survelliance cameras
•
but buildings/streets
Application Systems
•
Industrial uses- -Honeywell systems (stock-take etc),
industrial systems, defence sys.(real-time) etc
•
Accounting uses & decision making.
•
This classification by ACCA is more academic than
Practical today most application systems are modular
and you can “add on” when you have the budget.
Transaction processing systems
•
(TPS) simply records and processes trans i.e.
•
capture transaction data from source documents say;
– Invoicing systems – sales order/sales invoices
– Purchasing systems – P.O. and suppliers’ invoices
– Stock systems – MRP using BOM and GRN/GIN etc
– POS – retail POS audit rolls/tills also update stocks
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•
TPS records these daily trans and summarise them into routine reports
Application systems
•
TPS make repetitive tasks easy and accuracy checks are inbuilt. Essentially this was developed in the
1960s and it does what it says. It processes transactions such as sales, wages, salaries.
•
It was essentially just automation of what had been done by armies
of accountants. There was nothing very clever about it, but it took a lot of
repetitive calculation out of organisations, speeded up processing and
probably added to accuracy. It certainly saved costs.
Management information systems
•
•
Very soon after transaction processing was well established, people began to think that if, for example,
we have the receivables ledger in a computerised system, we can use the data which is there to
create useful management information, such as an aged receivables analysis. Management
information came into its own in the 1970s. It was producing information which was going to be useful
for management for making decisions. By and large, the information was for decisions which were
fairly black and white, right or wrong. Either someone is above that credit limit or they are not,
therefore we either authorise their order or we refuse it.
MIS convert data and info for reports used by tactical managers. Such reports help them to
monitor performance and maintain co-ordination with each departments, Example the
ageing report monitor credit dept and co-ordinate finance and marketing to collect debts.
Decision support systems
•
•
•
In the 1980s decision support systems became more common. Again this does what it says. It helps
and supports people when making decisions; the IT system doesn’t make decisions.
It help decision makers deals with unstructured decisions where there are high degree of
uncertainty or unknown factors
Very good example of the decision support system is how do you decide what next year’s budget should be.
Here there is no right or wrong way of deciding what next year’s sales should be: it’s a process which depends on
judgment and experience. However something like a spreadsheet where you set up a budget is going to be extremely
useful in helping you to come to a conclusion about what next year’s budget should be. You can change the input
assumptions and very quickly the results are calculated. The spreadsheet isn’t drafting next year’s budget but is
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giving you great help in arriving at next year’s budget. It is supporting your decision-making.
Application systems
Decision support systems –used to support decision making
Enhanced further from MIS for supporting your decision; as it give you more than just management reports
like profitability analysis
KPI systems/sensitivity analysis (IFPS)
Executive information systems
•Finally, in the 1990s we had executive information systems. There is perhaps not a huge difference
between decision support systems and executive information systems. But it helps strategic managers with
the characteristics it has:
•It provides very flexible access to information from the entire business.
•Executives often need information from outside the organisation. So an executive information system
almost certainly has links to external databases or at least to the Internet.
1.It allows drill down of data. The executive might see initially total receivables but if that figure is clicked
on, then it will divide into the receivables from each of the major divisions. If one of those is clicked on, it
will then begin to show the receivables from each of the major customers and so on. You are drilling down
into successive levels of detail and more information as required.
2.They are have highly graphical features. Executives need to see trends because they will often be
using trends to forecast the future and to decide on how the organisation should move
forward. It’s very often easier to see a trend such as growth or decline by looking
at a graph rather than looking at tables or figures. A picture tell a thousand words
so they say..
•Today the leading ERP softwares like SAP and Oracle have all the
features you expect from an executive information systems. And more
like SCM and prior year retroactive adjustments etc.
Expert systems ES ES holds special knowledge and allow
non-experts to interrogate the systems for advice, info and
recommendations. Robotic systems like robot surgery (left picture),
Artificial Intelligence systems (advanced medical diagnostics etc)
casino systems. Surveillance systems like Eagle eye??
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E Commerce
Ecommerce can be broken into four main categories: B2B, B2C, C2B, and C2C.
B2B (Business-to-Business). Companies doing business
with each other such as manufacturers selling to distributors
and wholesalers selling to retailers. Pricing is based on quantity of order and is often negotiable.
B2C (Business-to-Consumer)
Businesses selling to the general public typically through catalogues utilizing shopping cart software. By dollar volume,
B2B takes the prize, however B2C is really what the average Joe has in mind with regards to ecommerce as a whole.
Having a hard time finding a book? Need to purchase a custom, high-end computer system? How about a first class, allinclusive trip to a tropical island? With the advent ecommerce, all three things can be purchased literally in minutes
without human interaction. Oh how far we've come!
C2B (Consumer-to-Business) (FYI- not in ACCA syllabus) . A consumer posts his project with a set budget online and
within hours companies review the consumer's requirements and bid on the project. The consumer reviews the bids and
selects the company that will complete the project.
C2C (Consumer-to-Consumer) (FYI) . There are many sites offering free classifieds, auctions, and forums where
individuals can buy and sell thanks to online payment systems like PayPal where people can send and receive money
online with ease. eBay's auction service is a great example of where person-to-person transactions take place everyday
since 1995.
Business practices
BSB model
•Direct buying / selling over internet
•No middlemen
•Pricing flexibility-negotiate prices directly
(online bids)
•Efficient/versatile (payment systems etc.)
B2C model
•Sell direct to customers
•No need to have physical stores/outlets
•Wide reach of customers- the world
•Eliminate selling costs
Example: BSB model SCM
•A Demand-driven supply network (DDSN) is one method of supply chain
management which involves building supply chains in response to demand
signals. The main force of DDSN is that it is driven by customers demand.
•In comparison with the traditional supply chain, DDSN uses the pull
technique. It gives DDSN market opportunities to share more information
and to collaborate with others in the supply chain.
•Demand chain mgmt put emphasis on consumer pull vs. supplier
push. The demand chain begins with customers, then funnels through any
resellers, distributors, & other business partners who help sell the firm’s
products & services.
&
Finance (Accounting) & Administration
Finance & Accounting (F&A).
Manage money matters including
•Cash flows (financing) requirements
– 1) working capital management (operational day to day)
– 2) capital budgeting (L/T financing) 3) tax liabilities
•Accounting
– Financial and secretarial records (financial reporting)
• Maintain financial systems – for both financial reporting and management reporting
•Internal audit, external audit and audit committee matters
•Administration. Support other departments
•Normally under F&A but can be seperate as Human Resource department
•Ensure smooth to day operations
Enough stationeries, phone systems working, power supply don’t get cut-off, safe (comply with safety
regulations like safety points and fire drills etc.)
Employees recruitments – FTs stay in decent quarters (don’t get bust from SCDF). Pay them properly )
Compliance with laws- workmen’s compensation and other insurances (hospitalization benefits)
Updates of employee records and may c/w payroll
Physical security- warehouse and office security systems
Online security-many administration department are also responsible for this as they are entrusted with
setting up and support intranet/extra net and cloud computing services
Treasury functions (normally separate corporate dept for MNCs)
Treasury management refers to the corporate handling of all financial matters incluidng:
1) cash flow management
•generation of internal and external funds (short term excess funds go to short term instruments)
•working capital management (jointly with Finance)
2) forex mnagement (manage finance risks (interest / exchange rate fluctuations))
3) procedures for capital finance (CAPEX,Long-term excess funds- M&A or return shareholders etc, long
term funding include share issue/debenture issue))
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issue shares - may change ownership holding but no needs for collaterals
Financial accounting vs Management accounting
Financial Accounting means financial reporting
• Co’s House/ACRA annual filing.
– 4 Financial statements FS- SOFP, SOCI, CFS SOCE
• Annual audit -audited accounts are required for limited companies
• FS and financial records are responsibility of directors for disclosure
Comply with Co’s Act
Accounting standards/GAAP (which require specific disclosure formats)
Stock exchange regulations
Corp governance & social responsibility
Management accounting means reporting to internal users
• i.e. provide details for decision making; to assist them to discharge their duties to plan,
direct and control the operations of the orgn.
Management reports cover day-to-day & qualitative data; 3 of the most popular ones are:
i)
cost schedules
ii)
budgets
iii)
variance (exception) reports
Investment decisions
merger/acquisition/new markets
Focus on which products?
• Analyze costs & revenue by B/E analysis & other tools
• Performance management
• Budget and KPI systems. Set performance standards
• Monitor performance for corrective actions
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• Reward management
•
•
•
•
•
•
•
Audit provide assurance that reports are reliable and comply with basic
disclosure requirements
Internal audit
External audit
Supposed to be independent
Internal auditor not effective in SMEs as there
are too many relatives-no empowerment and
independence issue
• Preparer internal audit report to the CEO
who then dictate what to report, In MNCs IA
report directly to HO and/or audit committee
• Add value and improve organization
• Internal controls ensure policies and
procedures works and are updated regularly
• Reporting systems (incl mgmt reports) ensure
accounting records are effective and efficient
• Risks management (frauds/CBT/disaster
recovery)
• Ensure compliance with all laws and
regulations
• Work with the external auditor. External
auditor give management letter which outline
their findings on weaknesses or improvement
required in internal control systems.
Independent audit report from external
auditor
• Express audit opinion (with different level of
assurance)
• True & fair/Except for/Qualified/No opinion
•
•
•
•
• Qualified opinion means there are material
issue(s)
• Small fraud can still be true and fair
External auditor independence is impaired if he
become not objective:
– Huge fees as in Enron case
– Not seen to be independent eg have
connections to the client
Report to external parties basically the
shareholders and not the directors .
Under new money laundering laws they need
also to report any money laundering activities to
the authorities like MAS
Non management/Investors/govt authority/etc
More stringent as their interests need to be
protected
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External vs internal audit
External audit- Periodic or specific purpose (ad hoc) audit conducted by external (independent)
accountant(s). Its objectives include:
(1) Review adequacy of the accounting records are accurate and complete,
(2) Whether prepared in accordance with the provisions of GAAP/FRS, and
(3) Whether the statements prepared from the accounts present fairly the business financial position,
and the results of the financial operations.
The external auditors look at these financial statements, do many checks, and come to a conclusion
about them.
๏ ‘True’ means that the financial statements are more or less arithmetically accurate.
๏ ‘Fair’ is a slightly more difficult concept and means they are not misleading.
Something can be arithmetically accurate, yet still give an incorrect impression.
Additionally, the auditors examine the system of internal control of the company and transactions that happened
during the year and they then produce reports to management about their accounting procedures. So if the auditors
find for example that invoices are not being priced up properly, they will report this to management, and management
can then take action to try to ensure that and errors or problems do not occur again in the future.
Internal audit is basically concerned with frequent or on-going audit conducted by a firm's own
(as opposed to independent) accountants to
(1) monitor operating performance or (financial results-make money?),
(2) verify financial records (all the ledgers and documentation in order?),
(3) Evaluate internal controls (sufficient to manage risks?),
(4) assist with increasing operational efficiency and effectiveness and,
(5) to detect fraud.
Internal audit can identify control problems (for example– only one bank signatory required), and aims at correcting
lapses (say risks of the cashier stealing millions of dollars or already done so!) before they are discovered during an
external audit (internal auditor probably will lose job if so serious lapses happened!). Although the internal
auditors are the firm's employees, they normally do not audit themselves or their own departments, but entrust it
usually to independent auditors or HQ auditors
The Internal Auditor
His background
•Normally an accountant with sufficient experience (especially in audit areas)
•They also have their own professional body
His may report to CEO/Audit committee/BOD
•It depends on the level of empowerment in his contract of employment as he is an
employee which may has his independence impaired
His works -Able to conduct or be savvy in various areas of internal audit
1) Financial audit -work with accounting/external auditor to finalize annual returns
2) Performance audit -examine the performance of a particular type of work
• Say he want to audit QC work- he check the objectives of QC department and
whether they are performing
3) Operational audit- help ensure effective and efficient use of resources
• Say he want to examine production department operations as to its efficiency and
effectiveness and can meet ISO certifications
4) Systems audit -Say examine systems for appropriateness and proper controls with respect
to input, processing and output
5) Social and environmental audit.
He liazes with the independent party which is
assessing the organization compliance with environmental regulations or social issues
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The External Auditor
The law require an audit to be conducted for non-exempt companies with
the auditor being a professionally qualified accountant (and registered as a practising
accountant)
Need to be independent- this means he is appointed by shareholders to provide assurance on
the stewardship of the directors. Therefore you see audit firms say they provide assurance
servce.
His background.
As an independent auditor means
•
•
•
•
•
He is NOT an employee of, and not otherwise related to, the entity he or she is auditing and
cannot have conflict of interests (be independent in fact and in appearance)
Not related in contratual obligations with client he is auditing
He is dependent on the client’s fees or other service (like he is also co secretary or consultancy)
Current auditor cannot confirm to you no objections for taking over
His main responsibility is to express an opinion on the financial statements
•
•
•
•
•
Report to the shareholders of the organization in the annual General Meerting AGM
“True & fair” F/S- reasonably accurate and free from bias
If he find fraud, he might highlight it to management. He can be indirectly responsible or accountable
for fraud if proven he has not carried out his duties properly.
Management letter –review of internal control weaknesses
Other responsibility include compliance with money laundering matters. Corporate secretarial
department must also o background checks on nominee directors and suspicious transactions.
His works -The client need to book him for 2 audits (interim and final audits)
Final audit and Interim audit-after his work done, he made an audit report to the shareholders of the
company who appoint/re-appoint him in the AGM. So he is not an employee (because he need to be
independent)
As part of his work, he design and implement audit procedures to be conducted during the interim audit
and the final audit. The interim audit focus on internal control and risk assessment while the final audit
focus om the financial statement balances. With these work, he hope to have sufficient evidence to give
an opinion on the financial statements and hope that he can have reasonanle assurance that the chances
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or prospect of frauds or irregularities in the client records not being detected is low.
Auditor’s opinion
Statement (report of the auditor) recorded in an audited accounts/annual report by the external
auditor.
It is of three major types:
(1) Unqualified/clean opinion indicates the auditor endorse the accuracy and adequacy of the disclosed
information (in the financial statements) and of the entity’s financial picture presented by it. It means the
auditor has nothing negative to say of the audited entity) & have no reason to qualify their opinion or
subject to any conditions
(2) Qualified opinion *** is not necessarily negative and may indicate a limited scope of examination or
that the auditor was unable to directly verify certain information. For example- they were not able to verify
the stock balances of a remote location or it’s value. This means the audited accounts show certain
information about which the auditor has certain doubts or disagreement with the audited firm's
management (the directors).
(3) Adverse opinion indicates serious problems with the audit findings and can impact negatively on the
audited entity’s reputation and financial position.
*** Auditor’s qualify their opinion when…
•Accounts show certain information about which he or she has certain doubts or disagreement with the
audited firm's management. The accounts are representations by the directors of the client..
The auditor’s report will state :
(1) the audit was restricted in scope otherwise the financial statements present fairly the financial position
of the firm
(2) the audit was unrestricted and for the entire accounting period but an unqualified opinion cannot be
expressed because
•(a) the books and records do not completely reflect conditions that conform to the provisions of
IAS/IFRS/GAAP,
•(b) there has been a material change (between accounting periods) in accounting policies or in the
methods of their application,
•(c) there are significant omissions. in the financial statements, (d) the auditor was unable to conduct
complete verification of the accuracy of the accounting records due to certain omissions (e) the auditor
and the directors were unable to reach a compromise agreement regarding method of treatment
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valuation of certain assets (or their impairments) and/or (f) the management was unwilling or unable to
THE AUDIT
Do you need an external audit?
Costs & compliance. The UK laws require audit of non-exempt limited companies
•In Singapore, wef 2015 new companies if turnover <$10m and meet qualifying criteria, no need to have
external audit.
•Others since 2009 - $5m
•But in the day to day operations of your business, very often you will come across some forms of external
audit required:
– Bank loan- many banks may require you to have a short audited report
– Licensing authorities like BCA may ask for audited F/S figures
Add value to the business
•An audited F/S add credibility to your business as it is “certified” by an independent party
•Management letter on client internal controls (which is a function of the internal auditor- many SMEs no have)
which although not the function of the external auditor which is to express an opinion F/S healthy or not) helps to
improve client’s operational efficiency
•Investors and loan providers can rely on it for fast decision
– Shorten the due diligence exercise (no need to do extra audit step)
Audit planning
•
•
•
•
Auditor start with audit planning- when to go in for interim and final audit.
Interim audit/systems audit- test and evaluate internal control systems
Before the F/S are completed after year end, they come in before year end
They study how much reliance on your systems for scope of work (how much tests) by
assess risks of the organization including.
• They will arrange with the clients for :
• 1)
Interim audit
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• 2)
Final audit (with auditors also attend stock-count)
The Audit
Systems tests (compliance tests)
Test that internal controls are in place and work like what your policies and
procedures say and depends on findings;
– Systems in order & place high reliance or less substantive tests
– Systems risks too high and need to have heavy substantive tests
Substantive tests are tests to confirm the balance sheet balances
-Bank confirmation and review of bank transactions to confirm bank balances.
Vouch major transactions to source documents
Final audit
– substantive tests to confirm balances in balance sheet (financial position)
• Audit of the final financial statements balances. Do sampling tests of substantive
tests that the figures represented in the balance sheet are correct (or accurate
enough) and there are no material mis-statements by directors (investors and users
can rely on it). The aim is to detect material fraud or mis-statements of financial
statements- concerned with correctness of the account and the transactions.
Correct does not means 100% accurate – materiality factor to consider.
• Submit “report of the auditors” a statement att. in audited report for AGM filing.
• The audit is not expected to cover 100% sampling tests or uncover every errors or
inconsistencies. It main objective is for the auditor to express an audit opinion. Any
irregularities the auditor come across they may put in a management letter, unless it
is a material error which they have to report directly. Therefore audit report will
never provide absolute assurance or guarantee. The auditor only gather enough
evidence to give an opinion.
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Audit evidence-compliance & substantive testing
Basis on which an auditor expresses audit opinion on the accounts and financial operations of
the firm being audited.
•Auditors obtain such evidence from trusts that determine how well accounting controls
work (called compliance tests- the client-described systems work according to what the client
said?)) and tests of accounting details such as completeness and disclosure of information
(called “substantive test”).
Compliance test- Compliance audit (often called system audit) undertaken to confirm whether
a firm is following the rules and regulations (prescribed by its internal authority or control
systems) applicable to an activity or practice. This means the organization internal control
systems is working effectively and as prescribed in their manuals or as spoken to the auditors
during the systems audit.
An example- the auditor check the client policies says cheque must have 2 signatories with one
from HQ for amount >$200,000. If the client do 2 checks of $100,000 then it is non-compliance
with their policies.
Substantive test-A procedure used during accounting or final audits to check for errors in
balance sheets and other financial information(those described in the notes to the accounts
and representations made by management to the auditors). A substantive test might involve
checking a random sample of transactions for errors, comparing account balances to find
discrepancies, or analysis and review of procedures used to execute and record transactions.
An example- to confirm the balance sheet date balances of bank balances- the auditor get
bank confirmation letter direct from the bank, and check bank reconciliation and do cash count.
For exam, substantive tests for bank balances will include bank confirmation letter while
compliance tests will include tests of cheque issuance procedures or other control features151
The Audit Report – an example
Independent Auditors’ Report
To the Members of Singapore Telecommunications Limited
For the financial year ended 31 March 2014
Report on the Financial Statements
We have audited the accompanying financial statements of Singapore Telecommunications Limited (the “Co”) and its subsidiaries
(the “Group”) which comprise the statements of financial position of the Group and the Co as at 31 March 2014, the income
statement, statement of comprehensive income, statement of changes in equity and statement of cash flows of the Group and the
statement of changes in equity of the Company for the year then ended, and a summary of significant accounting policies and other
explanatory information,.
Management’s Responsibility for the Financial Statements .
Management is responsible for the preparation of financial statements that give a true and fair view in accordance with the
provisions of the Singapore Companies Act (the “Act”) and Singapore Financial Reporting Standards and for devising and maintaining
a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from
unauthorised use or disposition; and transactions are properly authorised and that they are recorded as necessary to permit the
preparation of true and fair income statement and balance sheets and to maintain accountability of assets.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance
with Singapore Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit
involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation of financial statements that gives a true and fair view in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In our opinion, the consolidated
financial statements of the Group and the statement of financial position and statement of changes in equity of the
Company are properly drawn up in accordance with the provisions of the Act and Singapore Financial Reporting Standards so as to
give a true and fair view of the state of affairs of the Group and of the Company as at 31 March 2014 and of the
results, changes in equity and cash flows of the Group and changes in equity of the Company for the year ended on that date.
Report on Other Legal and Regulatory Requirements
In our opinion, the accounting and other records required by the Act to be kept by the Company and by those
subsidiaries incorporated in Singapore of which we are the auditors have been properly kept in accordance with the
provisions of the provisions of the Act.
Deloitte & Touche LLP
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Public Accountants and Chartered Accountants Singapore, 14 May 2014
Basic legal requirements in relation to accounting
In the UK, accounts are regulated as follows: (the italics are Singapore regulations)
Company law. This, for example, insists that companies produce accounts roughly every year. Although
there are certain statutory disclosures set out in company law, by and large company law doesn’t go into
huge amounts of detail about exactly how different elements of the financial statements must be shown.
That’s really too complex a matter to have in law because frequent changes and great expertise is needed
to decide how things should best be shown.
Singapore company laws are adapted from UK. Singapore also have ACRA regulations
Accounting standards. This are discussed earlier slides
GAAP. GAAP stands for Generally Accepted Accounting Practice. This is a common set of accounting
principles, standards and procedures that companies use to compile their financial statements. How many
accounting concepts can you remember from your F3?
•
GAAP are imposed on companies so that investors have a minimum level of consistency in the
financial statements they use when analysing companies for investment purposes. Companies are
expected to follow GAAP rules in reporting their financial data through their financial statements.
•
Maintain proper records and account- Co’s act disclosure requirements for
– Financial statements (for annual filings)
– For tax department to assess tax liabilities (tax laws)
– Proper accounting records avail. for inspection (available from co’s house)
• Annual filing
• Register of shareholders/co secretary/liens/directors/etc
•
Proper means that the accounting records have sufficient details (or audit trails) for disclosure
requirements
– Financial transactions (no materials item left out)
– Financial position (balance sheet items)
– Amount of stocks and sales information
•
Keep these records for 3 years (private companies ) and 5 years (public co)
•
If directors did not ensure proper records kept
– Unless you provide justifications (earthquake?), it is a criminal offence
– Fine or prosecution for the organization, its directors ,or secretary
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The 4 financial statements and integrated reporting
•
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Income statement IS.
Income earned and matched expenses incurred in generating
earning for an accounting period. Format to be studied in F3
Cash flows statement (SOCF). Details inflows/outflows of cash for an accounting period
Focus on cash flows or liquidity. Format to be studied in F3
Statement of financial position (SOFP or balance sheet)
Tell users what assets, liability and equity the organization has
Represent net assets of the organization at point in time
Format to be studied in F3
Statement of equity (SOE): additional report extracted to show capital movement during
the financial year
Notes to the accounts are more detailed pages annexed together with above 4 reports in
an annual accounts. They normally provide more disclosure requirements.
There was a recent Singapore Exchange (SGX) consultation on its proposed “comply or
explain” regulation to sustainability reporting, and an increasing number of companies
locally producing sustainability and integrated reporting.
Sustainability Reporting is about communicating the organisation’s approach to
managing its key environmental and social issues. It is about communicating publicly how
the company assesses which environmental and social issues are most significant to the
company (“materiality”), how these issues are managed and how the company is
performing against each of these key issues (performance data). At Paia, we approach
these issues as business risks, and opportunities. Climate change, talent retention and
employee diversity, for example, can pose both risks and opportunities for companies, so it
is about communicating how the organisation is identifying and managing these risks and
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opportunities.
Duties of directors & annual filing requirements
Based on the principle that the directors must act with honesty, due diligence, and prudence, he must:
(1) avoid conflict of interests: directors must declare their interest in any transaction involving the firm
(2) exercise cae and skill or competence in all situations as reasonable persons would under the
circumstances.
(3) maintain confidentiality: he must not make improper use of privileged information obtained as a director
(4) Fairness: directors must deal with other directors and stakeholders w/out bias (act independently).
(5) must not engage in any conduct that may bring disrepute to the firm and/or other directors.
(6) Independence: directors must not compromise on the right to exercise an independent jugement
(7) must act in good faith in the best interest of the firm
Directors' report (in Sgp Directors' statement). In the UK and commonwealth countries, the part of a
large firm's annual report that states:
(1) Names and directors that served during the reporting year,
(2) Summary of the firm's activities and its future prospects
(3) principal activities of the firm and its subsidiaries and any changes
(4) recommended dividend for the reporting year,
(5) post-balance sheet date events that may materially affect the firm's finances,
(6) significant changes in the value of the fixed assets
Auditor's report.
This report (audit report discussed earlier slide) prepared by the auditors
appointed to examine must be filed every year by an incorporated or registered firm (along with its audited
FS) with the appropriate regulatory authority (ACRA/Company house). For SGP, exemption if sales <S$5m
Annual General Meeting AGM. Gathering of THE DIRECTORS AND SHAREHOLDERS of an
incorporated firm,reauired by law (Co’s Act) to be held each calendar year. Generally, not more than 15
months are allowed to elapse between two AGMs, and a 21-day's written notice of its date is required to be
given to the stockholders. The main purpose of an AGM is to comply with legal requirements, such as the
presentation and approval of the audited accounts, election of directors, and appointment of auditors
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Sustainability and integrated reporting
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•
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Integrated reporting is one step further – about communicating, how the company
manages its long term value creation by taking an integrated approach to both traditional
risks and these wider sustainability risks. Instead of reporting on financial performance and
sustainability performance separately, or even within the same AR, Integrated Reporting
intends to show how the company integrates environmental & social thinking into its
business.
So for example, an integrated report goes beyond financial, employee, environmental and
social data, to also demonstrate how the company integrates these broader risks and
opportunities into its long term strategy, into its risk management, into operating policies
and procedures, and what the trade offs between these issues are.
This means Integrated reporting pulls together information that sits in separate
reporting strands to explain how the firm creates value.
In the Singapore context, these reporting strands will include the
i) Corporate Governance Statement,
ii) Operating and Financial Review,
iii) Financial Statements and more recently,
iv) Sustainability Reporting.
“Sustainability reporting relates to one important aspect of a company’s performance, without which an
integrated report would be incomplete.”
– Ian Ball, International Integrated Reporting Council (IIRC) Board member & Principal Advisor and exCEO of International Federation of Accountants (IFAC)
In Singapore, and the region, it is often the sustainability reporting which is the weakest link to
integrated reporting. Many companies in this region are only just beginning to develop their sustainability
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reporting practices.
Sustainability and integrated reporting (FYI)
• So should companies just leapfrog to Integrated Reporting, and bypass
Sustainability Reporting? Companies don’t necessarially need to publish sustainability
reports, but they do need to put in place the sustainability fundamentals, for which GRI
provides clear guidance. Paia’s experience of having worked with over 25 companies in
Southeast Asia on both their sustainability and/or integrated reporting programmes, has taught
us that it is fundamental for companies starting out in their reporting journeys to firstly identify
what their key environmental and social risks and opportunities are, create management
programmes to manage these risks and maximise the opportunities and develop KPIs to track
environmental and social performance. These are the fundamentals of sustainability reporting.
• It takes time
• To embed these systems takes a couple of years. It takes time for companies to really
grasp the business benefits of sustainability and develop appropriate systems to manage these
risks in a way that is appropriate for the individual company. It is only then that companies are
ready to embrace integrated thinking and integrated reporting in a meaningful way.
• We are a great supporter of integrated thinking; that has always been our approach. We’ve
had the please of working closely with many clients to integrate environmental and social risks
into their ERMs, business strategy, policies, procedures and contract agreements, and this
experience has taught us that it takes time to achieve this integration, as it requires some level
of change management – for example to include environmental and social risks within business
investment decisions.
• Conclusion: get the sustainability part right first
• Sustainability reporting tends to be the part of Integrated Reporting that Southeast Asian
companies are weakest one, hence we recommend companies take time to embed
sustainability, before proceeding to Integrated Reporting.
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Accounting systems - snapshot
An orgn document its orgn systems requirements in their polices and procedures manual
• Systems changes due to bus. changes req. regular updates/so auditors every year do systems audit
Two main objectives
Planning objectives (no plan mean plan to die! Internet era!).
Planning due to limited resources require allocation
• Monitor results and make corrective actions to get planned results (budgeted or forecast) and
exception reporting for management performance (explain variances)
Recall Anthony 3 levels of planning
Control objectives. Risk mgmt [internal control features] especially for financial systems
Minimize risks of physical loss (pilferage/shelf life) fraud, criminal breach of trust (CBT) or material
errors
What is a system? An effective system has input/data capture procedures (organized set of manual and
computerized accounting procedures), and controls (processing) implemented [controls established to
gather, record, classify, analyze, summarize, interpret], and output (presentation of data files; present
accurate and timely financial data for management)
System security. Refers to control of access to a computer system’s resources, especially its data and
operating systems files.
Accounts or financial records of an organization that register all financial transactions and must be kept
at its principal office or place of business..
• The purpose of these records is to enable anyone to appraise the organization’s current finacnial
position with reasonable accuracy and frees from bias.
• Firms present their annual accounts in 3 main parts as we have seen earlier:
• (1) the SOFP,
• (2) the SOCI
• (3) the SOCF and SOCE and notes to the accounts.
Basic understanding of internal control principles
Definition.
The term ‘internal controls’ refers to the collection of mechanisms whereby an
organisation tries to ensure that all its transactions are properly authorised and recorded, and that its
assets are safeguarded.
The proper management of a business (and indeed now part of corporate governance requirements)
means that there has to be a good system of internal control in place if directors and other managers are
going to exercise their stewardship responsibilities correctly.
Internal control systems. The system of internal controls fall into two parts.
Control environment. This essentially refers to the culture within the organisation. Some
organisations put a very high priority on having a good system of internal control in place
whereas others see these as a nuisance. If the system of internal control is going to be
effective there must be a good control environment, otherwise controls which are
there in theory would simply be ignored in practice because people don’t take it seriously.
Control procedures:
• check manager sign off and/or attendance proof like biometrics]
• Once a supplier’s invoice has been paid, you expect that to be cancelled in some way to prevent it
being paid twice. (Control procedure: stamped paid on original invoice)
•Before you send goods to a new customer you should take up credit references, perhaps by writing to
their bank and then setting a credit limit. [Control procedure : initial credit limit by credit committee]
•It should be impossible to dispatch goods to that customer if it puts it over their credit limit
•[Control procedure: the computer systems highlight credit limit exceeded and no liftings allowed unless
override by senior officer]
๏ There should be a system of reviewing receivables and following up slow payments to try to prevent
the occurrence of bad debts. [Control procedure : receivables ageing and actions taken]
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Basic internal control principles
Implications of fraud.
If a good system of internal control is not in place and if corporate
governance is not operating correctly then there is a much higher chance that fraud will occur, and this
has got serious implications.
Type of fraud:
Financial. Lost of assets
The company may find that it hasn’t made the profit it thought, it may have lost assets, it might have a
liquidity crisis. Most fraud means removing assets from a company and of course this will adversely
affects its performance. Commonly financial fraud involve criminal breach of trust where the
employee is entrusted with the custodian of the assets for the company purposes but was diverted to
personal use temporarily which often end up with the employees unable to patch back. Sect F will cover
more
Misrepresentation. Fraudulent mis-statement of financial statements
At a higher level directors sometimes commit fraud to misrepresent how the company is actually doing,
and there have been several high profile events recently where financial institutions have pretended to be
in a much better situation than they actually were.
If the finances of the company are incorrectly recorded then incorrect decisions could be made. The
company might decide to expand when in fact the cash is not there or it may think a particular cost is
very high, but that cost has artificially been boosted because of a fraud.
Fraud not only make the company lose assets; it will also hurt reputation (and share prices!!!)
Reputation. The reputation of the company could be badly affected, and indeed many companies, for
relatively minor frauds, prefer to keep these secret. It doesn’t look good if the directors have to admit
that someone has been defrauding the company over a number of years. It rather makes people ask: what
have the directors been doing? How competent are they? Do we want to have dealings with that
company?
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Basic understanding of internal control principles
Preventing and detecting fraud depends on the following:
First, a good internal control system. As we said before, make sure that overtime payments
are authorised, purchases are authorised, invoices are cancelled, bank reconciliations are
performed and so on. This makes it much more difficult to manipulate figures. Part of the
internal control system will be internal audit. This is a team of people within the
organisation whose function is to go around the organisation, checking if the system of
internal control is effective and being operated as expected.
Secondly, ethics. It goes without saying that if everyone within the company is of a high
ethical standard, fraud will not be committed. It’s therefore essential to emphasise the role of
ethics. This is particularly important at the higher levels of the company where managers
might be induced to misrepresent figures so the company appears to be doing well.
Both control systems and ethics depend on training. If training is not given, how will people
know how to act appropriately, either to act in line with the internal control system as set
down, or how to deal with ethical dilemmas - which can sometimes mean asking for help
information, nor are they responsible for producing financial statements and advice.
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Basic understanding of internal control principles
Responsibility
The directors are responsible for setting up a system of internal control for ensuring that the
proper information for management control is provided, and for producing the financial
statements.
Directors (BOD) must ensure the integrity of the company accounting and financial reporting:
Make sure accounting records are properly kept / Timely reporting / No materials
misstatements or errors / No misrepresentation by management
Can face sanctions or fine from Co’s House (ACRA)
If listed, may have reprimands or trading suspension or delisting if major frauds or
unlawful actions by orgn
Responsibility delegated to management to implement an effective internal control systems
/and continually monitor and update the systems
Internal control features are included in corporate governance regulations of many stock
exchanges
The external auditors are responsible for auditing the financial statements. They will carry
out their audit procedures to collect evidence that the financial statements are presenting a
true and fair view. In the course of that examination they might rely on the system of internal
control which is in place, and if this is inadequate, they will write a report to the directors
advising them about how it could be changed.
The external auditors are not responsible for setting up and maintaining the system of
internal control, nor are they responsible for providing management information, nor are
they responsible for producing financial statements and advice.
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Basic understanding of internal control principles
Effective internal control features
1) Authorization procedures. Incorporate process with procedures that verify that the
individual or organization who has requested or initiated an action has the right to do so.
Include also both physical access and virtual access. For computer access: procedures to
grant or deny a user the access to a secure system.
Most computer security systems are based on a two step process:
(1) Authentication to ensure that the entity requesting access to the system is what or who it
claims to be, and
(2) Authorization to allow access only to those resources which are appropriate to that
entity’s identity. Use of passwords, encryption and decryption
2) Separation of duties
There must be established control according to which
no person should be assigned responsibility for more than one related function. For example,
the person responsible for purchasing should not also be responsible for making payment for
purchasing. Also called segregation of duties. Methods and procedures established as an
internal check on activities through separation of:
(1) custody of assets from accounting personnel,
(2) authorization of transactions from custody of assets, and
(3) operational responsibilities from record-keeping responsibilities
Internal checks therefore entails segregation of duties.
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Control features of main financial systems-generally there s/be
authorization and segregation of duties
Objectives
Control features
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•
•
• Control limits on types of purchases
(cannot over-buy)
• Authorized purchaser
• Systems do not allow processing (no
GINs printed also) if customer overdue
or exceed credit limit
• One person prepare and another
person check. Payment require the 2
persons endorse and authorized
signatory for payment transfers
• Credit approval policy
– Who can approve and limit
• Receipts/payments segregated
– By persons and even bank
accounts
– At least 2 signatories for payment
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• Recording by another
•
•
•
•
•
Purchasing
Purchases are authorized
Quality, specs. price (VFM)
Invoicing
Sales orders made are
collectible
Payroll
No un-authorized payments to
ghost employees or
unauthorized o/ts etc
Credit control
Payments
Payments are authorized and
goods received in order at
right extensions and castings
Internal control Systems ICS – The big picture
ICS basically will consists of the Internal Control Components and
the level of control activties in the system.
Internal Control Components consists of the following:
is the overall attitude of management regarding internal controls
CONTROL ENVIRONMENT
(whether they think is important or bochap)
AND INFORMATION
is relevant to the procedures
TECNOLOGY
and records to process business transactions
and maintaoin accountability for the nets assets
RISK
CONTROL
of the organisation
ASSESSMENT
MONITORING
ACTIVITIES
PROCESS
is the orn management
of risks by identifying the risks and responding to
the risks
are manual and computerised procedures to help the organisation
achieve its objectives and mitigate risks. These are often categories into the following types
of activities:
•SPAMSOAP is the mnemonic used to remember control activities or procedures.
•Segregation Of Duties.
Duties or authorities should be should divided between
employees in the way that no one individual or group of individuals have unfettered
(unrestricted) control over an activity or transaction.
•However, this control can be evaded by collusion (union) between employees. Therefore, it
should be reviewed for possibility of collusion between employees in order to commit
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unethical and illegal act such as fraud.
Internal control and internal check – The big picture
Internal Control Procedures or Activities for Risk Management
Physical Control.
Asset both tangible and intangible (copyright certificates, software etc.) asset
should be safeguarded against misuse, damage, theft etc.
•Arithmetical & Accounting.
Financial and non-financial information for internal and external
reporting purpose should be accurate and complete.
•To ensure this, reconciliation (bank reconciliation), re-performance and re-calculation of monetary
values for each material source document (invoices, GRN etc) should be done.
•Reliability of information should be determined by comparing internal information with external
information.
•Management.
Management should exercise control to ensure that all internal control
systems are working in a proper manner and they are followed by employees. It includes establishing
information systems to gather relevant information for performance management and internal audit
function to enable them to evaluate the effectiveness of internal control system.
Supervision. It means monitoring and reviewing work of individual employees, functions and
organization as whole.
•It communicates employees that their performances are being observed, measured and they can be
reward or penalised for their good or bad performance.
•Organization. Communicating and coordinating activities across whole organization.
•To accomplish this, role and responsibilities, reporting lines and organizational structure should be
formally established and clearly communicated.
•Authorization And Approval. It requires permission or signature of person(s) at an appropriate level in
the organization. It ensures that only activities and expenditures that are necessary for the achievement
of organizational objectives are made.
•Personnel. Key employees should be retained and underperforming employees should be motivated
and trained to achieve standard level of performance.
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•Clear and formal policies & procedures should be established for rewarding or penalising employees.
Internal control and internal check
Purpose of internal control (part of risk management procedures)
Timely, reliable , accurate financial reporting
Efficient and effective operations
Compliance with laws and regulations
Reasons for internal control
Segregation of ownership and control
Managers often delegates-”too much work”
Reduce risks due to frauds/CBT/pilferage (100% prevention impossible).
Divide/segregate duties in recording and authorization
Say Salesmen sells and payments made to (cheque issued to co specified receipt a/c and
cash receipts must be hand in immediately)
Internal checks and balances
Debtors’ statements sent directly by accounts to customers were highlights cash receipts by
salesman or when they try to re-order but blocked by systems (sales-order/invoicing clerk)
Different sections/employees cross checks each other work
Internal controls are systemaic measures such as reviews, checks and
balances, methods, procedures to
(1) conduct its in an orderly and efficient manner,
(2) safeguard its assets and resources,
(3) deter and detect errors [accounting systems and operations systems], fraud,
and theft,
(4) ensure accuracy and completeness of its accounting data,
(5) produce reliable and timely financial and management information, and
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(6) ensure adherence to its policies and plans.
Internal controls and internal checks
• Internal control systems use checks and balances and internal checks
Internal controls can be designed
1) To find errors or irregularities after they have occurred (detective controls)-Report
on inappropriate purchasing as no PO was issued – urgent and rush!
2) To fix errors or irregularities (corrective controls)
Variances or exception reporting
3) To prevent or reduce errors or irregularities (preventive controls)
Travel authorization signatures on travel request form
Checks and balances
Internal control mechanisms that guards against fraud and errors due to omission.
In a system with checks and balances, the following features are evident:
1) The authority to make a decision [says selling price decision],
2) The associated responsibility to verify its proper execution, is distributed among
different departments [marketing dept and finance dept jointly].(segregation of
duties principle)
These department are kept logically and physically apart, and no one department can
complete a transaction all on its own. A comprehensive example,
the purchasing department order goods, the stores-department reveives and
compares them with the respective purchases, the quality assurance department
inspects and verifies their quality, the accounts department verifies the invoice
amount, and only then the comptroller authorizes the payment for the purchase.
[this is often called 3 ways matching for payment]
This process emphasizes interdependence without interference,
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3) audit trails for auditing. The relevant documents are normally documented in
Internal controls and internal checks
Internal check. A division of duties where one individual does not carry out all
stages of a transaction. It is intended to prevent fraud and minimize errors. Therefore internal
checks are checks applying segregation of duties.
•Example :
1) To reduce the possibility of embezzlement, R Beng Co procedures for purchasing function
are as follows:
Different employees will perform different duties. For instance, one employee, Robert is
responsible for placing purchase orders with suppliers; whilst another employee, Richard is
required to check the delivered purchases and another, Chin makes the appropriate payment.
By having these roles split, it would be harder for Robert to order extra goods for himself, as
Richard checks the goods coming in. Richard would notice the extra goods and return them.
2) Payroll
One staff check the payroll to the staff attendance records which are either done by security
department or biometrics & another do the recording and payment is made by another after
approval
3) Sales systems
Marketing people raised sales order but credit limit set by credit department and accounting do
the invoicing and customer’s statements
Internal checks are a component of an internal control system. They represent a system of
checks that are conducted continuously throughout the day to day operations of an
organisation to ensure that policies and procedures are being properly carried out. The basic
purpose of the internal check is to detect / prevent any errors, whether they are done
intentionally or unintentionally. They are also designed to ensure that malpractices such as
fraud or theft do not occur.
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Internal financial controls incl accounting controls & admin. controls
Accounting controls
• Accounting controls. Methods
and procedures which an organization
management institutes to :
(1) safeguard assets,
(2) authorize transactions,
(3) monitor disbursements, and
(4) ensure
the accuracy and validity of accounting
records.
• It also involves segregation of duties.
Safeguard assets both Physical assets and
Intangible like IPs
Prevent and detects frauds
• 2 signatory/Approval limits
Accounting records are complete and
accurate (proper)
• Use decent software/Use decent people
Timely submission of reliable Financial
Statement
• Keep authority/users happy
Administrative controls
• Safety rules
• Work standards
• QC-sample tests/ ISO cert.
compliance
• Work environment
• Policy appraisals
• Employment policy
• Capitalization policy
• Reporting on non accounting
matters
• Environmental issues
• Labour movement/attendance
etc
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Features of effective internal control systems -continued
Features of an effective internal control systems
1. Systems of internal checks-purpose is to prevent potential risks and ask yourself what checks and
balances required (you make a risk assessment in each areas say cash payments etc and decide the
appropriate internal checks)-examples:
Set approval limits, credit controls, job rotation
2. Clear segregation of duties (authorization, recording & custodian)
– Store issue materials based on production issue note from prod authorized by produxction
order/sales order
– Sales orders (authorized by managers), signal store to issue & A/c receivable AR section to record
(issue invoice)
– Warehouse receive stock authorized by PO and recoding by store/AP/Payment
3. Updated documentation of policies and procedures
• for employees to understand the systems they use
• for external parties like auditors etc
4. Fast efficient systems to handle reporting requirements on timely and accurately say listed
companies use ERP (like Oracle or SAP)
•Listed firms do quarterly reporting with huge amount of transactions with many subsidiaries/ associates
•Must comply with Stock Exch/laws/environmental and stakeholders’ ‘ needs
5. Safeguard of assets – prevent unauthorized access or unauthorized removal and custodian of
company assets
* Proper custodian records of fixed assets and stocks (and other current assets
* Proper ledgers with coding/tagging of items and easy locating the items for inspection or counts
* Physical access- locked doors/cabinet/areas
* Physical controls-card access and password users etc
6. Clear directives for roles, responsibility and authority level. All employees should be clear as
what roles they play and their responsibility areas- spell out explicitly in the employment contracts
Approval limits-say local approval for capital expenditure limit say $10,000 and above $10,000 need HO
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approval, Purchasing above say $50,000 require 3 tenders., rules for entertainment spending/gift etc
Features of effective internal control systems -continued
When an IT computerized systems is involved (most co’s now are) additional IT control features
Controls are performed in such systems to ensure :
accuracy/validity (data input are accurate and valid),
completeness (all data input already?),
authorization (the person entering the dAata authorised to do so?)
identification (the person enterimng the data can be uniquely identified).
forensic checks (is the input data arithmethically accurate?)
2 types of controls
Application controls. Relates to processing of individual applications as the transactions
flows through each phase of the processing application(thereforeIt is fully automated and ensure
data input into the system is complete and accurate). Say payroll applications/P.O.
systems/invoicing systems and the 3 phases- Input control, processing control, output control and
computer master-files access and maintenance
General IT controls. Controls over the computer environment which the computer
functions- computer operation controls, systems software controls, systems/data security etc.
They are the policies and procedures that relates to the applications and enusre that the
system continu to operate properly.
General controls should be implemented for an IT environment like:
access to the systems in the form of logical access ny passwords (or level of passwords),
hardware and software controls
environment controls;systems security (like malicious software and viruses and phising)
physical controls- prevent unauthorised access using locks, biometric, cards
outputer controls (ensure output ate valid and secure (for the authorised receipients))
disaster recovery- to ensure the orgn still operate even if disaster or adverse codition occurs.
technical support- by internal staff and/or external suppliers to ensure users are competent and have right training and
upgrade
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Controls
over the
processes in
the systems
Control over
system
output
Standing data
Control over
inputs into
the systems
Output controls
We can summarise the control in another way as per the diagram
Processing controls
•
Input controls
Features of effective internal control systems -continued
Control of
Data security is concerend with keepingdata
data sae files
from various risks that could compromise or destroy it.
Control over
permanent
data records
(in master
files)
2 main types of risks:
Physical risks (impact of the physical environment where the data sits)
Human risks (uinauthorized access by orgn users or external hackers by physicval acess or remote, and virus infection and fraud
•
Right of access to the data. This is normally on need to know or have basis and controlled by passwords assigned to the users
according to where they are in the corporate food chain.
•Say the CFO has access to the financial statements, the AR clerk only have access to the receivable ledger but she casnnot update customer
master file (which can override credit limit) which must be done by her supervisor or the appropriately authorized staff (say credit control)
•Data can now be on site or on “cloud server”. Cloud servers boast that their “clouds” are as safe as what banks used like Verizon servers?.
If you cannot trust them you might as well also don’t do banking!
•Always have offsite back-up – grandfather/father/son 3 generation backup and disaster recovery procedures.
•Systems security. Software safe and reliable. Don’t buy un-licensed copy (say Lotus 123
you get fined and whistle blowers get rewards) which can give more problems than peanuts saved. Use appropriate software that meets the
needs of your organization. Buy proper database security and anti virus protection software.
•Also consider scalability and maintenance issues and Hardware security
•Maintain secure operating environment. Physical access controls include cards and biometric access.
•Hardware maintenance. This include planning for upgrade of your systems as the business grows and have more sophisticated needs –
both for customers & management. You cannot get a big supply contract if your IT cannot do SCM
– Scalability (sufficient for adequate records)
** Computer operations refer to day to day operations like jobs scheduling (priorities), back-up routine, printing, database maintenance,
systems programming, audit trails etc
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Control over output and master file maintenance
Control over output:
•Check expected output by doing reasonable checks
•Users access output files based on authorization levels
•System should also allow for error corrections to be listed out in error listing reports.
Master file maintenance.
Typically master file data refer to standing data that are more permanent in nature- they
do not change often . If they change it is because of the laws have changed or the
contract has changed. Non-standing data are transactions data.
In a payroll systems master records are – CPF contribution rates, maternity leave (the
laws may be revised) Rate of pay, basic pay, leave entitlement- his employment terms
have change
• In a typical sales systems, common master file records are:
•1) Customer permanent data like co’s address,
deliver to address
•2) Credit limit
•3) Contact
•Regular updates
and maintenance
by authorized staff
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Control over output and master file maintenance
Say after the data input clerk finish the batch input, she check the following
All master record files updated?- revised rates for basic pay, maternity (new employees whi
are now pregnant), leave entitlement etc? sales clerk check revised sales prices, discount
rates, credit limits?
•Output is correct- Check control total for the batch output- eg total amount for receivables
debited must be equal to total of the input of all credit sales invoices. The transaction
journals (or transaction detail entries) is an important printout that must be done whenever
any journals or trans is updated to the systems.
•Reasonableness check•all the receivables debited
look reasonable, GST value also ok …
•Inform A/R dept they can enquire
Or print A/R statements for their
further action
•If there are errors- in the batch
of sales invoices, the systems will
highlight the errors say:
Invalid customer code
Invalid GL code
the clerk will pass the corrections.
The schematic on the right shows
a typical payroll data flows
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for outsource payroll provider.
Security of IT systems and software (General IT controls)
Non-discretionary access control is when the overall system administrator (or a single
management body) within an organization tightly controls access to all resources for
everybody on a network.
Password assigned by the administrator for access to the systems cannot be over-written.
•Think of discretionary access controls like a democratic country. Everyone has their say as to
who can do what in their country.
•Non-discretionary access control, on the other hand, is like dictatorship/communism. Only
the government can specify what can or cannot be done.
Security considerations in the computer environment concerns areas of data security,
systems/software security and hardware security and computer operations (if you are big)**
over the 3 areas):
•Data security
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Data security
Data maintenance- data may need to be kept up to 6 years
Backup routine -3 generations b/up- “father/son/grandson’
Offsite backup and disaster recovery
Restricting access to data files
Password levels of controls-say A/R clerk only access sales data and GL supervisor
have higher level p/w for closing. Firewalls to prevent outsiders from accessing the
business intranet
Encryption and keys (VPN) -Encrypted files
need to be deciphered by receivers (encryption
means converting original message into another form
And the recipient do decryption (with entering
Prompted codes or passwords or card keys)
and get back original message form)
Cloud computing providers eg. Citrix provide
VPN cards that have passwords changed every
minutes on the cards. VPN is an example of
network access control without the issued
dongle, you cannot get into the citrix network.
Your internet banking also use dongle.
Cloud computing providers provide online
real-time accounting processing. No need
for you to buy software or hardware
Ensure providers have reliable servers and
security features Eg Quickbooks claim their
online systems. Very safe as they use same
security systems that commercial banks useif you have problems with
that- you may close all your bank a/c also!)
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Cloud Computing
Cloud accounting software is similar to traditional, on-premises, or self-install
accounting software, only the accounting software is hosted on remote servers,
similar to the SaaS (Software as a Service) business model. Data is sent into “the
cloud,” where it is processed and returned to the user.
• All application functions are performed off-site, not on the user’s desktop. In
cloud computing, users access software applications remotely through the Internet
or other network via a cloud application service provider.
• Using cloud accounting software no need to install and maintain software on
individual desktop computers.
• Cloud accounting solutions also allow employees in other depts, remote or
branch offices to access the same data and the same version of the
software.
• With cloud computing, it’s also easier to get real-time reporting and visibility
throughout your organization, with greater mobile capabilities and collaboration.
• Subscription-based models are popular among cloud accounting
providers, and in most cases these subscriptions are usage-based.
Companies that pay a cloud accounting subscription receive
updates to the software as soon as they arrive, with no
additional software purchases required.
• EXAMPLES
- For SMEs – QB online, Xero online
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Cloud Computing
•
•
•
•
•
•
•
•
•
For ERP systemsCitrix systems, Microsoft ERP (Great Plains)
There are a several key distinctions between cloud accounting and traditional, onsite accounting.
In the on-premises world, every time a firm grows, they encounter greater
software license , maintenance costs. new licenses and fees for database, and
other software. Also have to make expensive capital purchases of new hardware,
such as servers.
For one, cloud accounting is more flexible.
With cloud solutions,
Firms no need to buy expensive equipment and licenses
It requires far less maintenance
No backup -The cloud provider completes the backups
Accounting data can be accessed from anywhere on any device with an
Internet connection, rather than on a few select on-premises computers.
– This means account balances are always accurate and fewer errors take
place due to manual data entry.
– They are also better able to handle multi-currency and multi-company
transactions more efficiently.
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Cloud Computing
•
•
•
•
•
Nothing needs to be downloaded or installed on a company computer.
Cloud accounting software updates financial information automatically and
provides financial reporting in real-time.
Better security – Most cloud accounting software is run from a data center, which
offers multiple levels of security to protect the software and your data. The typical
data center has significantly better security than most small businesses.
Quickbooks Online says it is as as safe as banks because they also use Verizon
systems.
No installations or updates required – Cloud accounting vendors maintain the
software and install the updates.
• Cloud accounting applications are typically offered in one of these
two formats:
•
•
Hosted applications – The hosted solutions involve your desktop or client/server
accounting application running on a remote server. You gain access to your
accounting software using a remote session via the Internet. This solution allows
you to use your existing software and data.
Software as a Service (SaaS) – In this format, the accounting software and your
data are stored on the vendor’s servers and are accessible via a web browser. If
you have ever used a social media site or online banking, you have used a SaaS
solution
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Cloud Computing
•
.What are the risks?
•
The world of cloud accounting is not without risk. These solutions are new and
require that you perform the necessary due diligence to determine if the solution is
right for your business. Here are a few of the risks:
The vendor gone bust – Over a decade ago, we experienced a tech bubble
where vendors were here one day and gone the next. The same risk exists with
cloud accounting vendors. It is important to have a contingency plan (like your
own audit trails backup)
No Internet access – Cloud accounting vendors are accessible from anywhere
and anytime assuming that you have a connection to the Internet. If you find
yourself without internet access says in Philippines, you will not have access to
your accounting data.
Security breach – Cloud accounting software and your data both live on the
Internet. There is a risk that someone could gain access to your data. Refer
internet security issues.
What’s next? Firms are beginning to see the impact of cloud accounting
applications. It seems to be the next major paradigm shift in the world of
accounting.
•
•
•
•
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Automation and AI in accounting systems
AI means? According to Wikipedia:
In. computer science, artificial intelligence (AI), sometimes called machine
intelligence, is intelligence demonstrated by machines, in contrast to the natural
intelligence displayed by humans and animals.
Leading AI textbooks define the field as the study of "intelligent agents": any device
that perceives its environment and takes actions that maximize its chance of
successfully achieving its goals.
Colloquially, the term "artificial intelligence" is often used to describe machines (or
computers) that mimic "cognitive" functions that humans associate with the human
mind, such as "learning" and "problem solving".[2]
As machines become increasingly capable, tasks considered to require "intelligence"
are often removed from the definition of AI, a phenomenon known as the AI effect.[3]
A quip in Tesler's Theorem says "AI is whatever hasn't been done yet."[4] For instance,
optical character recognition is frequently excluded from things considered to be AI,[5]
having become a routine technology.[6] Modern machine capabilities generally
classified as AI include successfully understanding human speech,[7] competing at the
highest level in strategic game systems (such as chess and Go),[8] autonomously
operating cars, intelligent routing in content delivery networks, and military
simulations[9].
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Automation and AI in accounting systems
IMPACT OF AI
.
As artificial intelligence has done for every industry, it’s making a significant impact
in the world of accounting and finance.
• From saving time and money and providing insights,
• AI-enabled systems for accounting and finance are the way finance professionals
and their firms will stay competitive
• attract the next generation as employees and customers
New technology is changing the way people work in every industry. It's also changing
the expectations clients have when working with companies including accounting
firms
Artificial intelligence can help accountants be more productive and efficient.
• An 80-90 per cent reduction in the time it takes to do tasks
• Allow human accountants to be more focused on providing advice to their
clients.
• Adding artificial intelligence to accounting operations will also reduce errors
thereby increasing the quality of reporting.
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Automation and AI in accounting systems
•
.
•
•
After decades stuck in research labs, artificial intelligence (AI) is ready for primetime, transforming if not disrupting all the sectors of the economy that generate
lots of data (big data), from tech to finance, communications, energy, healthcare,
mobility or manufacturing.
More than most other industries, accounting hasn’t seen much innovation since
the creation of double-entry bookkeeping - a process of recording both profits and
losses - and considered one of the greatest advances in the history of business
and commerce.
That was over 500 years ago!
•
However, the good news is that applying AI and machine learning
technologies to bookkeeping, is becoming a reality with most of the major
accounting software vendors (Intuit, OneUp, Sage, and Xero) currently
offering capabilities to automate data entry, reconciliations (like bank
reconciliation and GST) and sometimes more.
•
In Forbes magazine research report on the future of accounting, Forbes expect
that by 2020, accounting tasks - but also tax, payroll, audits, banking… - will
be fully automated using AI-based technologies, which will disrupt the
accounting industry in a way it never was for the last 500 years, bringing both
huge opportunities and serious challenges
.
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Automation and AI in accounting systems
Artificial intelligence will not eliminate accountants
•
•
•
•
.
“Having machines to do all these tedious and repetitive tasks could sound scary
for many accountants because they are also very time-consuming and thus very
lucrative,” explained Stephanie Weil, CEO of Accounteam, a Silicon Valley-based
accounting firm. “However, if the AI system is well configured, it can eliminate
accounting errors that are generally hard to find and thereby reduce our liability
and allows us to move to a more advisory role.”
In an upcoming research study, Forbes also tested the automation capabilities of
4 of the most popular AI-enabled cloud-accounting solutions available in the
market today (OneUp, QuickBooks Online, SageOne, and Xero) and rank
them against their Accounting Automation Index (AAI) which evaluates the
accuracy of their AI engines to automatically recognize transactions coming in
from bank feeds and generate the correct accounting without any user
intervention.
OneUp proved to be the most effective with an Automation Index rate of 95% after
5 months of use, followed by QuickBooks Online (77%), Xero (38%) and
SageOne (30%).
Despite being very promising, the accuracy of the machine learning algorithms
used in most of today's solutions still needs to significantly improve in efficiency to
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avoid accounting errors and really fulfill their promise of automation.
Auotomation and AI in accountng systems
When accounting firms adopt artificial intelligence to their practise, the firm becomes
more attractive as an employer and service provider to millennials and Gen Z
professionals
.
This cohort grew up with technology, and they will expect prospective employers to
have the latest technology and innovation to support
a) their working preferences of flexible schedules
b) remote locations
c) free them up from mundane tasks that machines are better suited to complete.
As clients, millennials and Gen Zers will determine who to do business with based on
the service offerings they can provide. As accountants thesleves they will not feel
productive o relevant in this era.
As more accounting firms adopt artificial intelligence, they will be able to provide the
data insights made possible by automation and compete better while those who
don’t commit to the technology will not be able to compete.
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Auotomation and AI in accountng systems
Specific impact on role of accountants
• Robotic process automation (RPA) allows machines or AI workers to complete
time-consuming tasks in business processes such as document
. repetitive,
analysis and handling that are plentiful in accounting.
Once RPA is in place, time accountants used to spend on these tasks is
now available for more strategic and advisory work.
• Intelligent automation (IA) is a more sophisticated version of RPA. IA can mimic
human interaction in many cases, such as understanding inferred meaning in
client communication and using historical data to adapt to an activity. There
are multiple applications of RPA and IA in accounting work.
• AI can often provide real-time status of financial matters since it can process
documents using natural language processing and computer vision faster than
ever making daily reporting possible and inexpensive. This insight allows
companies to be proactive and adjust course if the data show unfavourable
trends.
• Automated authorization and processing of documents with AI technology will
enhance several internal accounting processes including procurement and
purchasing, invoicing, purchase orders, expense reports, accounts payable and
receivables, and more. Think AI in insurance, or hospitals?
• In accounting, there are many internal corporate, county , state and federalor
international regulations that must be followed. AI-enabled systems help
support auditing and ensure compliance by being able to monitor
documents against rules and laws and flag those with issues.
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Auotomation and AI in accountng systems
Specific impact on role of accountants
•
•
•
Fraud costs companies collectively billions of dollars each year
Machine learning algorithms can quickly sift through enormous amounts
of data to discern potential fraud issues or suspicious activity that might
have been otherwise missed by humans and flag it for further review.
Machine learning models applied to data can reduce fraud, enhance trust
and increase compliance. Machine Learning is the training of the AI with
the goal of building a model that continuously improves and supports the
augmentation of human tasks.
With an assist from AI-enabled systems, accountants are freed up to build
relationships with their clients and deliver critical insights.
Accountants need to be provided with the proper training and any support
necessary to learn how best to use AI to their advantage. Else they may not
accept and embrace the tech addition to accounting firms or their own commercial
firm.
AI can turbocharge the profession from a backward looking “bookkeeping” function to
delivering forward looking insights which can drive strategic decisions.
AI and automation in accounting/finance are just beginning. However, the technology
is getting more sophisticated, and the tools and systems available to support
accounting are expanding at a rapid pace. Accountants that resist these changes
will not be able to keep up with others who have the advantage of time and cost
savings and insights AI can provide
.
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Auotomation and AI in accountng systems
Specific impact on role of accountants
Conclusion
AI. changes everything
• AI technology and the accounting industry may seem to have contrasting impact
for some but many accountnats believe the profession is at the centre of an
exciting new era.
• Today, algorithms and code are still written by humans to solve problems and
learn from scenarios put in front of them. We are still a long way from true AI
where, in theory, computers can think for themselves.
•
•
As we move forward with the application of AI, we see many clear areas of
benefit to the accountancy profession:
Invisible accounting.. AI allows for repetitive tasks to be eliminated from an
employee’s daily workload, and also increases the amount of readily available
data at one’s fingertips. This, in turn, increases the intelligence available to
understand the health and direction of a business at any given time. AI
automatically manages the process of gathering, sorting and visualising
pertinent data in a way that helps the business run more efficiently. This
frees up staff to do more productive tasks and gives them more time to drive the
business forwards.
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Auotomation and AI in accountng systems
•
.
Technology enables accountants and bookkeepers to build value-based
businesses, bringing on more customers, having less interruptions and
increasing revenue, while putting in less time.
• Continuous audit
AI can handle that data review at speed. For example, it can detect anomalies such
as duplicate invoices or determine links between seemingly innocuous payments and
other known risks. It can also help to assign expenses to the correct categories,
ensuring the company doesn’t pay out for items it shouldn’t. By implementing
automated anti-fraud and finance management systems, practices can significantly
improve compliance procedures and protect both their own and clients’ finances.
In this way, AI and accountants can work together to provide a more predictive,
strategic service — using the available data to pick up on potential issues before they
arise.
• Active insights help drive better decisions
• Regardless of the sector, AI can be used to analyse large quantities of data at
speed and at scale. It has the ability to detect anomalies in the system and
optimise workflow. Finance professionals can use AI to assist with business
decision-making, based on actionable insights derived from customer
demographic, past transactional data and external factors, all in real-time. It will
enable accountants to not just look back but look forwards with more clarity than
ever before.
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Auotomation and AI in accountng systems
•
.
•
•
•
•
This will provide businesses with the ability to capture business activity in real
time, perform continuous reconciliation and make adjustments such as
accruals. . This will help reduce the burden at end of the period.
Build trust through better financial protection and control
AI can also significantly reduce financial fraud and minimise accounting
errors, often caused by human oversight. The rise of online banking has brought
a host of advantages, but it has also created new avenues for financial crime,
specifically around fraud. The chances of a dishonest payment slipping through
the net grow as the volumes of data increases. That has made the accountant’s
compliance task much harder to complete.
Companies can use data to perform cash flow forecasting, predicting when the
business might run out of money and take actions to protect against the situation
ahead of time. They can identify when a customer might be about to churn and
look at how to renew their series. All this means is that accountants will be able to
help clients respond to financial challenges before they become acute, adjusting
expenditure or processes as required.
As AI integrates wider business information flows into the accounting mix,
accountants will also be able to broaden their predictive consultancy beyond pure
financial planning to incorporate other areas of the business. For example, if a
manufacturer sees a rise in supplier costs, the AI-equipped accountant can predict
the likely impact on the business in the near future. They can advise on the best
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action to address the potential shortfall before it becomes a problem.
Auotomation and AI in accountng systems
• EXAMPLES OF AI APPLICATION
• . Business technology is continuously evolving, addressing big problems
that need better solutions. Technology can help us work more efficiently,
more accurately and more meaningfully, and AI is leading the way. A few
real-world examples of AI in practice today are:
• Healthcare: Machine learning is used to analyze vast amounts of medical
data. So far, this has led to the discovery of diabetes sub-types, detection
of brain tumors and accelerated the goal of curing cancer.
• Recruitment: Where once a recruiter would spend 60 percent of their
time reading a curriculum vitae (CV), a machine can now propose the top
10 candidates in minutes by matching resumes against the job description
and related skills required.
• Finance and accounting: Data interaction in these fields can be a complex,
time-consuming and a frustrating process. Cloud-based AI applications,
such as chata.ai, are emerging that employ machine learning and natural
language processing to do the hard work of data query and analysis. Users
simply ask questions, such as “How much did I spend with vendor xyz over
the past year?,” and get immediate answers – saving extensive time and
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resources.
Auotomation and AI in accountng systems
Artificial intelligence and FUTURE of accountancy
• Although artificial intelligence techniques such as machine learning are not new, and the
pace of change is fast, widespread adoption in business and accounting is still in early
. stages.
• To build a positive vision of the future, ACCOUNTANTS need to develop a deep
understanding of how artificial intelligence can solve accounting and business
problems, the practical challenges and the skills accountants need to work
alongside intelligent systems.
• Accounting bodies like ISCA or ACCA has long-standing expertise in technology-related
issues, drawing on the experience across many aspects of business, finance and
accounting, and will focus on building understanding of the practical use of artificial
intelligence across business and accounting activities today and in the near future.
• To summaise in a nutshell, with AI accountants can perform simple bookkeeping
responsibilities as a beancounter, all the way up to advising senior staff and
decision makers as they interpret financial information
The 18th Annual Global CEO Survey from PricewaterhouseCoopers (PwC) highlights that majority of CEOs believe
that investments in digital technologies have created value for their business, and around 80% say that mobile
technologies and data analytics are key strands of their strategy.
But standard setters appear to be lagging behind the rest of the industry in terms of embracing data and
technology in financial reporting.
Current disclosure requirements have led to annual reports reaching epic lengths that are difficult for users to
consume and lead to added complexity in financial reporting.
Today’s financial reporting system is based on paper and associates higher word or page counts with increased
complexity and neglects the ways that data and technology can improve the quality of information and investors’
access to it.
The current system presumes that information is consumed by humans; in other words, it assumes a human
consumption model, not a machine readable format.
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Application of Big Data and Data Analytics
There are inefficiencies in the current system and the ways that data, data analytics,
and technology may potentially improve or even transform that process.
.
The use of data and technology can result in a more effective and efficient overall
financial reporting process in which investors, management and stakeholders receive
more transparent, better-quality information on a timely basis.
But it require such changes with big data would lead to more effective investment
decision making
Effects of Structured Data on Investment Decisions and Regulation
Step 1
Financial reporting by companies by structuring data early in the process
For example, ACRA adopted XBRL long time ago
Step 2
More effective audit would lead to better-quality, more timely
information
Big data will move audit away fro sample – based audit
Step 3 More effective consumption of information by users, including
investors and regulators
Invesors can have a lot of info from ACRA (not free!)
Step 4 Better Investment Decision Making and More Effective Regulation
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Auotomation and AI in accountng systems
AI and financial reporting process with companies.
.
The current manual report assembly and review processes used by busineaes
require both time and money.
These processes can be enhanced through the standardization of data, formulas,
and presentation of financial information across disparate data sources or
software silos and through the effective implementation of disclosure management
applications.
When data are standardized, these applications are able to pull information from
disparate data sources to write automated reports, which enables streamlining of
current labor-intensive.
Example of data analytics application
Several years ago ,DBS commissioned E&Y (a big 4 firm) to assess which ATMs
machines have high level cash withdrawals and which machines have low
withdrawals.
By applying analytics , E&Y were able to accurately predict specifically which ATMs
need more replenishments.
Common examples in fintech companies – mining big data to establish the
consumer tastes and preferences of specific retail brands
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Big data
Auditors and Regulators
Structuring
data early in the process would not only benefit companies but would also
.
allow auditors to use audit data analytics to make the audit more efficient and
potentially provide users with a better quality and greater granularity of financial
information with greater reporting frequency and possibly a higher level of assurance.
It also allows regulators to use data analytics to cull structured data from
financial reports to identify violations of financial reporting regulations.
Investors Investors also seek structured quantitative data—combined with
management explanation of results in a quantitative and qualitative fashion—which
are not bounded by the document in which the information is contained. With the
availability of technology to sift through data and crunch the numbers, investors could
be in a better position to perform faster and better analysis.
In Singapore, ACRA uses XBRL language to extract structured data. To do so, the
XBRL (eXtensible Business Reporting Language) implementation issues that have
been faced by preparers and users—such as data quality issues—need to be
addressed.
When some of their finite resources are freed up, analysts can not only research
more companies but can also take a closer look at the companies they already follow,
which would support better-informed investment decisions. Greater efficiency with
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higher-quality investment decisions is a win for capital markets.
Big data
AI and Policymakers
To achieve these changes, regulators like ACRA and SGX and MAS need to
.
improve access to and searchability of information within the regulator’s
primary source documents. This step would serve to increase the use and the
integrity of primary source information.
Currently, data providers extract information and provide it in a substantially more
useful format than existing regulatory filings, resulting in the greater use of such
secondary sources by users.
Improvements by regulators could even remove the data providers as inte-mediaries
and thereby truly democratize information.
Structuring data early in the financial reporting process and improving the access to
and searchability of information in regulatory filings could produce a virtuous circle.
It would help companies by reducing costs and enabling them to analyze the data
more quickly and effectively to function more efficiently;
Investors believe standard setters and policymakers need to integrate into their
decisions the effect changes in technology have, or could have, on capturing,
managing, analyzing, presenting, and delivering financial data. In sum, because
much of the information provided must be mandated by policymakers, they need to
incorporate a view regarding technology in their work.
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Big data
BIG DATA AND AUDIT/ACCOUNTANTS
•
•
•
•
•
•
•
•
The results of big data's analysis used in the audit of financial statements allowed
revealing the occurrence of accounting misstatements, herewith full and
timely implementation of audit procedures did not provide an opportunity to
determine these misstatements.
Improving quality of financial reporting: Analytics can help
Accountants face constant pressures to close faster, report earlier and provide
more information to investors, shareholders, lenders and boards.
The quality of financial reporting cannot be compromised, as regulators and
investors have zero tolerance for errors or restatements of financial results.
What are the financial reporting challenges?
Financial reporting requirements are complicated, despite ongoing projects on
simplification and convergence. U.S. and international accounting principles are complex
and constantly changing, and they must be interpreted and consistently applied across
organizations and from period to period.
Size and diversity of operating units increases the challenge. Many companies have
multiple operating units in different locations with different systems, processes, languages
and currencies. Even small, privately held companies could have multiple products and
systems.
Regulatory oversight takes many forms. No financial executive wants to be subject to
comments or compliance audits from the U.S. Securities and Exchange Commission 199
(SEC). Such regulators are applying analytics to detect irregularities in reported data.
Big data
How can analytics help accountants?
• Analytics can provide a framework for evaluating financial and
operational results at period ends and between reporting periods,
thereby improving the quality of financial reporting.
• Variance analysis should be performed consistently, both at operating unit
and consolidated levels, with set parameters for investigating variances.
This analysis can be manual, automated or a combination of the two.
Finance staff should understand the role this internal control has in
creating accurate financial statements
• Different types of analyses should be performed, including balance sheet,
income statement, cash flow, budget versus actual, actual versus actual
current period and prior period by month, quarter, year to date, and
trailing 12 months. Material variances should be the focus for financial
reporting, but less significant variances can indicate internal control issues.
• Incorporate Nonfinancial data and forecasts can be used to ensure that
financial results are accurate. Finance should maintain ongoing dialogue
with personnel in areas like sales and human resources.
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Big data
Data analytics and auditors and regulators and
businesses
The SEC compares financial results by SIC code as part of its reviews,
Auditors compare a company's financial results to those of peers and the
overall industry to identify areas of audit focus and risk.
Accountants should use peer metrics (same industry firms) in the same way
that regulators and auditors do.
• Continuous monitoring uses systems to examine all of an organization's
transactions and data to assess control effectiveness and identify risks on
an ongoing basis. If finance detects control design or implementation
issues earlier, they can correct them earlier, thereby reducing cost of
errors, omissions and other deficiencies. It is important to design a process
for using data to address control issues and follow up on results.
• In these ways, analytics can improve the quality of financial reporting and
provide opportunities for financial professionals to gain valuable insights
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to aid in decision making.
blockchain
INTRODUCTION
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Blockchain technology has evolved greatly since the introduction of Bitcoin in
2008, the first decentralized peer-to-peer electronic cash system.
Today, innovators in various fields are realizing the benefits of the
technology behind Bitcoin. From medicine to finance, many sectors are
looking for ways to integrate blockchain into their infrastructures
Blockchain has leapt from obscure posts in tech blogs and discussion forums a
few years ago to front-page articles in mainstream media.
Organizations have attempted to capitalize on its hype in interesting ways.
Long Island Ice Tea Corp saw its share price soar by 500% intraday on 20
December 2017, when it changed its name to Long Blockchain Corp.
Blockchain is the technology that covers digital currency (like Bitcoin, Litecoin, Ethereum, and
others). This technology allows digital information to be distributed, but not copied. That means
each piece of data can only have one owner.
Why Is It Called Blockchain ?
A block is a record of new transactions. When a block is completed, it’s added to the chain.
So, Blockchain is a way to save data and make it immutable. That sounds great, but the big
question, of course, is: how does that work? The working is quite complex, you can check Wikipedia
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for this.
blockchain
Features of Blockchain
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Mostly people think that Blockchain is Bitcoin and vice-versa. But it’s not the case.
In fact,Bitcoin is a digital currency or cryptocurrency that works on Blockchain
technology
Blockchain was invented by Satoshi Nakamoto. As the name suggests,
blockchain is a chain of blocks that contains information. Each block consists
of a number of transactions and each transaction is recorded in the form of Hash.
Hash is a unique address assigned to each block during its creation and any
further modification in the block will lead to a change in its hash.
A block has mainly 3 parts:
Data/Information part- contain the information of the transaction incurred
Hash- Unique ID of block
Previous Hash- Hash of previous block
Figure – Blockchain architecture
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blockchain
Features of Blockchain:
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Data stored in blockchain is immutable and cannot be changed easily as explained
above.
• Also the data is added to the block after it is approved by everyone in the network
and thus allowing secure transactions.
Those who validate the transactions and add them in block are called miners.
DISTRIBUTED LEDGR
Blockchain is Decentralized as well as an open ledger. (or distributed ledger)
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Ledger is the record of the transactions done and because it is visible to everyone,
therefore is called an open ledger. No individual or any organisation is in charge of the
transactions.
Each and every connection in the blockchain
network has a same copy of the ledger.
Blockchain is Decentralized network
i.e., it has no central authority to control
the network as there is in the client server
model..
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blockchain
DISTRIBUTED LEDGR:
• Since in a Blockchain, every block has the hash of its previous block, therefore if
anyone tries to temper with the data in some block then the hash of the block will
be changed.
So he will have to change the ‘Previous hash’ of next block. In doing so, the
present hash of the next block will also change.
Eventually the intruder will have to change the hashes of every block in the
Blockchain which is not easy at all. Hence, the data in the Blockchain is
temper proof and maintains its authenticity.
• Data stored in blockchain is immutable and cannot be changed easily as
explained above.
• Also the data is added to the block after it is approved by everyone in the
network and thus allowing secure transactions. Those who validate the
transactions and add them in block are called miners.
• Each and every connection in the blockchain network has a same copy of
the ledger.
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blockchain
The Benefits Of Applying Blockchain Technology In Any Industry
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With its decentralized and trustless nature, Blockchain technology can lead
to new opportunities and benefit businesses (including audit and
accounting) through greater transparency, enhanced security, and easier
traceability.
How Blockchain Can Power Up Your Business
Blockchain solutions are not only limited to the exchange of cryptocurrencies.
There are numerous benefits that this technology can present to businesses in
many different industries, through its distributed and decentralized nature:
1 Greater Transparency. Blockchain’s greatest characteristic stems from the
fact that its transaction ledger for public addresses is open to viewing.
In financial systems and businesses, this adds an unprecedented layer of
accountability, holding each sector of the business responsible to act with
integrity towards the company’s growth, its community and customers.
2.. Blockchain provide a peer to peer network. This characteristic of blockchain allows
the transactions to involve only two parties, the sender and the receiver. Thus it removes
the requirement of ‘third party authorisation’ because everyone in the network is
themselves able to authorise the transactions.
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blockchain
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3. Increased Efficiency. Due to its decentralized nature, Blockchain removes the need for
middlemen in many processes for fields such as payments and real estate. In comparison to
traditional financial services, blockchain facilitates faster transactions by allowing P2P cross-border
transfers with a digital currency. Property management processes are made more efficient with a
unified system of ownership records, and smart contracts that would automate tenant-landlord
agreements.
4 Improved Traceability
With the blockchain ledger, each time an exchange of goods is recorded on a Blockchain,
an audit trail is present to trace where the goods came from. This can not only help
improve security and prevent fraud in exchange-related businesses, but it can also help
verify the authenticity of the traded assets. In industries such as medicine, it can be used
to track the supply chain from manufacturer to distributer, or in the art industry to provide
an irrefutable
For instance, if I am sending some money from US to my friend in US to my friend in India through
bank, then the bank will be the trusted third party. First it will verify the transaction and then may
cut some charges for the transaction. Hence the blockchain comes into sight. It aims at removing
trusted third party so as to makes the transaction fast and cheap.
Also-not traceable because3rd party cannot be trusted!
5 Better Security. Blockchain is far more secure than other record keeping systems
because each new transaction is encrypted and linked to the previous transaction.
Blockchain, as the name suggests, is formed by a network of computers coming together
to confirm a ‘block’, this block is then added to a ledger, which forms a ‘chain’. Blockchain
is formed by a complicated string of mathematical numbers and is impossible to be altered
once formed. This immutable and incorruptible nature of blockchain makes it safe from
falsified information and hacks. It's decentralized nature also gives it a unique quality of
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being ‘trustless’ – meaning that parties do not need trust to transact safely.
blockchain
• BLOCKCHAIN APPLICATIONS
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Blockchain-as-a-Service for Simpler Integration
The problem that many businesses face, however, is that blockchain is sophisticated
to integrate, and lack a technical team that is well-versed in this arena. BaaS or
Blockchain-as-a-Service companies allow customers to integrate Blockchain
technology into their businesses easily, without disruption to their daily processes.
One such company that identified the need for BaaS is Broctagon Fintech Company.
With a global presence across 7 countries, Broctagon provides premier fintech
solutions including multi-asset liquidity, brokerage technology solutions, and
enterprise blockchain development.
Blockchain has the potential for many use cases, applicable to a multitude of industries, and
BaaS facilitates that movement from ‘disruptive’ into ‘mainstream’ proof of ownership.
Blockchain-in-a-Box
Businesses are also apprehensive about blockchain integration, especially about
investing large sums of funds into development for a technology that is still considered
‘disruptive’.
Starter kits like Blockchain-in-a-Box allows modern businesses to create a proofof-concept to confirm blockchain’s viability and feasibility for their business
before embarking on a full development. Investors are more likely going to finance
a project they can see, rather than just a conceptual idea.
With it’s Blockchain-in-a-Box starter kit, businesses can create a fully tangible platform
to stand out in their market and gain confidence for their projects.
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blockchain
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OTHER APPLICATIONS
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The blockchain technology is increasing and improving day by day and has a really bright future
in the upcoming years. The transparency, trust and temper proof characteristics have led to
many applications of it like bitcoin, ethereum etc.
It is a pillar in making the businesses and governmental procedures more secure, efficient
and effective.
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Cyber security is the practice of defending computers, servers, mobile devices, electronic
systems, networks, and data from malicious attacks. It's also known as information technology
security or electronic information security. The term applies in a variety of contexts, from
business to mobile computing,
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The scale of the cyber threat
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The global cyber threat continues to evolve at a rapid pace, with a rising number of data breaches each year. A
report by RiskBased Security revealed that a shocking 7.9 billion records have been exposed by data breaches
in the first 9 months of 2019 alone. This figure is more than double (112%) the no. of records exposed in the
same period in 2018.
Medical services, retailers and public entities experienced the most breaches, with malicious criminals
responsible for most incidents. Some of these sectors are more appealing to cybercriminals because they
collect financial and medical data, but all businesses that use networks can be targeted for customer data,
corporate espionage, or customer attacks.
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With the scale of the cyber threat set to continue to rise, the International Data Corporation
predicts that worldwide spending on cyber-security solutions will reach a massive $133.7 billion by
2022. Governments across the globe have responded to the rising cyber threat with guidance to
help organizations implement effective cyber-security practices.
In the U.S., the National Institute of Standards and Technology (NIST) has created a cyber-security
framework. To combat the proliferation of malicious code and aid in early detection, the
framework recommends continuous, real-time monitoring of all electronic resources.
The importance of system monitoring is echoed in the “10 steps to cyber security”, guidance
provided by the U.K. government’s National Cyber Security Centre. In Australia, The Australian
Cyber Security Centre (ACSC) regularly publishes guidance on how organizations can counter the
latest cyber-security threats.
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Cyber Security
COMMON TYPES OF CYBER SECURITY:
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Network security is the practice of securing a computer network from intruders,
whether targeted attackers or opportunistic malware.
Application security focuses on keeping software and devices free of threats. A
compromised application could provide access to the data its designed to protect.
Successful security begins in the design stage, well before a program or device is
deployed.
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Types of application security:
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antivirus programs; Firewalls; antispyware software
monitored internet access; encryption programs
These help to ensure that unauthorized access is prevented. Companies can also
detect sensitive data assets and protect them through specific application security
processes attached to these data sets.
Information security protects the integrity and privacy of data, both in storage
and in transit.
Operational security includes the processes and decisions for handling and
protecting data assets. The permissions users have when accessing a network
and the procedures that determine how and where data may be stored or shared
all fall under this umbrella.
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Cyber Security
COMMON TYPES OF CYBER SECURITY:
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Disaster recovery and business continuity define how an organization responds to a
cyber-security incident or any other event that causes the loss of operations or data.
Disaster recovery policies dictate how the organization restores its operations and
information to return to the same operating capacity as before the event. Business
continuity is the plan the organization falls back on while trying to operate without
certain resources.
End-user security/education addresses the most unpredictable cyber-security factor:
people. Anyone can accidentally introduce a virus to an otherwise secure system by
failing to follow good security practices.
Teaching users to delete suspicious email attachments, not plug in unidentified USB
drives, and various other important lessons is vital for the security of any organization.
End-user protection or endpoint security is a crucial aspect of cyber security. After all, it is
often an individual (the end-user) who accidentally uploads malware or another form
of cyber threat to their desktop, laptop or mobile device.
So, how do cyber-security measures protect end users and systems? First, cyber-security
relies on cryptographic protocols to encrypt emails, files, and other critical data. This not
only protects information in transit, but also guards against loss or theft.
In addition, end-user security software scans computers for pieces of malicious code,
quarantines this code, and then removes it from the machine.
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Cyber Security
COMMON TYPES OF CYBER SECURITY:
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6. Critical infrastructure security:
Critical infrastructure security consists of the cyber-physical systems that modern
societies rely on.
Common examples of critical infrastructure:
electricity grid
water purification
traffic lights
shopping centers
hospitals
Having the infrastructure of an electricity grid on the internet makes it vulnerable to
cyber-attacks
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Security programs can even detect and remove malicious code hidden in Master Boot
Record (MBR) and are designed to encrypt or wipe data from computer’s hard drive.
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Some company only stick to intranet – no link to the internet or outside data including
non-corporate USB etc. Example- Singapore civil services with to intranet mode after it
was repeatedly hit by breaches. Many banks also use intranet for their own uses and
another for link to external users.
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Cyber Security
Types of cyber threats
The threats countered by cyber-security are three-fold:
1. Cybercrime includes single actors or groups targeting systems for financial gain or
to cause disruption.
2. Cyber-attack often involves politically motivated information gathering.
3. Cyberterrorism is intended to undermine electronic systems to cause panic or
fear.
Here are some common methods used by malicious actors gain control of computer
systems by threatening cyber-security:
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Malware. Malware means malicious software. One of the most common cyber threats,
malware is software that a cybercriminal or hacker has created to disrupt or damage a
legitimate user’s computer.
Often spread via an unsolicited email attachment or legitimate-looking download, malware
may be used by cybercriminals to make money or in politically motivated cyber-attacks.
There are a number of different types of malware, including:
Virus: A self-replicating program that attaches itself to clean file and spreads throughout a
computer system, infecting files with malicious code.
Trojans: A type of malware that is disguised as legitimate software. Cybercriminals trick
users into uploading Trojans onto their computer where they cause damage or collect data.
Then they can steal bank accounts etc.
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Cyber Security
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Spyware: A program that secretly records what a user does, so that cybercriminals can
make use of this information. For example, spyware could capture credit card details ·
Ransomware: Malware which locks down a user’s files and data, with the threat of
erasing it unless a ransom is paid.
Adware: Advertising software which can be used to spread malware.
·Botnets: Networks of malware infected computers which cybercriminals use to perform
tasks online without the user’s permission.
SQL injection. An SQL (structured language query) injection is a type of cyber-attack
used to take control of and steal data from a database. Cybercriminals exploit
vulnerabilities in data-driven applications to insert malicious code into a databased via a
malicious SQL statement. This gives them access to the sensitive information contained in
the database.
Phishing. Phishing is when cybercriminals target victims with emails that appear to be from a
legitimate company asking for sensitive information. Phishing attacks are often used to dupe people
into handing over credit card data and other personal information.
Man-in-the-middle attack. A man-in-the-middle attack is a type of cyber threat where a
cybercriminal intercepts communication between two individuals in order to steal data. For
example, on an unsecure WiFi network, an attacker could intercept data being passed from the
victim’s device and the network.
Denial-of-service attack. A denial-of-service attack is where cybercriminals prevent a computer
system from fulfilling legitimate requests by overwhelming the networks and servers with traffic.
This renders the system unusable, preventing an organization from carrying out vital functions.
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Cybe Security
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Dridex malware
In December 2019, the U.S. Department of Justice (DoJ) charged the leader of an organized cybercriminal group for their part in a global Dridex malware attack. This malicious campaign affected the
public, government, infrastructure and business worldwide.
Dridex is a financial trojan with a range of capabilities. Affecting victims since 2014, it infects
computers though phishing emails or existing malware. Capable of stealing passwords, banking
details and personal data which can be used in fraudulent transactions, it has caused massive
financial losses amounting to hundreds of millions.
In response to the Dridex attacks, the U.K.’s National Cyber Security Centre advises the public to
“ensure devices are patched,
Romance scams. In February 2020, the FBI warned U.S. citizens to be aware of confidence fraud
that cybercriminals commit using dating sites, chat rooms and apps. Perpetrators take advantage of
people seeking new partners, duping victims into giving away personal data. The FBI reports that
romance cyber threats affected 114 victims in New Mexico in 2019, with financial losses amounting
to $1.6 million.
Emotet malware
In late 2019, The Australian Cyber Security Centre warned national organizations about a
widespread global cyber threat from Emotet malware.
Emotet is a sophisticated trojan that can steal data and also load other malware. Emotet thrives on
unsophisticated password: a reminder of the importance of creating a secure password to guard
against cyber threats.
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Cyber Security
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Electronic security protocols also focus on real-time malware detection. Many use
heuristic and behavioral analysis to monitor the behavior of a program and its code to
defend against viruses or Trojans that change their shape with each execution
(polymorphic and metamorphic malware). Security programs continue to evolve new
defenses as cyber-security professionals identify new threats and new ways to combat
them. To make the most of end-user security software, employees need to be educated
about how to use it. Crucially, keeping it running and updating it frequently ensures that
it can protect users against the latest cyber threats.
Cyber safety tips - protect yourself against cyberattacks
How can businesses guard against cyber threats? Here are our top cyber safety tips:
1. Update your software and operating system: This means you benefit from the
latest security patches.
2. Use anti-virus software: Security solutions like Kaspersky Total Security will detect
and removes threats. Keep your software updated for the best level of protection.
3. Use strong passwords: Ensure your passwords are not easily guessable.
4. Do not open email attachments from unknown senders: These could be infected
with malware.
5. Do not click on links in emails from unknown senders or unfamiliar websites:This is
a common way that malware is spread.
6. Avoid using unsecure WiFi networks in public places: Unsecure networks leave you
vulnerable to man-in-the-middle attacks.
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Computer Security Risks
• Cloud security:
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Improved cyber security is one of the main reasons why the cloud is taking over.
Cloud security is a software-based security tool that protects and monitors the data in
your cloud resources. Cloud providers are constantly creating and implementing new
security tools to help enterprise users better secure their data.
The myth flying around cloud computing is that it’s less secure than traditional
approaches. People tend to believe that your data is more secure when stored on physical
servers and systems you own and control. However, it has been proven through cloud
security that control does not mean security and accessibility matters more than physical
location of your data.
Alert’s Logic Cloud Security Report found that on-premises environment users suffer
more incidents that those of service provider environments.
The report further finds that…
On-premise environment users experience an average of 61.4 attacks while;
Service provider environment customers experienced an average of 27.8 attacks.
Cloud computing security is similar to traditional on-premise data centers, only without
the time and costs of maintaining huge data facilities, and the risk of security breaches
is minimal.
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Defence against Computer Security Risks
As information technology soars to new heights, the number of cyber threats also increases.
So, companies need to be on their toes when it comes to their digital assets. In today’s digital
world, digital assets are major company assets. They are no longer secondary soft copies.
When they are gone or corrupted, companies incur hard losses.
That is why it is best to invest in great IT security software solutions that can protect you
from various malicious techniques and tactics such as viruses, spyware, and ransomware,
among many.
OTHER SECURITY PROCEDURES
information Security Policy
The company should promote information security, and confidence in its ability to not
only continuously provide goods and/or services, but also to recover quickly from IT
disasters with minimal computer disruptions. The included Information Security
Policies help to provide a safe, secure IT environment to serve the company’s
customers’ requirements and ensure stability and continuity of the business IT Assets.
The Information Security Policy Manual outlines the information security process and
comes with an acceptable use policy example, computer usage policy for employees,
IT security planning, IT risk assessment and IT security auditing procedures.
An Information Technology (IT) Security Policy identifies the rules and procedures
for all individuals accessing and using an organization's IT assets and resources
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Defence against Computer security risks
IT SECURITY POLICY
Effective IT Security Policy is a model of the organization’s culture, in which
rules and procedures are driven from its employees' approach to their
information and work.
Thus, an effective IT security policy is a unique document for each organization,
cultivated from its people’s perspectives on risk tolerance, how they see and value
their information, and the resulting availability that they maintain of that information.
• The objectives of an IT security policy is the preservation of confidentiality,
integrity, and availability of systems and information used by an organization’s
members. These three principles compose the CIA triad:
• Confidentiality involves the protection of assets from unauthorized entities
• Integrity ensures the modification of assets is handled in a specified and
authorized manner
• Availability is a state of the system in which
authorized users have continuous access to
said assets
• The IT Security Policy is a living document that is
continually updated to adapt with evolving business
and IT requirements
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Defence against Computer security risks
Hardware security
Hardware security can pertain to a device used to scan a system or monitor network traffic.
Common examples include hardware firewalls and proxy servers. Less common examples
include hardware security modules (HSM), which provision cryptographic keys for critical
functions such as encryption, decryption and authentication for various systems.
Hardware systems can provide more robust security than software is capable of and can also
add an additional layer of security for important systems
The term hardware security also refers to the protection of physical systems from harm.
Equipment destruction attacks, for example, focus on computing devices and networked
non-computing devices such as the ever-increasing number of connected devices in M2M or
IoT (Internet of Things) environments. These environments are bringing connectivity and
communications to large numbers of hardware devices that must be protected through
either hardware- or software-based security. .
To assess the security of a hardware device, it’s necessary to consider vulnerabilities existing
from its manufacture as well as other potential sources such as running code and the
device’s data I/O on a network
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Defence against Computer security risks
Software security
Software security is an idea implemented to protect software against malicious attack and other hacker
risks so that the software continues to function correctly under such potential risks. Security is
necessary to provide integrity, authentication and availability.
• Software security assurance is a process that helps design and implement software that protects
the data and resources contained in and controlled by that software. Software is itself a resource
and thus must be afforded appropriate security.
• Since the number of threats specifically targeting software is increasing, the security of our
software that we produce or procure must be assured. "Dependence on information technology
makes software assurance a key element of business continuity, national security, and homeland
security
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An advanced persistent threat (APT) is a stealthy computer network threat actor, typically a nation
state or state-sponsored group, which gains unauthorized access to a computer network and
remains undetected for an extended period.[1][2] In recent times, the term may also refer to nonstate sponsored groups conducting large-scale targeted intrusions for specific goals.[3]
Such threat actors' motivations are typically political or economic. Every major business sector has
recorded instances of attacks by advanced actors with specific goals seeking to steal, spy or disrupt.
These sectors include government, defense, financial services, legal services, industrial, telecoms,
consumer goods and many more.
Some groups utilize traditional espionage vectors, including social engineering, human intelligence
and infiltration to gain access to a physical location to enable network attacks. The purpose of these
attacks is to place custom malicious code on one or multiple computers for specific tasks.[7] 221
Defence against Computer security risks
Eavesdropping is the act of secretly or stealthily listening to the private conversation or
communications of others without their consent.[1] The practice is widely regarded as unethical, and in
many jurisdictions is illegal.
Eavesdropping vectors include telephone lines, cellular networks, email, and other methods of private
instant messaging. VoIP communications software is also vulnerable to electronic eaves
dropping via infections such as trojans.[1]
Network eavesdropping is a network layer attack that focuses on capturing small packets from the
network transmitted by other computers and reading the data content in search of any type of
information.
This type of network attack is generally one of the most effective as a lack of encryption services are
used. It is also linked to the collection of metadata. Those who perform this type of attack are generally
black-hat hackers; however, government agencies, such as the National Security Agency, have also been
connected.
Computer access control
In computer security, general access control includes identification, authorization,
authentication, access approval, and audit. A narrow definition of access control would
cover only access approval, whereby the system makes a decision to grant or reject an access
request from an already authenticated subject, based on what the subject is authorized to
access.
Authentication and access control are often combined into a single operation, so that
access is approved based on successful authentication, or based on an anonymous access
token. Authentication methods and tokens include QR scan, passwords, biometric scans,
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physical keys, electronic keys and devices, hidden paths, social barriers, and monitoring by
Defense against Computer risks
DEFENCE (VS IT/CYBER ATTACKS)
Authentication (from Greek: αὐθεντικός authentikos, "real, genuine", from αὐθέντης
authentes, "author") is the act of proving an assertion, such as the identity of a computer
system user. In contrast with identification, the act of indicating a person or thing's identity,
authentication is the process of verifying that identity. It might involve validating personal
identity documents, verifying the authenticity of a website with a digital certificate,[1]
determining the age of an artifact by carbon dating, or ensuring that a product or document
is not counterfeit.
In computer science, verifying a user's identity is often required to allow access to
confidential data or systems.[
• Authentication can be considered to be of three types:
• The first type of authentication is accepting proof of identity given by a credible person
who has first-hand evidence that the identity is genuine.
The second type of authentication is comparing the attributes of the object itself to what is
known about objects of that origin.
The third type of authentication relies on documentation or other external affirmations. In
computer science, a user can be given access to secure systems based on user credentials
that imply authenticity. A network administrator can give a user a password, or provide the
user with a key card or other access device to allow system access. In this case, authenticity is
implied but not guaranteed.
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Defence
Authorization is the function of specifying access rights/privileges to resources, which is
related to information security and computer security in general and to access control in
particular.
More formally, "to authorize" is to define an access policy.
During operation, the system uses the access control rules to decide whether access requests
from (authenticated) consumers shall be approved (granted) or disapproved (rejected).[2]
Resources include individual files or an item's data, computer programs, computer devices
and functionality provided by computer applications. Examples of consumers are computer
users, computer Software and other Hardware on the computer.
• Access control in computer systems and networks rely on access policies. The access
control process can be divided into the following phases: policy definition phase where
access is authorized, and policy enforcement phase where access requests are approved
or disapproved.
• Authorization is the function of the policy definition phase which precedes the policy
enforcement phase where access requests are approved or disapproved based on the
previously defined authorizations.
• Most modern, multi-user operating systems include access control and thereby rely on
authorization. Access control also uses authentication to verify the identity of
consumers.
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Section D
•Leading and managing
individuals and teams
In simple English-(how to mange yourself
and your team)
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D1 Key terms
Leadership is an inter-personal influence directed towards the achievement of goals
Leaders (lowest level of involvement with people).
Individuals who people want to follow
• They set direction for people to follow and lead
and co-ordinates the activities of the people under his charge
• Have formal authority and other quality like charisma
Leaders become just managers if they lost the ability to influence people to work toward the goal(s)
Management is the effective use and co-ordination of the orgn resources in order to
achieve key objectives with maximum efficiently. Another definition is “Getting things done
through other people”.
Managers (higher level of involvement with people).
Individuals who manage people and
get things done thru them) by delegating. They are responsible for specific function or dept and
set tasks and monitor people
Managers are not leaders if they can influence people to work toward the goal(s) without using formal authority “pull ranks”
Another definition is “A social arrangement with a controlled performance of collective goals”.
The important words here are “social,” “controlled,” and “collective.” The word “social” recognises that we are not
machines, that we are people, that we have an important social or human aspect to our characters. The idea of
“controlled” is important. Basically one of the roles of management will be to set some sort of goals or targets and
then to try to ensure that people achieve that. Finally, “collective”; the idea that in an orgn we should all be working
together as a team
A supervisor given responsiblity to plan and control the work of a group of employees
Supervisors (highest level of involvement with people). Interface between
management and workers. They supervise people by directly overseeing them and get
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specific tasks done
D1 Key terms
Management process as “getting things done thru others”
Power, authority, responsibility, delegation
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Power. What give people the ability to influence other people or events?
Rational-legal, that's the power your manager has. He is drawn higher on the eorganization chart than you
are! So you do what your manager tells you and also your contract of employment implies that you should do
what your manager tells you provided that it's legal.
Coercive power. Use of force. “Do or resign”
Reward power. Using motivational methods or procedures implemented or simply offer you more pay or
promotion if you do what you are told.
Knowledge power. The power that some have because they have specialist knowledge which they
release selectively. “I will teach you these new methods if you make no mistakes for 1 year”
Charismatic power - the power that some people have simply by their force of personality or their charm.
(sound like city Harvest leaders)
Authority is the right to give orders and the power to exact obedience per Fayol. Managers may
delegate their authority to a lower level staff
Having power doesn't mean you have a right to exercise that power. It you have the right to exercise power then
you have what's known as authority. So for e.g, you may heard of the term "authority limits" where people may be
able to buy fixed assets up to a defined limit) but nor beyond that. Having power without authority is poor but so is
having authority without power. We probably remember some school teachers who have the authority to tell the
class to sit down and be quiet, but when they try to exercise that authority, they had a complete lack of power over
the class.
Responsibility is one liability to be accoutable for one actions. Therefore it is not delegable
• If you are made responsible or accountable for a task then as the saying goes “your problem now".
Managers have responsibility for their tasks and their subordinates
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Authority and responsibility of managers
Managers have authority and responsibility in the 3 levels of Anthony’s hierarchy.
1)
Strategic level -focus on low term planning involving few managers with highest level of authority
2)
Tactical levels Many managers and staff involved. May need to delegate
3)
Operational day to day levels - day to day supervisors with their employees
•
Managers lead with various styles. Leadership theories next slide - 5 theorists in FIA syllabus.
•
To be effective, managers need to be leaders influencing others toward the goals. Need to motivate the team- the ways
the jobs get down, quality of works and level of innovations
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D1 Nature of management (mmanagement theories) –the big picture
Most of the theories of management discuss on what makes a good manager? and what activities good
managers should actually undertake?.
Early 1800s to early 1900s
Classical theory of management – focus onn improving efficinecy and productivitgy
Henry Fayol Focuses on the organisation as a whole and not the individual employee
•
Covers how management should organise large groups of employees into the overall structure of the
organisation so that the efficiency and output of each group increases.
•
Suugested that management of an orgn s be split into 5 key areas (NEXT SLIDE)
Human relations school – Mayo. He believes that social relationships among employees and group interactions
directly affect productivity and efficiency of employees
1930s before world war 2
Scientific Management - focus on getting the maximum for both emploer and emplyee
F. Taylor believed that this casn be achieved by applying 4 scientific management principles:
1. Analyse tasks in detail parts to determine most efficient methods to use
2. Scientifically manage (standardization of tasks) the employees and implement a fair pay systems
3. Managers make key decisions and give details to employees
4. Division of labour- work divided between managers and workers
Human Relations School-focus on worker attitudes, group relationships & leadership style
Elton Mayo argued that focus on individual is important due to:
•
Workers' attitude or behaviour depends a lot on group relations & management-worker communication and
not working practices or physical conditions (imagine u joined Google but no collague talked to you at all!)
•
Group relationship (like peer pressure / people from same type) is impt for workers to feel they belong
•
Leadership style is important now that wagelevels is not the most dominant factor for workers
Modern writers (Post world war Functional approach/Traits/Contingency Theories
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Peter Drucker, Mintberg others (R Tan?) add on their side of the stories
D1 Henri Fayol - Classical Management
One of the earliest management theorists was Henri Fayol who was active in the early 1900s. He
believed that the management theories could be developed, then that management could be
taught.
• He said that managers have five functions:
Planning ๏ Organising ๏ Commanding ๏ Coordinating ๏ Controlling.
• This theory main contributor/writer Fayol, outlined 14 principles of managerial tasks for
organising that they managers need to follow when organising employees into their organization
structure
• There are perhaps two things to note here.
– First of all, he really said nothing about inspiring or leading or motivating; much of the social
aspects of management were missing.
– And secondly, although none of us is likely to deny that planning, organising, commanding,
coordinating, and controlling are important aspects of management, dividing the
management tasks into these five functions doesn’t necessarily help us to be
better managers. We are unlikely to set our diaries saying that from 9:00 to 10:00 in the
morning we will do a bit of planning, from 10:00 to 11:00 perhaps a bit of commanding and
so on.
Knowing what you should do is very different from being able to do it at appropriate times. Fayol’s
work comes under the heading of “classical management” and classical management theories hold
a view that there is a correct way of managing, just as classical architecture put forward the idea
that there are proper proportions of buildings which please the eye and which are therefore correct.
• Classical management held a view that there was a set of golden rules and if you obeyed these
you would be a good manager.
• In general, classical management is not believed, or at least not naively believed, any
more. Today Y and/or 1990s generation are not so simple to manage lah!!!
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D1 Taylor – scientific management
•
Frederick Taylor developed his theories of scientific management in the late 1800s by
systematic observation & study of processes. Until the late 1800s most businesses are
relatively small, with 1-3 people. As businesses grew in size and Taylor introduce function of
management to study work, to develop a science of work, and from that to work out how
jobs could be designed so that they could be carried out efficiently.
• This could allow employees to earn more. rule of thumb
methods should be replaced by application of methods
based on scientific study of the tasks. Scientifically select,
train, and develop each employee rather than letting them
train themselves; provide detailed instructions and supervision
of each worker; apply division of work between managers
and workers so that the managers apply scientific
management principles to planning the work that the workers have to actually carry out.
• Inevitably this led to task specialisation, which is basically the classic production line,
because it was discovered that one of the most efficient ways of carrying out work was to do a
relatively simple task over and over again.
• Potential benefits arising from Taylorism are:
• ๏ Increases in productivity, ๏ Fair and higher wage allocation based on output, and
• ๏ Workforce care programs because if you didn’t care for your work force, you have to waste
money through additional recruitment, training, and inefficiencies
• On the downside it had a great capacity for dehumanising work Work is no fun but it’s
important to remember that Taylor ambition was not to do this - his ambition was to enable
workers to earn more through working in a more efficient environment.
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Frederick Taylor
1)
Scientific/classical
Taylor
1856-1915 14 principles managers need to follow (next
(Scientific
theory).
Father of modern slide-no need to memorise!)
management-management process structured into
Management should design jobs (give
or managed according to five functions:
employees “scientific methods”) so that
(i) Planning by forecasting events that may affect
they are carried out efficiently
an organization and develop suitable organizational
Employees have little discretion over how
plans in order to obtain the desired results in the
they work
future.
E.g Set up a new dept say accounting dept:
(ii) Organizing the available resources (machinery,
Draw up the department planning- what tasks
required
materials, and human resources) in order to
complete a certain task.
GL/AP/AR/CB
Organize by getting suitable resources (people
(iii) Commanding means leading by the process
& equipment) for each task (in the department)
of giving instructions to subordinates and must act
and ask what each staff need to do
as
role
models
and
practise
two-way
Leading- setup coding, processing and closing
communication when giving instructions.
procedures for them and show them the way
(iv) Coordinating the action plans of subordinates
Co-ordinate-responds to their quarrels (like R
by implementation of activities. They must always
Beng keep the GL for himself for 3 days how
assess the structure of the organization and
can I keep the deadline?)
implement changes if weaknesses exist in the
Controls- Keep the deadline for each tasks
existing structure.
say:
(a) processing by 10th day
(v) Controlling
Managers controls the activity
(b) Draft by 15th day
with control procedures like standards to ensure
(c) Management reports by 20th day
that actual activities are consistent with planned
activities
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Fayol’s 14 principles
Division of Work
Each employee perform a specific job or task in
order to increase efficiency in the organization.
Authority
Giving instructions and obtaining loyalty.
Created from a formal position in the organization
Create responsibility
Discipline
Important to ensure that the organization is running
smoothly.
Unity of Command
Employees should receive orders only from one leader.
Unity of Direction
A single purpose that creates erne plan of action based on
the available organizational resources
General Interest over Individual
Interest
No priority should be given to the interest of an individual
or a specific group of employees in at organization
Remuneration
Fair remuneration is given to employees and the employer.
Centralization
• Centralization or decentralization depends on the
situation.
• Maximize the use of skilled and efficient employees.
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Fayol –cont’d
Line of Authority
• The line of authority flows from top to the
bottom of the organization.
• Encourages horizontal communication.
Organization
• Equipment is stored in the appropriate place.
• Suitable employees must be assigned to the correct tasks.
Equity
• Employees must be treated fairly in terms of
pay and promotion
Stability of Tenure
• Avoid employee turnover as hiring new
employees involves time and high training costs
• A loss to the organization if there is a high
employee turnover.
Initiatives
Employees are encouraged to take their own
initiative to complete their tasks.
Esprit de corps (Pride and
Unity and the spirit of teamwork are given
mutual loyalty in a group)
priority in completing a task.
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D1 Mayo – (Human Relations School theory)
Around 1935, Elton Mayo carried out a very important series of experiments at the Hawthorne plant of the Western Electric company.
In one of these experiments he divided a department into two. Half of the workers were the control group, but for the other half he
varied the lighting, sometimes making it better, sometimes worse. He then asked those workers what lighting they preferred and what
suggestions they might have for improving it. Much to his surprise he discovered that whether or not the lighting was increased or
decreased, the productivity of the people in the experimental group went up.
•
The conclusion from this experiment was that by making these people feel special, by asking their opinions, by asking for
suggestions, they were motivated. They enjoyed being treated as individuals, as people, rather than simply being told
what to do. This led to what was called a “human relations school” in recognition that there is more to good management
than simply planning, organising, controlling, coordinating, and communicating.
Focus on the individuals rather than telling them what to do which is Taylor/Fayol
•
Employees are motivated by more than pay. Just offering higher pay may not increase productivity. Social aspects like
relationships and group interaction (group norms and teamwork) have strong influences on workers’ group behavior
•
Therefore you must manage “human relations” and treat them as individuals to raise productivity
Covers how management should organize large groups of employees into the overall structure of the organization so that the
efficiency and output of each group increases.
To summarize: Human relations school advocates believes that social relationships among employees and group interactions
directly affect productivity and efficiency of employees
•
Organization must be thought of as a social system and employees as an integral part of this system. Management must take
into account personalities of employees as both individuals and members of a group
The second part of these studies dealt with groups.
Management had tried to increase productivity by offering people higher wages, and was surprised to discover that productivity did
not increase. He eventually concluded that productivity depends more on individuals and group behaviour at work (or group
norms) is a very important factor or influence on productivity.
What Mayo discovered was that there was a sophisticated but informal system
whereby people agreed what the proper level of productivity actually was.
These people formed what’s now known as a group: a number of individuals
who develop group norms, in other words, an accepted standard of behaviour.
If you don’t comply with the norms of the group, you are likely to be excluded
from that group. Note that management did not deliberately form groups;
these were formed by people just because they worked together or relied on each
other or they became friends.
People inevitably liked being part of the group and being associated with other people.
These groups have a very profound influence on how people are likely to behave.
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FUNCTIONAL APPROACH- PETER DRUCKER
Management is a multi-purpose organ that manages business and manages managers and manages workers and
work." This definition of mgmt was given by Peter Drucker in his book "The Principles of Management".
Peter Drucker argued that all managers perform 5 basic functions. Together they result in the
integration of resources into a viable growing organism.
Drucker’s Five Basic Operations of the Manager
1. Set objectives
A manager … sets objectives. … She makes the objectives effective by communicating them to the people whose
performance is needed to attain them.
2. Organise
A manager organizes. … He classifies the work. He divides it into manageable activities and further divides the
activities into manageable jobs. … He or she selects people for the management of these units and for the jobs to
be done.
3. Motivate and communicate
A manager motivates and communicates. He makes a team…. This is the manager’s integrating function.
4. Establish yardsticks
… Measurement. The manager establishes targets and yardsticks. … The manager analyzes, appraises, and
interprets performance. …
5. Develop people
… A manager develops people, including himself or herself. This task … in this age of knowledge takes on even
greater importance…. The manager’s resource [is] people.
MBO stands for Management by Objectives, a phrase coined by Peter Drucker in his book "The Practice of
Management," published in 1954. MBO measures the performance of employees as compared to typical
standards for the job. The belief is that, if employees help determine those standards, they will be more likely to
fulfill them.
SMART Method
Drucker's SMART Method is a means of checking to make sure an objective is valid. Managers carried out this
verification by using the SMART acronym to make sure the objective is specific, measurable, achievable,
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realistic and time-related.
PETER DRUCKER set the trrends
Drucker other famous thinking Drucker is considered the single most important thought leader in the world of
management, and several ideas run through most of his writings:
"Knowledge worker" is one of the many terms coined by Drucker within his management theories. By the
measure of today's society, a knowledge worker is equivalent to the executive of a company.
The knowledge-based work has become increasingly important in businesses worldwide.
The concept of what eventually came to be known as "outsourcing." He used the example of "front room" and
"back room" of each business: A company should be engaged in only the front room activities that are critical to
supporting its core business. Back room activities should be handed over to other companies, for whom these
tasks are the front room activities.
A profound skepticism of macroeconomic theory.[36] Drucker contended that economists of all schools fail to
explain significant aspects of modern economies. In simple English, macro-economists are all bullshit.
Respect for the worker. Drucker believed that employees are assets not liabilities. He taught that
knowledgeable workers are the essential ingredients of the modern economy, and that a hybrid management
model is the sole method of demonstrating an employee's value to the organization. Central to this philosophy is
the view that people are an organization's most valuable resource, and that a manager's job is both to prepare
people to perform and give them freedom to do so.
A belief in what he called "the sickness of government." Drucker made nonpartisan claims that government is
often unable or unwilling to provide new services that people need and/or want, though he believed that this
condition is not intrinsic to the form of government. Apply to S'pore-make sense?
Drucker was a believer in decentralization of management. He saw that many leaders try to take on everything
in a demonstration of power or a means of maintaining control, under the assumption that only they can
accomplish a task correctly. Drucker believed that managers should delegate tasks in order to empower
employees. He asserted that companies work best when they are decentralized. According to Drucker,
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corporations tend to produce too many products, hire employees they don't need (when a better solution would
be
outsourcing), and expand into economic sectors that they should avoid.
D1 Contingency/situational approach
Originally developed by Ken Blanchard and Paul Hersey.
It focus on leadership in situations – different situations demand different kinds
Of leadership. There is no one best approach but rather it will depends
on the actual situation. The leader’s ability to lead is contingent upon various
situational factors including:
1)
The leader’s preferred style
2)
The capabilities and behaviors of followers
3)
Other situational factors like harsh environment
•
Every action taken by a manager must suit the situation
•
Universal principles are not suitable for all situations
•
The overall evidence suggested that persons who are
leaders in one situation may not necessarily be leaders in
other situations. Subsequently, leadership was no longer
characterized as an enduring individual trait,
• individuals can be effective in certain situations,
but not others
• For example, an autocratic leadership style may not
be suitable for all situations although it is very suitable
during warfare, when it is necessary to obey orders at all
times.
During peacetime- such style impact negatively on employees
who want freedom at work
• Contingent theory- organization should react according to events
– Managers are always “fire fighting” reacting to events (not planned)
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Functional approach/Style theories-Mintzberg-the big picture
Style theories–basic idea - A good manager becomes a good manager because of his style of management.
You have to know the names of writers and the key terms that they were associated with.
• Manager has 3 level of roles to play (can be further broken into 10 basic managerial roles). You can take
it to means 3 categories of skills
• Mintzberg criticized the view that you can carefully plan the strategic direction of the firm and believe:
• Strategy emerges over time & Managers become good managers because of their styles
• Managers spent time
“fire fighting” reacting to
events and not focus on
long-term plans
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Mintzberg’s 3 layers (roles) and 10 functions –con’d
Interpersonal role.
Arising from formal authority and status & supporting the info and decision
activities
• Figurehead – managers are symbolic and represents the orgn; involved in ceremonies, e.g.
signing documents
• Leader – they lead in management functions-planning, organisation, motivation, controlling
• Liaison - works with groups outside the organisation (stakeholders like shareholders, pressure
groups. etc), between groups within the organization
Informational role. For example, they monitor information maybe by looking at management
accounts and they distribute information
• Monitor - seeks and receives information
• Disseminator - transmits information within the organisation
• Spokesperson - transmits information externally
Decisional role. making significant decisions, perhaps about how resources should be allocated,
negotiating with suppliers or lead members of staff, and dealing with disputes; in other words, the
disturbance handling role
• Entrepreneurial - initiates and plans change; exploits opportunities and solves problems
• Disturbance handler - reacts to problems, difficult situations
• Resource allocator - decides where resources will go, e.g. money and materials
• Negotiator - with individuals/ groups/unions
Management is an ongoing dynamic process with many changes as the orgn responds to many
new challenges, re-organize resources and manage their constraints. Once again, if u have these 3
functions - interpersonal, info processing & decisional - doesn’t necessarily help u be a better
manager
D1 Leadership theories
Leadership is "organizing or influencing a group of people to achieve a common goal“.
May or may not have any formal authority.
Early western history
Trait theory –early theory of leadership based on idea that leadership is based
on individual attributes, leaders have certain qualities (IQ?) and charisma
"What qualities distinguish an individual as a leader?
It assume that leadership is rooted in the characteristics that certain individuals
possess. Leadership was inherited?. In other words, leaders were born, not
developed or nurtured? Limited use for firms because there is no conclusive
evidence that leaders are born with same traits. Instead leaders have different
styles (behavioural/stylist theories emerged later)
Re-emergence of trait theory
A new version of trait theory -Behavioral and style theories
Managerial grid model. In response to the early criticisms of the trait approach, theorists began to
research leadership as a set of behaviours, evaluating the behavior of successful leaders,
determining a behaviour taxonomy, and identifying broad leadership styles. David McClelland, for
example, posited that leadership takes a strong personality with a well-developed positive ego. To
lead, self-confidence and high self-esteem are useful, perhaps even essential.
For FIA, we study later theories of situational , functional and contingency approach to leadership:
1) Adair 2) Fiedler 3) Bennis 4) Kotter 5) Heifeitz
•
Other contexts-behavioral theory-ways managers behave -Ashbridge and Blake and Moulton
models
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Leadership theory-Variants
The managerial grid model is also based on a behavioural theory. The model was developed by Robert
Blake and Jane Mouton in 1964 and suggests five different leadership styles, based on the leaders' concern
for people and their concern for goal achievement
Situational and contingency theories
History was more than the result of intervention of great men. Karl Marx
said that the times produce the person and not the other way
around. This theory assumes that different situations call for different
characteristics; according to this group of theories, no single optimal
"what
an individual
actually
doesexists.
when acting as a leader is in large part
psychographic
profile
of a leader
dependent upon characteristics of the situation in which he functions.
Three leadership styles and situations each style works better
in:
1) The authoritarian leadership style, for e.g, is approved in periods
of crisis but fails to win the "hearts and minds" of followers in day-today
management, in an emergency no time to wait for consensus (where
there
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is a high degree of risks, the group respect the leader, employees lack
Leaders do not entertain any suggestions or initiatives from subordinates. The autocratic
management has been successful as it provides strong motivation to the manager. It permits quick
decision-making, as only one person decides for the whole group and keeps each decision to
him/herself until he/she feels it needs to be shared with the rest of the group
2) "The democratic or participative leadership style is more adequate
in situations that require consensus building where leader discuss or
consults with employees and involve them in decisions; but still got
somebody “take charge” The leader is the “supreme court”no more appeal. The democratic leadership style consists of the
leader sharing the decision-making abilities with group members by promoting the interests of the
group members and by practicing social equality. Employees are skilled and trained and motivated
and they can accept the leader. There is no time pressure and the jobs or projects will require inputs
from everybody for example if the orgn start to computerize or IPO project- it is something new &
everybody participate
3) The laissez-faire leadership style is appreciated for the degree of freedom it
provides, but as the leaders do not "take charge“ or have little direct input
and the leader joins in decision making (say by asking all employees to vote) ,
they can be perceived as a failure in protracted or thorny organizational problems;
where there is high motivation and alignment and homogeneous level of
expertise.
A person may be in a leadership position without providing leadership, leaving the group to fend for
itself. Subordinates are given a free hand in deciding their own policies and methods.
Paternalistic style- Some people say Singapore political leadership style is
“paternalistic” or “fatherly style” . In such leadership style, employees are treated
as family members; leaders try to guide them and have tendencies to make
decisions for them “father knows best”
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Quiz:
What can of management style do you think exists in the following
organization:
1) Singapore Government linked companies or civil service
2) Singapore Island Country Club
3) A family owned company where no single member has majority
control
4) A silicon Valley company where all employees are talented valuable
PHd
5) Google vs apple
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Asbridge 4 management styles
Tells
Sells
Consults
Joins
Autocratic ---------------------------------------------→Democratic
First and the most autocratic or dictatorial is "tells“. The manager
simply tells the staff what to do. The manager does not even feel a
need to have
to explain why that's what has to be done.
A slightly more “space for employee” or liberal approach is "sells."
Here the manager tells people what to do but then sells that idea to
them, convinces or persuades them, or explains why it has to be done
that way.
Next, there is the "consults" style. Here the manager will ask staff
what they think ought to be done, but then the manager will make
the final decision. However, this is quite a participative style.
Lastly the "joins" or joins with style. If I
cannot beat you at your game I might as
well join in!.
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Approach to effective leadershipsituational or contingency, functional (writers included in FIA syllabus)
Situational approach-Freidler
The variables **
No one best way of leading- it depends on the
situation and a number of variables **
Effective leader react according to the situation eg:
If it is a complex task with high risks, with unwilling
and untrained subordinates and a tight deadline,
the leader to be effective will apply autocratic style
•
•
•
•
Leader must have ability and willingness to
delegate and can trust subordinates
Subordinates may be trained, untrained, good or
bad attitude and skills levels
The task can be simple or difficult, degree of
risks, rate of change and time available
Organization have different culture, group
norms, group cohesiveness
Functional approach
Already discussed under Fayol and Mintzberg
Effective leaders mange changes
Other writers:
or contingencies. Friedler is one
Bennis Effective leaders must have management of:
of the original old school of
•attention (sense of vision);
writers on this and Kotter is best
•meaning ( good communication skills);
example of more recent writers
•trust (trust of their followers) and
–effective leaders create,
•self (always be learning)
communicate and obtain
Ronald Heifetz. Effective leaders distance themselves
form day to day operational activities Focus on planning
support for their
and direction to meet challenges and capitalize on
organization
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opportunities
Contingency approach
Or change management
Bennis
Bennis makes a distinction between the term “manager” and the term “leader.”
• A manager is primarily concerned with administering the status quo. In other words, primarily
looking after the existing business somewhat in the short term, keeps an eye on the profit for
the coming year. That’s not to say it’s not an important activity. But best to think of a manager
as having a time horizon of about a year.
• A leader is more concerned with innovation, will be looking at the long-term future of the
organisation, will not be so concerned with matters of detailed control, but will be focusing on
people, inspiring trust, asking “How can we improve, where should the business go, what
should the business do?”.
• The leader can therefore be regarded as transformational - in other words, concerned
with doing the right thing; whereas the manger is more concerned with transactional
leadership - in other words, doing things right, but not necessarily questioning whether what
we are doing and controlling is useful.
Bennis suggested that great leaders have certain qualities. You might like to compare this list
with the qualities of good managers you have known or good world leaders and politicians you
know about.
•
•
•
•
•
๏ Integrity – that really means honesty;
๏ Dedication;
๏ Magnanimity - magnanimity is like generosity, particularly when you have won a battle; humility;
๏ Openness, so that people can trust you;
๏ Creativity, so that you can think of novel solutions to difficult problems.
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Heifetz – adaptive leadership
Heifetz was responsible for the idea of adaptive leadership. The principles of this approach are
as follows:
• Move between the balcony and the battlefield. In particular, make sure you move to the
balcony where you get a long view, an overview of a whole problem. Make sure you don’t
concentrate purely on fine detail.
• Identify what the adaptive challenge is. This will be a challenge for which there is no ready
solution and where there may be a gap between current behaviour and the behaviour
required.
• Create a holding environment. That is a safe environment, an environment where you will
agree to support those who are responsible for putting through the changes. Don’t impose
change but give it back to the people without problem.
• Protect the voices of leadership from below. Leaders are not always the top of a hierarchy,
there could be important and influential leadership well down in a hierarchy and their views
and interests must also be taken into account.
• Regulate the distress
• Sequence and pace the work so that it doesn’t become too overwhelming.
• Pay disciplined attention to the issues, keep people focused, use conflict positively and
ensure that people keep their eye on the ball.
• On summary, adaptive leaders must not only be clever but also have wisdom.
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Kotter (Change management)
• Kotter had similar ideas to Bennis, making an important distinction between
leadership and management. He said that leadership and management are two
distinct and complementary systems and both are necessary.
Transformational Leadership
change (Leadership)
Creating agenda
Developing HR
Execution
Outcomes
Transactional Leadership
(Management)
Establishing direction
Planning and budgeting
Aligning people
Organising and staffing
Motivating and inspiring
Controlling and problem solving
Produces changes–often dramatic Produces predictability and order
• Management is about coping with complexity. Without good management complex
companies and organisations tend to become chaotic. Good management brings order and
consistency.
• Leadership by contrast is about coping with change. All change always demands more
Leadership.
• Companies manage complexity by planning and budgeting, by organising their staff, by
controlling performance, and problem-solving.
• Leading an organisation, however, involves setting a direction, developing a vision of the
future, developing strategies to achieve that vision, motivating and enthusing people to keep
them moving in the right direction.
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Fiedler
Fiedler suggested that leadership effectiveness depends on:
• Leadership style - that’s the leader’s own attributes, and the leader can either be
psychologically close or psychologically distant, and
• Situational favourableness, the degree to which a situation gives the leader control and
influence.
A leadership style which is psychologically distant is one where there tends to be very formal,
effectively distant relations between the leader and the subordinates. For example, they prefer
formal consultations with subordinates rather than more informal seeking of opinions.
A psychologically close leader will be more concerned to maintain good human relationships at
work than to ensure that tasks are being carried out well. They are a friendlier, perhaps more
easy going type of leader.
A favourable situation is one where there is a good relationship between the leader and
followers. For example, if the followers trust the leader, or where the structure of the task is
clearly defined so that everyone knows what has to be achieved, or where the leader has power
to, for e.g, reward and punish. Successful or effective leadership depends on adopting the right
style so that it matches the situation.
Fiedler suggested that a psychologically distant style would work well where either the situation
was very favourable or very unfavourable. So in these two extremes, the leadership style should
be psychologically distant. If however the situation was unfavourable, a more difficult situation,
then it would be more important for the leader to try to adopt a close leadership style.
Summary of his writing.
Effectiveness of a leader is dependent upon the match between his personality and the
situation / organisation. Leaders with a task motivation, more effective in a formalised
250
hierarchical (tall) organisation. Leaders with a relationship motivation, more effective in an
Fiedler Contingency Model
1 Fiedler's Contingency Model stated that the success of leadership styles depend on matching the leader's
styles with the conditions of a situation. Fred Fiedler provided several views of this model as follows:
(a) A leadership style is said to be effective when the leadership style is practised in the right and suitable
situation.
(b) There is no perfect leadership style that can be followed by managers.
(c) The leadership style practised must be suitable with the situation and condition.
(d) Managers must understand the leadership styles that must be practised in different situations.
(e) Self-leadership and make situational diagnosis.
2 The purpose of the theory is to overcome problems that are difficult to change according to the situation. This
theory emphasizes the organization's situational changes in order to suit the manager's leadership style.
3 According to Fiedler, there are 3 main factors to be considered in matching the leadership styles with suitable
situations as follows:
(1) Leader-member relations.
Relationship between managers and subordinates can influence the
subordinates' level of acceptance towards the leadership styles practised by managers. If managers have a good
relationship with all their subordinates, employees will respect them due to personal reasons, behavior, and the
managers' abilities. In this situation, managers do not need to rely on formal authority or their position in the
organization when allocating tasks to subordinates. Meanwhile, managers who are disliked or disrespected by
their subordinates will need to rely on formal authority or their position in the organization to give orders to
subordinate.
(2) Task structure. The task structure clearly states the goals and characteristics of a task. Subordinates will
have clear information on what is expected of them, The task structure has information regarding the
performance measurement which can strengthen the orders given by managers. If the task structure is not given
in order, the managers' power will decrease as subordinates will have the. opportunity to oppose and question
the orders given by managers.
(3) Leader position power. Leader position power determines how far managers can control the rewards and
punishments received by their subordinates, A higher position power would enable managers to influence their
subordinates while a lower position will cause some difficulties for managers to influence their subordinate
251
Adair 3 needs for leaders to address
John Adair believed that to be an effective leader, you need to be aware of
leadership in three areas: the task, the individual and the
team, as shown in the circle here. We know that Blake and Mouton plotted
people’s approach to leadership
by looking
at their
concern fortheindividuals
and
Each circle
overlaps
and influences
other. A good
the concern for the task. Adair
added
a third variable
– a recognition
there
leader
recognises
that a healthy
interactionthat
between
should beTask
a needs
concern for the the
group.
team, the task and the individual is vital. So for
example, if a team is working on a project, then the
Team needs
leader thinks about:
Individuals
1. Task - what are the goals, what resources are
needed, what are the timelines etc.
2. Team - how will the tasks be divided amongst the
team, how often will they meet, how will they interact
How shall we manage? According to
Adair,
it depends om thehow
situation.
somemeasure
occasions there
may be
with
stakeholders,
will On
they
success
a very urgent task and we have to reduce our concern for individuals and the group and concentrate on the
etc.within a group; perhaps their leader has left, perhaps there is
task. Sometimes there may be crisis
disagreement within it, and then the 3.
manager
or leader should
more individuals
attention to making
sure that
the
Individual
- arepaythe
in the
team
group operates properly. Of course, sometimes the proper approach to leadership will mean concentrating on
working
to their
Are they learning from the
an individual and seeing to their needs,
perhaps like
giving strengths?
advice or training.
252
experience? Are they being listened to on the team?
Handy’s best fit theory
•
•
•
•
•
•
•
•
Theory of Handy is a flexible theory through which his emphasis is on the flexibility of style which is
adequate according to the situation and circumstances of work whether the style is preferred by the
leader or groups but the style should be competent to fulfil the requirements of the task. In this theory
the style should be chosen according to the environment and task performance and it is immaterial that
the style is preferred by whom, the leader or the groups.
According to Handy’s best fit approach, a style which is fit in accordance of leader, groups or
subordinates), task and environment occur only when all the factors accept it and such style fulfill all the
needs and requirement of the working and it makes the leader confident that all the other workings are
in consonance of task and the task now could be completed as is expected.
Now go to the next slide and read the details of Handy’s theory and apply to the following scenario
assuming you are the leader and which styles you may adopt?
In an SME where staff turnover is high in an environment/industry that is having shortage of the
particular skills of your staff and you need to complete a major task say a mega project?
Will you use loose or tight leadership style?
How do you make yourself the leader, the subordinates and the task are all workings in consonance?
Now assume that you are the leader in an SME that employs subordiantes whoi die die cannot resign
because there are too many people with such skills unemployed in the industry?
Now do you think it is easier to be a tight leader style to achieve the 4 factors in consonance?
Now- you notice a use the business as an SME because I think big MNCs have no room for Charles Handy
theory as big corporation do not run their businesses or task based on the leadership styles or “mood” as
Handy would suggest in different environment!
253
Handy’s best fit theory
Handy’s best-fit theory identified four variables: ๏ Leader ๏
Subordinates ๏ Task ๏ Environment
Handy said that each of these variables could be what he
d e s c r i b e d
a s
‘ l o o s e ’ o r
‘ t i g h t ’ .
A tight leader is very autocratic. Tight subordinates like being told
what to do and want to avoid risk. They want repetitive tasks;
tighter tasks are routine and well understood, relatively smple.
And a tight environment would be one where, perhaps, time is
short or there isn’t much resource to go around.
‘Loose’ leader is very participative or democratic; subordinates
w
a
n
t
t
o
participate and contribute to solutions. The tasks are novel,
c o m p l e x ,
h i g h
r i s k ;
t h e
environment is one which is more generous in time and
resources to allow complex tasks to be dealt with.
Handy said that provided all four variables line up, either all loose
254
or all tight, things will
people and task (how
importantstyleis each
to &
them)
and place emphasis on
Leadership
Blake
Mouton
concern for people (their welfare) versus concern for results (the task or
the job) It focuses on task (production) and employee (people)
orientations of managers, as well as combinations of concerns between
the two extremes.
Authoritative/dictator style
leaders
255
Interpretation of Blake & Moulton
Y axis represent people focus, X represent task
focus points 1 to 9
Therefore co-ordinate (x, y)
(9,1) represent high task focus
•
Authoritarian style (task more important than
people) Authority/obedience
(1,9) represent high people focus
•
Country club management style (people more
important and do not give attention to
production elements)
(9,9) represent high task , high people focus
(both high point) Team management style
•
good team management motivate people fully
committed to get task done. Based a lot on “trust
and respect for each others”
(1,1) represent low people focus, low task
focus
Impoverished management style
•
People and task both low points means both no
control. Poor management control and cannot
get task done
(5,5) represent middle- compromised mgmt
•
(middle of the road) of people and task
(management balance both to be adequate
solution)
The emphasis on production
(focus on task) can be seen from
the manager’s attitude towards the
following aspects:
1) Quality of the decisions taken
2) Work procedures
3)Quality of services by employees
4) Work efficiency
5) Research innovations/creativity
The emphasis o human elements
include the following aspects:
1) Degree of personal commitment to
the mission/objectives
2) Maintain employees’ self respect
3) Emphasize mor eon trust and not
loyalty
4) Provide good working environment
5) Maintain personal relationship
256
D2 Recruitment and selection of employees
Why effective recruitment important?
1) Enable the firm to employ right candidates
– “Best fit” of people with necessary skills and knowledge and
experience for the recruitment of the position
2) Assist in future growth of the firm
– Part of the headcounts necessary to achieve the budgeted
objectives
3) Ineffective recruitment potential problems
– Hiring wrong people (intentionally or un-intentionally)
• Low morale/motivation and productivity
• She got the job because she is related or “she greased HR”
• Greater staff turnover
• “Cannot keep teaching my superiors …”
4) Increased costs
– New recruitment costs
– Damages done by unsuitable employees
257
How to recruit?
Personnel planning and forecast
• Many firms have headcount budget by department. “Justify our staffing needs”
• Normally done by HR/Admin-It forecast staff needs for immediate future
• What new positions need o be filled (due to retirement or additional
staffing
Recruitment stage
• Many firms have headcount budget by department
– It forecast staff needs for immediate future
Fill the vacancies from internal sources or external sources
– External sources
• indirect approach by using various media or third parties like ask for referrals
(say the auditor or other associates), head-hunters etc
• Firm approach/call candidates directly or ”poaching”
• At end of this stage come out with shortlist
– Internal sources - pro-active method –scan personnel files for match or the
reactive method where the firm invite employees to apply
Selection
• Interview the candidates – “face to face” with interviewers from requesting
department and/or personnel department
– May come with aptitude or skills, IQ/EQ testing- 4 main test areas:
• Personality EQ/intelligence IQ/competence/psychometric tests
258
Recruitment methods
Internal sources vs External sources
Advantages of internal sources:
•
•
Candidates are “known”
Making position available to internal staff can boost morale
Disadvantages
•
•
No fresh ideas or initiatives compared to someone outside which can bring in
fresh ideas
Tendency to be bias to choose someone older (or more senior) than the more
suitable candidate
Advantages of external sources:
•
•
Wide choice of candidates
Fresh perspectives/ideas/new ways to do things
Disadvantages:
• Candidates are “not known” you can tell from just the interview!
• Costly and time consuming
Type of recruiting from external sources:
• Direct method. Very focused approach. But must pay competitive salaries
• Indirect method.Larger pool of candidate but sacrifice quality for quantity
of candidates
• Agency method. Effective screening method but expensive to you these
agents
• Referral method.
Advantage is that a “known “ source say business
associate like the auditor. Disadvantage is that the referring party have a limited
259
pool of candidates
Diversity/equal opportunity policy
Purpose of equal opportunity policy
• Treat all job applicants or employees fairly
• Unfair discrimination practices based on race, religion, gender not acceptable
• At all times when employees exposure with the firm- starting from advertising,
recruitment, selection, hiring and termination/cessation
Benefits of having such policy (equal opportunity employer)
• Make the best of your existing employees (skills and experience)
• Improve motivation & performance as employees believe in fair employer
• Comply with anti-discrimination laws (UK) (US-FLSA acts)
• Helps in recruitment and retention of good employees – various levels
• Firm workforce is based on abilities or skills where it may match the demographics of
the society at large
Steps to ensure the policy is effective
• Commit to it by Including policy in the firm mission statement
• Recourse/channels for victims of discrimination or harassments to report it
• Firm must immediately investigate any incidents and take corrective actions
• Make employees aware of policy- awareness programs like say during their
orientation or reflected in their employees’ handbook as their rights
• Have an equal opportunity/diversity committee to ensure such policies are
implemented
260
D3 Individual, team and group behavior
Handy defined a group as : “Any collection of people who perceive themselves to
be a group.” Groups can be formal or informal.
• ๏ The formal group is simply one which is formed and known by management. You
may remember groups were mentioned when we talked about the human relations
school of management first identified by Elton Mayo. In his study at the Hawthorne
plant of the Western Electric Company the existence of informal groups was
discovered.
• Informal groups are not formed by management action and indeed management
• may not even be aware of their existence. However we are social beings and we like
• being part of a group and therefore understanding groups is important to
• management.
• This is a very good definition because it includes both formal and informal groups.
Handy
• said any group will have:
– A sense of purpose or aim
– An identity; in another words, there is a feeling of who is within the group and
who isn’t within the group.
– Group norms, that is, accepted ways of behaving and if you don’t fall in line
with group norms, you are likely to be excluded from the group.
– Communication between the members of the group.
261
D3 Individual, team and group behavior
Team is a small number of people with complementary skills who are committed to a
common purpose, performance goals and approach which they held themselves
accountable. Identify these characteristics from the diagrams.
Now ask yourself: Is your accounting people in your orgn working as a team?
• Eg SWAT team with different skills and approach to rescue hostages from terrorists.
If they make mistakes and all died they are accountable.
• Firms make more use of teams to
– Get more benefits eg greater creativity and motivation
– More involvement from staff (team based management)
– Teams can be costly/time consuming but can bring
consensus/acceptance/commitment
– Can pool complementary skills
– Can do brainstorming
262
How do individuals or groups behave?
Individuals or groups behave due to what they perceive themselves to be and what they expects to
have and may be classified as:
1) Job fit and composition of group and group size .How individual or employee’s skills &
knowledge match the job requirements. Perfect match- no issue as long as he thinks he is
paid fairly nd he has similarities with other group members. Imperfect match- when he is overskilled, he think he should be upgraded in position or pay. When he is under-skills, he may
need training and have fears and anxiety if his situation is not handled properly by his
superiors. Or he think he has nothing in common with other group members- no similarities
2) Organization culture. The individuals or employees will share the same cultural basic
assumptions. Say if he work in a bank and everybody get 3 months bonus although not explicitly
stated in employment contract. If he get only one month- he will be dis-motivated, question whether
he fit in
3) Individual group member personality- Personality traits and attitudes
– Agreeable team player type (easier to get along)
– How he feels about the job- challenging? Job satisfaction? meet expectations?
– The above 2 issues will impact his overall commitment to the job
4) Individual or Employee expectations (or Group norms).
The way members are
expected to behave and work (perception and expectation of other members)
• Salaries and benefits and prospect of promotions
• Others-when you work for an organization- what is your wish list?
– Nature of job- desk bound or adventure, job exposure etc….…..
• Desk bound (be management accountant), adventure- be an auditor
• and travels all subsidiaries
263
How individuals and teams can contribute
Formal groups.
Formation-created by organisation itself to either carry out an on-going function (accounting, marketing,
operation etc) or perform a specific project say IPO project team
Informal groups.
Not formed by the organization. Formed by members usually for non-work related activities like common
interests or hobbies say bird watching group or wives club for friendships
As an individual
• “Need of firm”-Hired by firm for specific
purpose- say new market PRC business
development
– “how can you contribute?” if they don’t
need you-not hired
• “Do the job”-individual expected to use
his connections and skills to effectively and
efficiently perform his job and achieve
results
– No issue of role conflict or ambiguity
• You bring in huge market shares or profit
levels many times your salary
• You must be able to blend in
– fit into firm’s culture
– Team player complementing and
helping other employees perform
As in a team a team member (formal group)
• commissioned or formed by firm for specific
activity or problem) group do not have any
specific activity only a general purpose (like
environmental group)
• Team work means
– Enhanced productivity and performance
– Members learn to avoid errors/wasted
efforts
– Effective team means small number of
members and have team consensus
• Teams are formed to look into productivity which
basically reduced costs and increased
competitiveness
• Promote greater inter- departmental co264
operation
To contribute, individuals & teams must handle themselves properly in work environment
Individuals
Teams
“Job profile”-Be familiarize with
their job profiles. Get to know any
persons or departments they need
to know
1) Key persons in the firm
2) business associates like
Auditors-Filing requirements (acct)
or customer base (marketing)
“Deliverables”-determine
what
you can produce- the end results of
your hard work --need to present
the results/info
-By meetings c/w formal reports?
“Systems to do”- implement a
systems to monitor and checklists
• Say number of prospects and
new accounts every month if
you are sales
• Say monthly closing
procedures and reports
required and deadlines if you
are an accountant
Outline the specific activity or problem) say IPO
team
•
Analyze the problems and/or situations
– Need restructure- which business segment
– Affect which employees
– Other legal issues
Team work (IPO members debate on pros and cons
of listing and feasible or not)
•
•
Issue -Some family members restructured out due to
business conflicts
– Members suggested solutions
– Option 1 option offer compensation and closed the
conflicting entities
– Option 2- take out business segment from the listing
entity
Joint solutions- take out business segment after failing
to convince affected relatives to accept compensation
Implement the solution (after deliberating how to)
•
•
Terminate/transfer all relevant existing contracts out of
listing entity.
Affected relatives operate new entity independent265
of the
listing entity
D4 Purposes of a team
One day in your life as a senior manager, the organization will ask you to form a team
to look into some problems or perform some tasks
The task cannot be done by your department alone or fall within normal functions or
responsibilities of individual department
*Advisory team-normally high level involving policies or guidelines-say you need to
advise on whether to set pay guidelines for your new overseas subsidiaries and
performance bonuses. HR can provide guidelines on minimum pay/benefits
Marketing can advise on commission schemesCredit department advise on credit policies
Action teams- assembled for specific events -your firm want to do 50th anniversary
celebrations
-Finance member control budgets
-Marketing member in-charge of invite lists
-HR member in charge of logistics
Production teams- drawn up to produce a similar product over a period of time
Project teams-Say you need to advise on specific projects like whether to go IPO or
joint-venture when trying to source more funds
-IPO team with representatives from all key departments
Or Project team to discuss a major oil/offshore contract just won
266
Successful teams- how to define roles for team members
Belbin (1985) study members behaviour in competing teams in business games and
derived the concept of nine distinct and interdependent team roles. Belbin believes that
team members with complementary roles are 'richer' and more successful
• A team role is 'a tendency to behave, contribute and interrelate with others in a
particular way'. In order to be successful, a team and its members need to fulfil the
following complementary nine roles:
– Shaper
– Implementer
– Completer/finisher
– Co-ordinator
– Team worker
– Resource investigator
– Plant/creator/inventor
– Monitor/evaluator
• In order to make use of the model, members of a prospective team should first
determine which roles they can and want to fulfil.
• Each member should subsequently be assessed using the following indicators to see
whether, and to what extent they can play one or more of the following nine roles:
267
Successful teams- how to define roles for team members
Each member should subsequently be assessed using the following indicators to see whether, and to what
extent they can play one or more of the following nine roles (one member multiple roles). Successful teams
need a good balance between the different roles for members.
• 3 action oriented roles
– Shaper: "Shapes" the behaviour of others to work towards achieving
the team objectives (he set the objectives, prioritise it and push the team towards it)
– Implementer: focuses on turning ideas into practical actions
– completer finisher: maintain momentum and make sure the job get done and finished within
prescribed time limits and as little mistakes make as possible.
• 3 people oriented roles
– Coordinator: sometimes called the leader because he lead by
delegating and( coordinating the efforts of other : team members
– Team worker: focuses on ensuring the team functions effectively
by carrying out plans. More of administrator than a leader
as a , whole and personal conflicts between individual members are minimised
– Resource Investigator: Explore and investigate on development outside the team and
negotiating for the team with outside parties and obtaining any resources the team may need.
• 3 cerebral oriented roles (use ‘the brain”)
– Plant: “plant new ideas”-come up with new ideas and focuses
on problem solving & addressing major issues facing the team
– Monitor Evaluator: Analyse problems and evaluate team progress. Do so
by comparing & evaluating different proposals & suggestions put forward by other team’s members
– Specialist: Individual who possesses rare or unique technical skills and knowledge
268
Tuckman's theory of team development
•
•
•
•
•
•
Tuckman identified first 4 stages & others add in stage 5-describes and explains how a team
develops over 5 stages:
Forming.
Individuals come together. During this stage, the team depend on a leader to
guide them on exchange of ideas/information; explore each other roles; and
acceptable behaviour for team members. Example; the team that develop the
atomic bomb will not even allowed to tell their wives the project for 1 year.
Storming.
Members start establishing own roles and responsibilities after some conflicts and
agreements (agree to disagree to reach agreement on objectives and strategy!)
Norming.
Members clear on individual roles and responsibilities after sharing of ideas. Most
individuals will a mixture of their roles; Team start to function as a cohesive whole
Performing.
Team members contribute by focusing on the tasks with no participation from leader
(no need for him to be around); working procedures established;
Adjourning.
Team disbanded as its objective has been achieved. Otherwise, another
team takeover the project
Forming
Adjourning
Performing
Storming
Norming
269
To have effective teams, management must have clear objectives when forming team
Then you can decide on the size and composition
then you build team spirit (assuming right atmosphere exists)
Only then you can get effective, focused discussion with consensus in decision making
Enough members with right skills
Positive atmosphere
-Small elite team
Build team spirit by:
1) Discussing and improving
-members comfortable with one other
• Whether the current team is effective
-effective focused discussion as
• May adjust the “fit” of the team
members are expert in their fields
• Members feedback on assigned tasks
limited interpersonal conflicts
• Communication issues/dominant members?
-easier to come to consensus
Too many members
2) Organizing social events
-Members come and go
• Outdoor or indoor
-Low continuity means low rate of
• Some companies organize their top budget teams
performance
to check into a resort for say 3 days
•No pride in achievements
• Leader invite members to wives get together for
•Unequal participation from members
dinner. Wives cook and man build team spirit
•Frequent inter-personal conflicts
while waiting for food!
•More difficult to get members to
3) Monetary incentives for meeting deadlines
focus on task
• Early completion means the business have huge savings
•Roles duplicated or not clear
– Recognition for work done may be non-incentive
270
The big picture
•
•
•
•
•
D5 Motivation theories
Maslow (Content theories)
Motivational theories can be divided into
two categories, content and process
theories.
Content theories- WHAT are the things
that motivate
assume that all individuals possess the
same set of needs and therefore prescribe
the characteristics that ought to be present
in jobs. Individuals are motivated by their
desire to fulfil their inner needs (or
contents)
Process theories- HOW are people
motivated
stress the difference in people’s needs and
focus on the cognitive processes that
create these differences. In other words,
individuals are motivated to achieve certain
goals. The theories try to explain the
“hows and whys” (cognitive process)
individuals behave these ways
(behavioral choices) and resultant actions
to achieve their goals
• He (1954) outlined the most influential of
content theories. He suggested a hierarchy of
needs up which progress. Once individuals
have satisfied one need in the hierarchy, it
ceases to motivate their behaviour and they
are motivated by the need at the next level up
the hierarchy.
• 1. Physiological needs such as hunger and
thirst are the first level on the hierarchy.
• 2. Security needs such as shelter and
protection are the next level.
• 3. Social needs such as need for satisfactory
and supportive relationships are the next
level.
• 4. From these needs, the individual can move
up the hierarchy to higher order needs. Self
esteem needs for recognition and a belief in
oneself is the next level.
• 5. Finally, the progression leads to the need to
realize one’s full potential, which is termed self
– actualization. Only a small proportion of the
population achieves this level.
271
Self actualization
Esteem/Ego needs
Social needs
Security needs
Physiological needs
•
•
•
•
•
•
Maslow’s hierachy of needs. The theory suggests that employees will always tend to want more from their
employers. When they have satisfied their subsistence needs, they strive to fulfil security needs. When jobs are
secure they will seek ways of satisfying social needs and if successful will seek the means to the ultimate end of self
– actualization
Physiological need. Graduated from police academy–physiological needs met -basic pay, housing, ..
Security needs. Job security and teamwork- rookie become more experienced and involved in police team culture
and at same time his pension..
Social needs. Finally get his detective badge- can proudly work socially together with fellow detectives on cases
and join them in the “detective club” (fulfill social needs)
Esteem needs/Ego needs.
Promoted to Chief of Police- more responsibility and job enrichment (now high
level engagement with politicians (the Mayor/publicity/etc) <new job title, bigger office>
Self actulization needs.
Run for Mayor or Senator (self actualisation needs) (next stage- President and then
272
challenge God!)
How to motivate employees;
Different methods according to their needs, according to Maslow hierarchy
Self actualization
• Provide challenging assignments.
• Provide feedback on performance.
• Provide personal support and encourage employee participation in the goal-setting process.
• Encourage employee participation in the decision making process
Esteem
• Identify and give publicity to employees who have done well- :”employee of the month”
• Divide assignments according to employees’ skill levels
• Provide opportunity for employees to get promotion- “reason why civil service have so many levels and
grades?”
Social
• Encourage employees to participate in social activities.
• Encourage cooperation among employees in groups.
• Provide group assignments.
Safety
• Create safely rules and procedures at the workplace that emphasize work and employee safety.
• Reduce employee turnover.
• Provide additional welfare benefits to employees
Physiological
• Implement a fair salary or wage system.
• Create a comfortable working environment with lights, air
273
• conditioners, furniture, and fixtures
Hertzberg
Hertzberg (1959) presented a two – factor theory (two groups
with 6 sub-factors), which looks at motivators and hygience and
proposed that job satisfaction and dissatisfaction appeared to
be caused by two sets of different factors.
• The presence of motivators in the workplace caused enduring
states of motivation in employees but their absence did not lead
to dissatisfaction.
• Hygiene on the other hand produced an acceptable working
environment but did not increase satisfaction – their absence
did however cause job dissatisfaction.
Hygiene comes before motivators- organization need to provide
factors to reduce employee dissasfaction and motivators ot
increase the emp;yee satisfaction levels
Motivators
Hygiene (or dissatisfiers)
Factors which motivate
Factors expected to be
present
(i.e potential to increase)
(if absent- will de-motivate274
Herzberg 3 ways of motivating staff
• Herberg identified 3 ways of motivating staff
• Job enrichment-load employees with more responsibility and more challenges in their jobvertical loading say from accounts assistant to management reporting
• Job enlargement-same level of responsibility but more task to do= horizontal loading say in
charge of another geographical location for an accountant
• Job rotation form one to another provide variety and wider exposure to emplyees say from
accounts receivables to accounts payable
Job rotation
Job
enlargement
Job
enrichment
Motivated
employee
275
Importance of motivation
The business do 3 level of planning – strategic, tactical and operational goals.
The employee carry out the plans to achieve the targets sets
If they are not motivated (as when the budgets is set too stringent and they feel they cannot achieve it),
they will not be willing to work hard even if you have huge reward schemes.
• If you set achievable targets, they feel they get achieve it and willing to work harder or go the extra mile
as they feel worth it (this is called motivation), it will overall increase the efficiency and effectiveness of
the organization.
• Therefore the organization must understand what they need to do in order to motivate them towards the
corporate objectives
David McClelland 3 main types of motivation. David McClelland (Studies in Motivation, 1955) identified
three basic types of motivating needs present in people. He shows that all three needs can be present in a
person but the weight attached to each can vary. Management can delegate or empower tasks to motivate
employees to meet their needs The three needs are:
• (a) Need for achievement - where this is high then people have an intense desire to succeed and an
equally intense fear of failure. Example, all directors and employees work hard towards successful IPO
as it is an achievement as both an individual and the IPO team.
• (b) Need for affiliation - where this is high people tend to seek acceptance by others, need to feel
loved and are concerned with maintaining pleasant social relationships. Organization must identify the
drive and desires of both the individuals and the teams. Example if you get promoted to next level and
you are entitled to golf membership which may you affiliated to top management as you play golf with
them regularly
• (c) Need for power - people with a high need for power seek opportunities to influence and control
others, seek leadership positions and are often articulate, outspoken and stubborn. Example, some
people prefer to be big fish in a small pond rather than one of the many big fish in an ocean where you
are small. If you sent me to Beijing without pay rise and perks, rather stay in Urumuji as I am the local
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king here with highest authority.
McGregor’s Theory X and Theory Y
Theory X managers believe:
• the average employees are
lazy and has an inherent dislike
of work
• Need to control and monitor
employees
• May threat to threaten with
punishments to chive
objectives
• Lack motivation and value
security most. Motivation
occurs at only physiological
and security needs
Therefore you need to be more
autocratic as a manager
Theory Y managers believe:
• that most people want to work
as work come naturally like play
or rest
• Since they like work and
therefore can be given more
freedom
• Want responsibility with
appropriate rewards
• Motivation occurs at all levels
of the Maslow’s pyramid
Therefore you can be more
democratic and involve employees
in decision making because they
trust and value their inputs
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The Expectancy Theory
•
•
•
•
•
•
•
The Expectancy Theory is the most comprehensive motivation theory introduced by Victor Vroom.
This theory is based on the premise that the need for acknowledgement will determine human
behaviour.
This theory also considers the issue of motivational strength, which refers to the individuals' desires to
show certain behaviour. The motivational strength will change according to the increase or decrease in
human needs. According to the Expectancy Theory, motivational strength is determined by two factors:
The desire to achieve certain results; and _
The possibility that an action will create the desired result.
If both factors increase, the motivational strength will also increase. Generally, in the long run, humans
tend to show behaviours that will maximize the expected personal rewards.
This theory explains that motivation, performance, and job satisfaction depends on beliefs that an
action will produce the desired result.
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Design & implement rewards systems
Purpose to attract, retain and
motivate talents (competent
employees included)
3 main components
1) Base salary
• Link to job and skills
2) Bonus (variable)
• Linked to performance
3) Profit sharing
Firm share success with employees:
• i) profitable year
• Ii) successful IPO
• Further additional cash or in kind
like share options/upgrade
Factors to consider
1) cost efficient
2) Motivating
3) Easy to administer
4) Easy to understand
Example:
A company may set a reward
systems linked to key
performance indices (KPI) and
the budget. (in F2 syllabus)
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Intrinsic and extrinsic rewards
• Intrinsic rewards come from carrying out the activity or tasks relating to the
job (example treat job as hobby
• Employers should factor in intrinsic rewards when designing jobs to motivate
employees by: 1) job rotation 2) job enlargement 3) job enrichment 4)
autonomous wok groups with the teams responsible for results 5)
delegation to subordinates 6) empowerment
• Extrinsic rewards occur when an individual expects to receive benefits or
rewards for performing the activity (external to the job)
• Successful reward systems will attract and retain sufficient number of
suitable employees and reward employees for effort, experience, loyalty and
achievements
• Factors that have influences on pay;
• 1) inflation (erode real pay)
• 2) resources of the firm “we cannot afford to pay you too much!”
• 3) competitors’ rates
• 4) union/employees’ bargaining power
• 5) minimum wage regulations
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D6 Training, development and learning
Why it is important for organization to train and employees to learn and have career development in
the workplace? Training is the acquisition of knowledge, skills, and competencies as a result of the
teaching of vocational or practical skills and knowledge that relate to specific useful competencies
(say to be the firm accountant- you need to meet the competency requirements)
In addition to the basic training required for a profession, professionals need to continue training
beyond initial qualifications: to maintain, upgrade and update skills throughout working life. People
within many professions and occupations may refer to this sort of training as professional
development
• Training has specific goals of improving one's capability, capacity and performance. .
• Training includes programs or methods to give employees a specific skills or knowledge say
learn new equipment or software or either general skills like communication. Many MNCs have
induction and training program to orientate and “absorb” the new employees into the
organization (to learn about the ways things are done or their corporate culture). Example:
Arthur Andersen sent all new auditors to their corporate training centres in New York for a 6
week program.
• Capability means you can be upgraded for more senior position after learning specific set of
skills or knowledge base. Capacity means you can handle more workloads given that you
are now trained and more efficient
• Performance means now you work more efficiently
The term learning relates to the process of how an individual changes because of an experience he
undergoes . Learning in the workplace refers to how an organisation develops the talents and skills
of its employee base. 2 types of training in an organization:
• Formal training.
Represents the educational opportunities organisations provide to
their employees Is normally classroom based and highly. Informal training. Informal learning
takes place spontaneously and on an almost daily basis whilst employees are on the job 281
The value of training & employers need to invest in it
1)
2)
3)
4)
5)
increase employees’ skills in their present jobs
prepare employees for change
the orgn’s can be more flexible in deploying its’ hum]man resource
reduce mistakes (as they are trained) and increase profits
motivate employees.
– Motivated employees are more productive and innovative
– Lesser employees leave or reduced employee turnover
– Improved recruiting results as more people apply for such firms or motivated
employees recommends/referrals
Investment in training depends on:
• 1)
effectiveness of the training
• 2)
Impact on the skills and whether employees can be motivated
• 3)
alternatives e.g. opportunity costs of no training (or seconded staff)
• 4)
resources available
• 5)
is there a need for the training
Development refers to long term process for individuals self improvement
• Individuals need to identify skills and knowledge for their own long term objectives
• Helpful for individuals current job and broaden his horizon
Education means any experience that make individuals learn
• It is a life long process and can come from all sources
1) classrooms/internet/books/periodicals
2) Colleagues/friends/family
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Kolb’s Experimential Learning Theory
Kolb's learning theory sets out four distinct learning styles (or preferences), which are based on a fourstage learning cycle. (which might also be interpreted as a 'training cycle'). In this respect Kolb's model is
particularly elegant, since it offers both a way to understand individual people's different learning styles,
and also an explanation of a cycle of experiential learning that applies to us all.
Kolb includes this 'cycle of learning' as a central principle his experiential learning theory, typically
expressed as four-stage cycle of learning, in which 'immediate or concrete experiences' provide a basis
for 'observations and reflections'. These 'observations and reflections' are assimilated and distilled
into 'abstract concepts' producing new implications for action which can be 'actively tested' in turn
creating new experiences.
Kolb says that ideally (and by inference not always) this process represents a learning cycle or spiral where the learner
'touches all the bases', ie., a cycle of experiencing, reflecting, thinking, and acting. Immediate or concrete experiences lead to
observations and reflections. These reflections are then assimilated (absorbed and translated) into abstract concepts with
implications for action, which the person can actively test and experiment with, which in turn enable the creation of new
experiences.
Kolb's model therefore works on two levels - a four-stage cycle:
1.Concrete Experience - (CE)
2.Reflective Observation - (RO)
3.Abstract Conceptualization - (AC)
4.Active Experimentation - (AE)
and a four-type definition of learning styles, (each representing the combination of two preferred styles,
rather like a two-by-two matrix of the four-stage cycle styles, as illustrated below), for which Kolb used the
terms:
1.Diverging (CE/RO)
2.Assimilating (AC/RO)
3.Converging (AC/AE)
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4.Accommodating (CE/AE)
Kolb’s Experimential Learning Theory
Kolb's experiential learning style theory is typically represented by a four
stage learning cycle in which the learner 't
1. Concrete Experience - (a new experience of situation is encountered,
or a reinterpretation of existing experience).
2. Reflective Observation (of the new experience. Of particular
importance are any inconsistencies between experience and
understanding).
3. Abstract Conceptualization (Reflection gives rise to a new idea, or a
modification of an existing abstract concept).
4. Active Experimentation
(the learner applies them to
the world around them to
see what results).ouches all
the bases':
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Kolb’s Experimential Learning Theory
Effective learning is seen when a person progresses through a cycle of
four stages: of (1) having a concrete experience followed by (2)
observation of and reflection on that experience which leads to (3) the
formation of abstract concepts (analysis) and generalizations
(conclusions) which are then (4) used to test hypothesis in future
situations, resulting in new experiences.
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Honey and Mumford's model (Learning from experience)
Two adaptations were made to Kolb's experiential model. the stages in the
cycle were renamed to accord with managerial experiences of decision
making/problem solving. The Honey & Mumford stages are:
Having an experience (Activist style)
Reviewing the experience (reflector)
Concluding from the experience (theorist)
Planning the next steps. (Pragmatist)
The styles were directly aligned to the stages in the cycle and
named Activist, Reflector, Theorist and Pragmatist. These are assumed to
be acquired preferences that are adaptable, either at will or through changed
circumstances, rather than being fixed personality characteristics. underutilised
styles in order to become better equipped to learn from a wide range of
everyday experiences.
Example;
Get burned in PRC because pocket no deep/huge success
Having an experience (Activist style)
Invest in PRC (everyone hot on it)
Reviewing the experience (reflector)
Reflect on investment 2 years later
Concluding from experience (theorist) Conclude- cut loss or expand
Planning the next steps. (Pragmatist)
Move to Vietnam/Expand to more
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provinces?
Role of HR and managers in learning process
Treat employees as “partner” and give them opportunities for continuous learning
Ensure 4 conditions for effective learning are present in employees
- Stimulus- desire for employees to learn (Say LCCI training for IT staff)
- Response- opportunities for employees to learn when
- they response to the stimuli (regular classes conducted in house)
- Motivation- awareness of benefits of learning
IT staff will be motivated as the skills are directly relate to their financial systems they
implement
- Reward- employees are rewarded upon successful learning
Boss confirmed that those who pass will be priority on the next ERP projects and/or next
stage of learning FOC:
HR needs support from individual managers who helps to
1) identify training needs (say CPE training for accountants)
2) Encourage employees to learn (say can go for seminars on co hours and paid for)
3) Create conducive environment for informal training (say other than point 2- subscribe to
professional periodicals, make available resources like in-house library and manuals
HR evaluate training based on
1) Costs
2) employee reaction (feedback))
3) impact on performance
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Training and development process
Design and implement training programs with objective of producing a measurable and
noticeable change in knowledge, skills or attitudes
• Sent accountants to IFRS seminars- improved knowledge
• Safety officers for latest fire fighting skills and equipment
• Attention management and communications skills to improve attitudes
5 steps (feedback can be given at every steps)
1) identify needs
Managers identify their staff who need training on particular knowledge and skills- say new
technology/laws (say GST)
Staff can also fill in training requests relevant to their jobs
2) Set objectives- measurable and job performance related
Engineer can use new systems and accountants can do GST filing themselves (no need to
get audit firm)
3) Program designmanagers learn first and then design training programs for staff in-house training and selected
few for regular updates
4) Delivery- schedule training programs and personnel to attend
5) Validation- evaluate training programs for effectiveness.
Staff normally feel in course evaluation forms for feedback
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Training methods
Training methods include:
1) Induction training.
Introduces
employees to their job and the
organization say for new
employees- tour of the plant and
brief by different department
heads
2) On the job training. Employees
learn on the job say audit
assistant attached to the
supervisor
3) Off the job training. Attend
seminars/courses outside the
workplace say GST by IRS
4)
Training and Enterprise councils
(Workskills Development Agency
etc). Government funded
organizations which co-ordinate
training with the employers
Learning modes.
It is currently fashionable to divide
education into different learning "modes". :
• Visual: learning based on observation and seeing what is
being learned.
• Examples role playing exercises to new employees
who need to pick up new skills say in sales training,
maintenance, etc. watching training videos and
handouts with diagrams may be more effective
• Auditory:
learning
based
on
listening
to
instructions/imformationmation. Use lectures/discussion
• Kinesthetic: learning based on hands-on work and
engaging in activities.
• This is common in audit firms where new employees follow
audit seniors why they start hand-ons after 2 days of visual
training on skills required. Doctors need to be hand-ons in
hospital for one-2 years before they are allowed to
practice. Scientists also prefer to learn this way.
• Simulation method is widely used and effective where
you need high skills and judgement (and reduce costs) say
training of following personnel:
1) Flight pilot (use flight training stimulator)
2) Doctors (use AI stimulator systems)
3) Military personnel weapons systems
• Although it is claimed that, depending on their preferred
learning modality, different teaching techniques have
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different levels of effectiveness
Managers need to learn to deal with 8 types of people at work
•
•
Some 30 years ago, Howard Gardner, a Professor at Harvard University proposed a new
paradigm on IQ. He suggested rat there are eight kinds of intelligences: verbal linguistic, logical
mathematical, interpersonal, intrapersonal, kinesthetic, musical, visual spatial and naturalist.
Everyone is imbued with the eight intelligences but in different proportions. You have your
dominant intelligences, and that influences your behaviour and the way you approach problems
It is logical to postulate that you will meet 8 different types of people in the workplace. Here are eight types of
intelligences:
1) Verbal linguistics are sensitive to words and language. They are skilled in one or more of the
areas of writing, peaking, listening and reading. Wanna be writers/producers?
• 2) Logical mathematical dominant people rely on logic and numbers in their thinking. Wanna be IT
experts?
• 3) Interpersonal intelligence refers to the ability to sense other people's feelings and how to relate
to others. Wanna pyscho people? Goodpay-$500 pee hr common!
• 4) Intrapersonal intelligent people have good understanding of themselves. They are more
reflective and are comfortable and happy when they are alone. Wanna be yourself! Artist?
• 5) People high in kinesthetic intelligence are good at expressing themselves through bodily
movements. They tend to excel in sports and learn physical activities more easily. Wanna be
Olympians?
• 6) Musical intelligence can be exhibited in music appreciation, playing of-musical instruments,
singing or writing music. Wanna be Chopin?
• 7) Visual spatial refers to having good spatial awareness and orientation. It also encompasses the
skills in visualising, space planning and drawing. Wanna be architect?
• 8) Naturalist abilities include understanding and working with animals, plants and ecosystems.
In any given problem-solving task, we use a combination of the eight intelligences. However, the
combination used differs from person to person. It depends on choices as well as inclinations. We
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tend to use what we are stronger in. Wanna be biologist?
D7 Value of appraisals and consequences
Performance appraisal.
Assessing an employee in his or her job and s/be an ongoing
basis. Many organizations have a formal process and use it to identify training needs and/or
reward performance
Importance of performance assessments -each employee is hired for specific function. The
employee performance affects the organization performance Therefore the organization must be
aware of how well the employee performs. Having a systems of performance assessments (part
of performance appraisal) help both parties to assess whether employees doing their job
properly. Appraisals is often linked to rewards systems as employee performance are being
assessed based on KPI’s/MBO systems or budget system
Value of appraisals.
• 1)
Provide opportunity/platform to review progress. If done properly, it can be good
communication
• 2)
Identify and possibly rewards achievements of individuals (KPI)
• 3)
Identify training needs
• 4)
Potential control mechanism.
Effectiveness depends on:
• 1)
how introduced
• 2)
how it is perceived by employees
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• 3)
how it is used (eg if have good performance- variable bonus? promotion?new roles?).
Value of appraisals and consequences
For those who continue to under-perform
and/or conduct frauds/mis-behavior and cannot
be trained for alternatives, there are
consequences
• Termination.
Also called severance. Can
be due to retirement (employee working life
cycle over), resignation (employee decides
to leave) or dismissal (employer terminate
employee contract)
• Unfair dismissal. If
employees
are
dismissed for unfair reasons, they may get
settlement from employers. If they cannot
accept the settlement, they can complain to
the authorities like industrial tribunals
– In Singapore they can go to Manpower
ministry
– An industrial tribunal may order the
firm to reinstate the employee to the
same job, or re-employ in another job
or pay fair compensation
Retrenchment
• This means an employee is made redundant due to
business conditions that lead to closure of all or part
of its business say a business segment.
• Most countries have statutory redundancy
compensation if it is not already inbuilt in company
policy. Say you will be paid for one month for each
year of service
• The employer will often place you in outplacement
services.
– Main purposes is to help employees find
alternative employment
– Involve information, advice and facilities (say
the firm refer you to another subsidiary and/or
provide references or allow you to go for
interviews without pay cut or use the company
computers during work hours to look for jobs)
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How to benchmark employment performance
Key step is to create a specific performance criteria/set of expected competencies in advance. (normally
set for next year). -many firms use reward systems like KPI targets or balance scorecard/6 sigma
These serve as benchmark against his performance in the coming year
The employee is assessed based on his performance vs the targets set
Say one targets for customer service is “reduced the number of complaints by 10%” and if the actual
complaints has fallen by more than 10% he has performed well
Each target or goals should be SMART as in our example
Performance appraisals are done periodically normally once or twice per year in a face to face meeting to
deliver results of the review to employee. Of course some companies can afford more continual basis say
quarterly.
3 main steps to appraisal systems:
1) Job definition.
Define the employee roles and responsibilities and what is expected of him by the
firm. Set it out clearly in his contract and also generally required as a firm employee in the company’s
personnel handbook
2) Perform appraisal stage.
Compare his performance results against the expectations set for him
3) Feedback.
The employer must get feedback from him by:
1) Face to face meeting to discuss his appraisal
2) Matters other than his performance may be discussed-like difficulties he is facing and his future
objectives and possible corrective actions like training or transfer of him out or other same
department colleagues out
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Analyze and define the job
Job analysis- analyze the role of the employee or detailed examination of;
(1) tasks (performance elements) that make up a job or the employee role. Say if you are a credit
controller, it will include timely collection of debts, analysis of credit risks and follow up on debtors and bad
debts
(2) conditions under which they are performed.
You should have access to credit reports on the
debtors from the system and have authority to imposed “stop lifting” when debtors default or exceed credit
limit”…to
(3) Job requirements. A terms of aptitudes (potential for achievement)-should be able to communicate with
debtors and warehouse (stop delivery..) and lawyers (legal actions). Anotehr example- Say a tax assessor
should have mathematical and detection aptitudes
Job requirements
A) Attitudes (behavior characteristics). Keen to learn new things? Change management?
B) Knowledge and skills required to carry out the job.
Say entry levels-If u pass O level- data
input clerks, if FIA-accounts assistant, ACCA- accounts executive
C) Experience on the job and other certifications (CPEs)
D) Physical condition of the employee. Fit for the job- to be navy seals- u are most fit. To be professor if
u are as intelligent as Professor Hawkins- any conditions also can
Its objectives (of job analysis) include
(a) determine most efficient methods of doing a job,
(b) Enhance employee’s job satisfaction
(c) Improve training methods
(d) Develop performance measurement systems (KPI systems/reward systems)
(e) Job matching-match right employee with right job at the right time in emplyee selection.
• Comprehensive job analysis begins with the study of the organization itself: its purpose and orgn
structure, inputs and outputs, internal & external environments, and resource constraints. It is the first
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step in a thorough understanding of the job and forms the basis of job description which leads
to job
4 approaches to performance appraisal
• Tell and sell (Judgmental approach-employee no chance to explain)
Reviewer tell reviewee his performance and pass judgement “point out”
employee strengths and weaknesses, achievements and failures.
(Employee feels that it is judgmental because all these weaknesses
and failures are actually the evaluator personal experiences!)
• Tell and listen (non judgmental- chance to explain)
Reviewer listen first (get reviewee to talk about his strengths and
weaknesses and what explanations he can offer)
Reviewer then tell reviewee his performance
• Problem solving (look for solutions to problems)
Reviewer and reviewee come together to analyse problem(s) of poor
performance and resolve it (hopefully his job performance will be
improved and his problems will go away or get better)
• 360 degree approach (Feedback & evaluation-”leave no stones unturned”)
Get every party involved to discuss and resolve problems (go one
round 360 degrees on all relevant parties)
Say marketing manager sales down- invite sales managers or peers
(fellow marketing managers), suppliers (quality issues), customers
(complaints and expectations), delivery (when not prompt)…
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Barriers to effective appraisal-and how to overcome it
(i) Recency effect (recent events). Managers evaluate their subordinates based on the current actions and events
happening to their subordinates. Evaluation is not conducted consistently during the evaluation period, and hence does
not cover a long time period or the past period.
(ii) Halo effect. Employees are usually evaluated based on one of their characteristics. For eg, an employee who works
late may be given a high evaluation in terms of productivity, motivation, and work quality. Popular or attractive employees
may be given high evaluations in terms of personality and their ability to mix with other employees.
(iii) Different reviewers’ standards. Different managers may practise different evaluation styles. Some managers give a
flexible or a lenient evaluation compared to another. This is unfair to employees as the results may not reflect the true
picture of the employees' performance. It is also unfair for organizations as management cannot determining the rewards
for employees.
(iv) Central tendency. Managers evaluate their subordinates at a moderate or centralized level towards a value that is
believed to facilitate job evaluation. Managers should try to avoid from giving reasons in their evaluation.
(v) Evaluator biasness. Some managers are influenced by different standards and expectations. . Biasness is a form of
prejudice not only towards gender, skin colour, ethnicity, and religion, but also includes the employees' personal
characteristics such as their age, appearance, dressing style, and political views.
(vi) Personal bias. Beside the different reviewers having different standards, they can also be personally bias for different
reasons-"race/religions/looks..."
(vii) Contrast effect . Rewiewee is assessed/benchmark against his peers instead of say done vs targets set
(viii) Isolation effect. Many reviewers just simply "group together same peers" as a cluster and everyone same standardsnot really assessing individual performance
(ix) Single incident effect. Reviewer based whole appraisal on a single incident- "this is not fair-1 perform badly on job xxx
because my girlfriend left me that week but for the other 50 jobs I was first class"
(x) Job effect. Reviewer award higher performance for higher ranking jobs. That is why CEO always outstanding, senior
managers very good and then managers all good and come to me small fry-my assessment is limited to "my pay 296
grade"
Ways to overcome these barriers
<you may notice the subjective element in each of the barriers mentioned- and therefore the need to
make it more objective and more acceptable to person being appraised>
1)
Sent reviewers on training programs so they understand consequences of not doing the appraisals
properly and impact the employees deeply
2)
Reviewers must keep a log of events relating to performance or “diary keeping system” where major
incidents relating to an employee is recorded. This help reviewers to base their appraisal exercises
on the whole period not just recent or one incident. Fairer to good consistent high flyers
3)
Act on feedbacks received from employees
Methods to appraise appraisal systems
(1) Obtain feedback from employees on the fairness and accuracy of the systems
Was the review done fairly and accurately? Their opinions is important for reviewers to checklist on
themselves. Sometimes employees are scared to speak up-”this manager always give outstanding
performance to beauties but no brains”. Can victimized employees appeal? Facebook/Youtube?
(2) Appraisal process serve its needs?. Main objective of appraisal system is to deliver potential
benefits like increased productivity and performance enhancements and improved communications. But
many managers and employees just cannot disitinguish between “facts and feelings”. Everything should be
based on facts or evidence not perception
(3) Follow up.
(i) Act on feedbacks from employees
(ii) Review performances of those upgraded or promoted. How are they coping with their new
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responsibilities
Section E
•Personal effectiveness
•Communications in
business
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E1 Personal effectiveness & time management
As an accountant you must learn how to manage time according to prioritize the tasksmulti-tasking if you need to do so! Effective time management is important as it has
benefits below. After having all these benefits, you feel empowered to do anything you
set out to do!
• Maximize productivity- when you are comfortable with the time you have you are
more productive as you are more focus on the task
• Greater control due to less or reduced stress and anxiety
• Eliminate inefficiencies-Wasted time in less focus work and many interruptions
• Example you are finalizing management reporting and then you have the
following interruptions (or barriers to time management);
• First the son called to remind you about his weekend adventure
– You forgot about time and spent an hour chatting
• Then your wife called to talk about the wedding anniversary
• Then your brother called concerning mother birthday celebrations
• Then you called all of them to say you will be sacked if you cannot finish
your management reporting! You collapsed due to work overloads as you just
realized you need to have some urgent meetings tomorrow!
• Self discipline with better allocation of time -priority for what is more urgent. You can
be more disciplined as you have methods or procedures to remind you
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Meaning and importance of time management
Time management is the act or process of planning and exercising conscious control over the amount of
time spent on specific activities, especially to increase effectiveness, efficiency or productivity. individual can
increase the amount of work done or tasks in same amount of time
Time management may be aided by a range of skills, tools, and techniques used to manage time when
accomplishing specific tasks, projects and goals complying with a due date. This set of time
management systems encompasses a designed combination of processes, tools and methods
with wide scope of activities, and these include:
1) planning, allocating, setting goals,
• To do lists” and establish goals **
2) delegation, analysis of time spent,
• Daily or weekly plan** and amount of time planned and spent
3) monitoring, organizing, scheduling, and prioritizing
• Prioritize tasks ** according to importance. Carrying out activity around those priorities and
the related process of reduction of time spent on non-priorities
• Importance means according to the overall organization and individual needs not the
immediate supervisor who is often selfish and insist his things first.
• To illustrate: your CFO ask you to do a project cash flows plan first (due say 6 months later) but
CEO/HQ want management report due yesterday. CFO threaten you with dismissal for insubordination
if you don’t do his first–what should you do? Clue- you are the one get sacked! And who is the
Emperor- prioritise their needs also!
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**Usually time management is a necessity as it determines the project/task completion time and scopei.
Why you always have no time
Q: God give everyone 24/7 hours/day but for you it is not enough?
A: Because you waste time.
You have barriers to effective time management. Overcome barriers by
creating an environment conducive to effectiveness.
1) Work overloads- learn to prioritize
2) Social interruptions- No phone calls when closing accounts. Sent SMS for people to
call during lunch hour
3) Procrastination/fraternize-Have discipline. Ms/Mr Universe just reported for work this
morning.
No need to be in beeline to catch him/her!. Urgent work (not so fun) need to be
done first (finish urgent tasks on to do lists/daily plan before joining beeline)
4) Time spent in meetings- set a strict time for each meeting – ensure everyone
is prepared for meeting and learn to get attention from all in attendance
– (know why lawyers have good control of time in meeting?)
5) Use IT to work smart-Invest in suitable ‘toys’ if it helps to be more effective
in work or communication . Learn if you must (get company to sponsor?)
• Productive tools like Excel/powerpoint; Internet for information also
Email/mobiles phone are so friendly and powerful
• Personal planners / programs- whether in mobile or on desk 3M stickers
• Learn project management, attention management, time management!
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Time management strategy-pls see handout
•
•
•
•
•
•
Eisenhower's Urgent/Important PrincipleUsing Time Effectively, Not Just
Efficiently
Eisenhower's Urgent/Important Principle helps you think about your priorities,
and determine which of your activities are important and which are, essentially,
distractions.
What Are "Urgent" and "Important" Activities?
In a 1954 speech to the Second Assembly of the World Council of Churches, former
U.S. President Dwight D. Eisenhower, who was quoting Dr J. Roscoe Miller,
president of Northwestern University, said: "I have two kinds of problems: the urgent
and the important. The urgent are not important, and the important are never urgent."
This "Eisenhower Principle" is said to be how he organized his workload and
priorities.
Important activities have an outcome that leads to us achieving our goals, whether
these are professional or personal.
Urgent activities demand immediate attention, and are usually associated with
achieving someone else's goals. They are often the ones we concentrate on and
they demand attention because the consequences of not dealing with them are
immediate.
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Time management strategy
•
When we know which activities are important and which are urgent, we can overcome the
natural tendency to focus on unimportant urgent activities, so that we can clear enough
time to do what's essential for our success. This is the way we move from "firefighting"
into a position where we can grow our businesses and our careers.
How to Use Eisenhower's Principle
• Do a To-Do List or Action Program,
Prepare a list of all the tasks that have to be performed
• Next , decide on the relative importance of each task and prioritise them
Think about each task/activity and put it into one of four categories, as shown in Figure 1,
below:
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E2 ways and consequences of not being effective in work
It affects both the individuals and the organization (especially your
team). Ineffective individuals
1) don’t contribute positively towards the objective of an
organization (say when he feel injustice)
2) Less likely to be loyal
3) Create an environment of distrust (only talk bad about the firm!)
An individuals will be ineffective at work when
1) Procrastinate (not innovative or motivated therefore waste
time)
2) Ineffective when communicating
3) Being inactive (say pretend to work during
4) non-peak hours or keep applying sick leave)
5) Fear conflict (the good guy that don’t offend even if it is
wrong to keep quiet)
6) Being unapproachable (perceive too many things in his
coconut brain!)
7) Being over-optimistic – say book the auditor too late for the
final audit)
8) Being a silent onlooker (not contributing to the team efforts
intentionally)
9) Being unethical – especially when internal controls are weak
10) Fail to plan – sure way to plan to fail
Team can be ineffective
when
1) leader dominate
2) poor leadership
3) clear on goals
4) members or cliques
conflicts
5) lack of resources
6) not clear on members’
roles
7) unhealthy competition
8) un-productive meetings
9) goal dis-congruence
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E2 Consequences of not being effective in work
When individuals or teams are not effective, they affect the organizational performanceone evil lead to another. Consequences are:
1) Loss of market share/goodwill (lead to next consequence)
2) lower returns on investment (ROI) lead to
Lower market share hurts the bottom line, reduce ROI
3) lower growth rate/expansion lead to
Stakeholders not investing or interested
4)problem with managing change (recall kotter) lead to
Cannot cope with rapid changes going on
No resources or will to manage the change
5) Motivational problems- high employee turnover lead to
Everyone leave when they can
6) More groups/interpersonal conflicts lead to
Whatever remains lack leaderships or goal congruence
7) Weaken the organization culture lead to
We don’t do things the ways we used to , not anymore
8) Increased costs of communications lead to
Basic cultural assumptions/paradigms broken down
Eventually it further lose market share/goodwill and the evil continue if not corrected
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E3 Personal development and CPE
Purpose of personal development plans-a tools for an individual to help plan one personal
development . One needs to identify:
Components of such a plan include:
• Where one present position and status
– Current job and its future prospects
– Say an account clerk and progressed to “condemned senior clerk”
• Where one would like to be (in say 5 years time and further)
– What job or career expectations
– Become accountant and CFO before retirement
• How one can get there - action plan?
– Finish ACCA FIA in year 1, ACCA Advance Diploma in Year 2
– Get accountant job 2 years after finishing FIA
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Corporate personal development programs
Corporate personal development plan (FYI on;ly)
Personal development programs in companies fall into two categories:
1) the provision of employee benefits
•
•
Employee benefits have the purpose of improving satisfaction, motivation and loyalty. Doing employee
surveys may help organizations find out personal-development needs, preferences and problems, and they
use the results to design benefits programs.
Typical programs for employee benefits include work-life balance (sports club etc), time management,
stress management, health programs, counseling
2) the fostering of development strategies.
• As an investment, personal development programs have the goal of
increasing human capital or improving productivity, innovation or
quality.
• Employees gain access to these programs by selection according to the
value and future potential of the employee, usually defined in a talent
management system which include new hires, perceived highpotential employees, perceived key employees, sales staff, research
staff and perceived candidates for future succession as leaders.
• Organizations may also offer other (non-investment-oriented)
307 to
programs to many or even all employees. It sends employees
Formulate, implement, review & monitor plan
Formulate personal development plan (as least from previous slide- you know
what the co can do for you)
1) Write up the plan-say plan to be manager 5 years time
• Assess present situation/current position - Now you are accounts assistant
• Assess future desired position (Finance Manager 5 years from now?)
• What need to be done - Learning gap- training and experience
– Do remaining papers ACCA in 2 years/post graduate 3 years
2) Implement the plan
– Set deadline with time limit (and milestones or time frames)
– Balance 4 papers in Yr1, and final 5 papers in Yr 2
– Join an SMEs as full set accountant at yr 3
3) Monitor the plan
• Checklist at the milestones (are you realistic enough?)
• Review the plan
– Review at each milestone what has been achieved
– Revised/create a new plan if necessary
• Allow more time per week if first milestone not achieved
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Formulate, implement, review & monitor plan
•
Example
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professional result or goal. Benefits include:
Coaching,
counseling
1) relatively inexpensive
way ofmentoring
training an and
employee
for a new position
(regardless of position)
2) The employees is learning whilst he is working
3) The employee gets immediate feedback on his performance
4) Effective method of training evidenced by its widespread use
Mentoring usually involve an older and more experienced employee (the
mentor) providing guidance (not just day to day but long term career issues) to a less
experienced employee (the protégé) It is about an on-going relationship of
learning, dialog, and challenge with focus on development of the whole person.
Benefits include:
1) Increased loyalty of the protégé
2) Protégé expected to be more efficient and productive
3) May be part of succession plans and procedures for the organization
Counseling refer to an employee discussing his personal problems to another
individual (may be a professional counselor in the organization). As these are
personal but may affect his work performance hence the counseling. Benefits
include:
1) Individual employees get help with their emotional problems / traumas 310
Competence framework followed by professional development needs
Organization must have policies and procedures in place to get right people at right place at right time. For
professionals like accountants, continuing professional education (CPE) is one way to complement
professional development needs. Qualified accountants continue to attend courses by their institutes
Features of competency framework:
1) Organization use it to describe the necessary skills and qualities of the various positions in the
organization chart
2) It enable organization to do human resource planning (headcount).
• Spotting, recruiting and retaining both talents and “non talents-drifters?”, grading employees, ensure
quality control and the employee development including performance appraisal
How to develop a competency framework? 4 steps process
1) Define purpose and scope (the above features that an organization want to see)
2) Collection information – say sources and avenues for talents
3) Develop the framework
• Basic requirement of each position
• How to conduct interview? need HR + department head?
• Need certification (say CPE approval for lecturers in the school?
• Background and reference checks? Recruitment methods
4) implement the framework
• Comply with the laws- foreign talents quotas?
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• Document the process and communicate to department heads
E4 Organizational conflicts
Situations where there can be conflicts at work
1) Functional conflict.
This may results in higher performance as it can
also induce motivation and creativity. Say accounting function focus on cutting
costs (want to see low advertising budget and fixed it at say 5% of sales).
Marketing people feel that they are constraint by square accountants as they not
given enough advertising budget to market their products. Chicken and egg issueone fellow say “show me the results then I increase budget”, another say “if you
give higher budget sure higher sales lah!”
2) Dysfunctional conflict.Such conflicts make employees hesitant to act thus
holding back their performance and can promote interpersonal hostilities and
create a negative work environment. Say this purchasing manager approve
subs-specs products (suspected of kickbacks from suppliers) and his ethical staff
deplore his actions but cannot do anything because he is royalty (father in law of
the CEO-conflict of interests)
3) Levels of conflict - 1) interpersonal 2) intragroup 3) intergroup
Interpersonal conflicts are inherent due to language, customs or culture or other
personal backgrounds (even hobbies-the company you keep!). It can lead to division in
the group and even escalate into intergroup conflict.
Intragroup conflicts can come from different levels of staff in same group (due to poor
leadership or lack of trust in each other).
Intergroup conflicts can happens due to many reasons- employees align with
their
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bosses, different objectives or focus (as above example)
Situations that may leads to conflicts
Different perspective. The famous economic cartoon drawing- some people see it as a young girl some see
it as an old woman
Departmental incompatibility
Like finance and marketing example above.
Another example- purchasing department often criticised by engineering department because engineering dept
want to buy from their contacts but finance says buy from another supplier due to prices and other controls. Or
'entertianment' claims by marketing from finance approval-look at ST Marine case where CEO is involve with
bribery scadal involving huge entertainment expenses (like Geylang expenses for a US admiral-valid?)
• Scare resources .Money no enough. Just like man and woman getting
married but man say simple wedding but women say grand wedding
(they end up marrying others!). In the business world there is always budget constraints
• Power. CFO, CAO, CMO etc always fight to be next CEO in succession fights (siblings rivalry). Another
example of functional conflicts
• External changes –Recall PEST. As they say “weather may change” and business change their model to
survive and conflicts may arise
• Unjust treatment. Discriminatory practice against an employee can lead
to strikes as in Foxconn PRC.. or lawsuits (Citibank US paid huge sums to a
woman employee who was sacked for dressing too low neckline and cause
beeline! The bank punished her the victim and not the perpetrators!)
• Role conflict. A party is required to engage in an activity that is incongruent
with his or her needs or interests. (role conflicts). Say you areActing MD in
the absence of the MD on home leave) and refuse to approve say dept x chief
request although he always get approval from MD direct
• Interdependence of work. The AP clerk need the GL to clsoe her work
but must wait for AR clerk as she is using the manual GL. Say accounts want to do closing
but some managers late in submiting their expense accounts or say their variance reports.
They blame each other when deadline for closing is not met
Poor leadership and control. In previous example, CEO too weak to even tell the father in law to behave
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Conflict management : ways to avoid conflict
Ways to avoid conflicts
• Maintain open communication
• Avoid one sided solution
• Listen more talk less
• Use positive language (body and verbal)
• Deal with problem early before it escalates
• Respect for others- their feelings and emotions
• Be transparent (nothing to hide or cover up)
• Be professional (focus on the facts and the real issues) and not personal feelings
In summary, encourage constructive criticism only. This will make the teams members feel that you
as team leader allow free and open style of communications. Every member will want to give
feedback in the form of constructive criticisms and will be more participative. Only innovative and
creative ideas will come out. Destructive critisms only have negative impacts- members are “clam
up” or become defensive- waste of time!
Conflict management involves
• implementing strategies to limit the negative aspects of conflict and to increase the
positive aspects of conflict at a level equal to or higher than where the conflict is taking place
Say Ms A and Ms B cannot work together-reassign to another job/location/shift?
• The aim of conflict management is to enhance learning (nothing personal) and group
outcomes (effectiveness or performance in organizational setting) It is not
concerned with eliminating all conflict or avoiding conflict. Conflict can be valuable to
groups and organizations. It has been shown to increase group outcomes when managed
properly
Conflict significantly affects employee morale, turnover, and litigation, which affects the
prosperity of a company, either constructively or destructively
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Approaches to conflict resolution
There is agreement among management scholars that there is no one best approach to how to
make decisions, lead or manage conflict
Within this framework are five management approaches: integrating, obliging,
dominating, avoiding, and compromising
1) Integration (collaboration) involves openness, exchanging information, looking for
alternatives, and examining differences so solve the problem in a manner that is acceptable to both
parties. When management responses to conflict are based on integration and collaboration
emphasis is placed on the task at hand. Individuals are encouraged to accept the need to
modify their views for the sake of the task.
2) Obliging (acceptance/accommodating and smoothing is associated with attempting
to minimize the differences and highlight the commonalities (smoothing) to satisfy the concern of the
other party.
3) Assertiveness/Dominating/competition when using the dominating style one party goes all out to win
his or her objective and, as a result, often ignores the needs
and expectations of the other party.
4) Avoidance -when avoiding a party fails to satisfy his or her
own concern as well as the concern of the other party.
5) Negotiation/Compromising -compromising involves give-and-take whereby both parties give
up something to make a mutually acceptable decision (negotiate until you reach consensus).
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Approaches to conflict resolution
Example. You are the audit supervisor and you need to discuss with 2 of your auditors
You need to sent one of your 2 auditors to witness a fixed asset count in central Borneo jungle
during the Christmas break. It is not going to go down well with either one- one says his girlfriend
birthday same time and the other say mother 60th birthday!
What should you do? Which approach?
1) Integration (collaboration)
Engaged both of them in open communications, exchanging information, looking for alternatives,
and examining differences so solve the problem in a manner that is acceptable to both
parties reminding them that this task is paramount to the audit as the fixed assets is
valued at say $600m
2) Obliging
You so nice and end up you go lah?
3) Assertiveness/Dominating
You just arbitrary choose one of them without even
listening to each of them their pleas
Go or tomorrow no need to come for work!
4) Avoidance
You avoids the issue and try to get another group to do!
5) Negotiation/Compromising
Suggest that whoever go this time wil get exemption for
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“remote assignment” and you owe him one
Outcome of conflict resolution
Definition from Heidi Burgess and Guy Burgess. Win-win, win-lose, and loselose are game theory terms that refer to the possible outcomes of a game or dispute
involving two sides, and more importantly, how each side perceives their outcome
relative to their standing before the game. For example, a "win" results when the
outcome of a negotiation is better than expected, a "loss" when the outcome is worse
than expected. Two people may receive the same outcome in measurable terms, say
$10, but for one side that may be a loss, while for the other it is a win. In other words,
expectations determine one's perception of any given result.
• Win-win outcomes occur when each side of a dispute feels they have won
(or they feels they get what they really wanted). Since both sides benefit from
such a scenario, any resolutions to the conflict are likely to be accepted voluntarily.
The process of integrative bargaining aims to achieve, through cooperation, winwin outcomes.
• Win-lose situations result when only one side perceives the outcome as
positive (where one party feels they get what they want and the other party
feels they don’t get what they want). Thus, win-lose outcomes are less likely to
be accepted voluntarily. Distributive bargaining processes, based on a principle of
competition between participants, are more likely than integrative bargaining to
end in win-lose outcomes--or they may result in a situation where each side gets
part of what he or she wanted, but not as much as they might have gotten if they
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had used integrative bargaining.
Outcome of conflict resolution- Definition Heidi Burgess and Guy Burgess
• Lose-lose means that all parties end up being worse off (in simple Englishboth parties did not get what they really wanted). An example of this would be
a budget-cutting negotiation in which all parties lose money. The intractable budget
debates in Congress in 2012-13 are example of lose-lose situations. Cuts are essential--the
question is where they will be made and who will be hurt. In some lose-lose situations, all
parties understand that losses are unavoidable and that they will be evenly distributed. In
such situations, lose-lose outcomes can be preferable to win-lose outcomes because the
distribution is at least considered to be fair.
• In other situations, though, lose-lose outcomes occur when win-win outcomes
might have been possible (3 possible outcomes!). The classic example of this is
called the prisoner's dilemma in which two prisoners must decide whether to
confess to a crime. Neither prisoner knows what the other will do. The best
outcome for prisoner A occurs if he/she confesses, while prisoner B keeps quiet. In
this case, the prisoner who confesses and implicates the other is rewarded by being
set free, and the other (who stayed quiet) receives the maximum sentence, as s/he
didn't cooperate with the police, yet they have enough evidence to convict. (This is
a win-lose outcome.) The same goes for prisoner B. But if both prisoners confess
(trying to take advantage of their partner), they each serve the maximum sentence
(a lose-lose outcome). If neither confesses, they both serve a reduced sentence (a
win-win outcome, although the win is not as big as the one they would have
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received in the win-lose scenario).
E5 Communication in business
Communication means -1) Transmission and receipt of information between 2 or more
individuals and 2) Can be verbal (spoken) or written or even by body/sign language?
Purpose of communication in an organization (Internal)
1) Pass instructions to employees. Let them know what to do & how to do
2) Ask for suggestions for ideas. To gain from their experiences and benefits from their ideas. 3M
is famous for getting ideas from employees and convert it to saleable products
3) Information flow from/to employees- especially how they are doing and co-ordinate the
activities . Sometimes employee assets can be “exploited”
4) Identify possible problems before they develop
•
Spoken(Non face to face) (Face to face) Written/spoken
•
By mail
•
By Computer or Software comm (say BSB SCM) Body language
Broadcast/Notice
Methods used depends on the message – say you do not broadcast an employee
confidential information on the co’ notice boards which re used to announce company
procedures/events. When it is formal, it should be formal letter and discussed with
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employee face to face (say terminate your CFO)
External communication
Recall
Mendelow- the organization need to engage the stakeholders
appropriately
Corporate
governance
(public
oversight
committee) requires the organization to
communicate to outside parties
• Customers.
Keep them informed and listen to them
and anticipate changes in the market
• Local community.
Pollution and other issues
• Government (IRAS/ACRA (companies house etc)
• Potential investors. Need to add shareholders’ value,
not just keep them informed
• Media Some good publicity once a while (bad
publicity….check with Hollywood moives on what to do!)
• Competitors. You sometimes need to “sleep with the
enemy”
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Communication process model
Message
Sender sent message
• Encodes with encryption etc
• Decodes by receiver
Comm.
Sender
Receiver
process
Receiver acknowledge message
• Encodes with encryption
• Original sender receive feedback
Message
Noise
This represent all kind of interferences or factors that can distort the message
• Can be external noises that physically affect interpretation . Say you sent an
email to a colleague overseas. It was hacked and the recipient receive the
message distorted (and extra like virus?)
• Can be internal noises that mentally affect interpretation. Say your message
was interpreted with a distorted view due to perceptions of the recipient.
This is because you use complicated words or jargon.
• Distortion occurs when the meaning of a message is lost at the coding or
decoding. Distorted means incomplete or error message.
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4 types of noise
Psychological noise results from preconceived notions we bring to conversations ( the
preconceptions of the receiver- before we speak- they jump to conclusion, they judge ask already!)
such as:
• Racial stereotypes (he is a black – his monies must be from drug dealing!),
• Reputations (he is incorrigible thief- don’t believe what he says!),
• Biases, and assumptions- he is poor the othe ris rich- poor guy lie more?.
When we come into a conversation with ideas about what the other person is going to say and why,
we can easily become blinded to their original message.
Physiological noise is a distraction caused by some physiological process that interferes with the
communication process. Communication is the process of transmitting information from one
person to another. Noise is any type of disruption that interferes with the transmission or
interpretation of information from the sender to the receiver. There are different types of noise,
such as physical noise, psychological noise, semantic noise, and of course, physiological
noise. Examples of physiological processes include hunger, fatigue, headaches, pain, and
physiological effects from medicine that affects the way you think or feel.
Physical noise is any external or environmental stimu;lus that distracts us from receiving the
intended message sent by a communicator (Rothwell 11).
Examples of physical noise include: others talking in the background,
background music, a startling noise and acknowledging someone outside of the conversation.
Semantic noise. This is noise caused by the sender. i.e., the encoder. This type of noise occurs
when grammar or technical language is used that the receiver (the decoder) cannot understand,
or cannot understand it clearly. It occurs when the sender of the message uses a word or a phrase
that we don't know the meaning of, or which we use in a different way from the speakers.
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Pedadodge? Trainers? PSTD? PTSD?
Examples and potential problems- 3 channels of formal communication (the organization
preferred ways of communication)
Formal communication. Use channels of comm. established by the orgn
Vertical (top-down communication or up and down the organization)
• Upward channels when employees communicate upwards (say when presenting a report)or
managers communicate to employees downwards channels when superiors give orders or
set budget
• Top down communication
• May not passed to intended recipients
– Subordinates reluctant to pass negative
information upward (for fear of retaliation)
– Not comfortable to talk to managers
(who have not earned their trust)
May be edited along the way because current
recipient think info not to his liking
Lateral/Horizontal communication
• One dept member directly to another dept member
(normally same rank-horizontal) say when they are team
members of a task force (diffeent ranks-lateral)
• Problem of different perspective & hence need
coordination
• Poor communication may results in operational
disruptions
– Say accounts want to stop a sales order
delivery but misunderstood by warehouse
because of “noise”
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Informal communication channels-grapevines
(the way employees prefer to communicate with one another
exchange of ideas or views) FYI
Key terms
•
•
•
•
•
•
•
•
•
Gossip
Individuals seek and inform others about the random information they receive. Gossip involves spreading
interesting information that is not related to work.
Single strand
Single strand involves communicating irrelevant information that is not related to anything. Information
delivered is not stated in black or white.
Probability
The sender will inform anyone he meets randomly. The receiver will also inform anyone he sees randomly
and the communication continues. The information delivered is usually not important but interesting, for
example the live telecast of soccer games.
Cluster
The first individual will inform a second individual, and the second individual will then pass the same
information to certain individuals in an organization. The receiver believes that the sender will obtain important
information related to work matters.
The organization can use such grapevine for communication especially they want an informal feedback. Say
the department head casually gossip to the section heads who gossip to the sub-group heads to further
gossip/disseminate information on a proposed new policy say “reducing overtime costs by converting senior
clerks to executive level”. Such policy is not popular if a senior clerk earn basic salary $1,500 and overtime
$1,600 but if policy in place they get say $2,000 but no overtime pay. This information will spread like “wildfire”
as affected people are unhappy.
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When communication break-down
What is considered good communication- the characteristics or attributes
Sender
•
Clear in the message (clarifies purpose of communication)
•
Direct communication (sends information directly to receiver)
•
Relevant and no other non related matters and matches
media to message – say can you give a termination notice
for a manager on the company notice board?)
•
Appropriate (uses simple /easy to understand language)
•
Accessible- “door always open for you”
(encourages feedback)
Receiver
•
receive with an open mind
•
provide feedback (let the sender knows by communicating)
Communication is not effective when the sender is not clear in the content or purpose of the message
and / or the receiver is unwilling or unable to clearly understand the message / information or he
interpret according to what he want to believe “perceived notions”
Consequences of bad communication
•
Individual lose out on the message : Boss says “want to promote you” but due to ineffective
communication you misunderstand and resign
•
Consequences for the business include loss of moral, productivity “all the managers cannot even talk to
their staff!” and no team spirit “espirit de corps”
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Barriers to communications-snapshot
Barriers to communication
1) Jargon.
words or phrases not known to the receiver
2) Noise. any form of interference makes it difficult to receive, e.g. actual noise or complicated
words
3) Emotional state. if the receiver is upset, angry or depressed he or she can misinterpret
4) Distrust. if employees do not trust their employer, this affects their interpretation of the
message
5) Suitability of the communication channel
e.g. a long list of sales figures might be easier to
understand if written of the channel down
6) Location. e.g. Communication can be difficult if the business is spread out in many remote sitesone in Alaska, one in Siberia, one in Greenland (say offshore company prospecting for oil)
Barriers/problems of communication for larger organisations <and possible solutions>
1) Over-reliance on written communication and failure/inability to deal with issues face to face
• Sent managers for communication courses? Learnt what is important to communicate and
distinguish facts and feelings
2) Too many layers of hierachy- Slow decisions/Workforce feels alienated/Distorted messages as
they are sent in a hurry
• Delayering (removing some levels of hiraechy can improve communication but may effect the
managers left out motivationally feeling they are now less important
3) Overload of managers -Cannot make effective decisions as they have too much work
• Decide if overload due to performance issue-managers not qualified or trained to handle
• Or it is temporary and can send some seconded staff to help out
4) May need to invest in information technology; may need to invest in training even then more IT
may simply lead to more communication, not necessarily good communication unless
• Organization must also trained the staff to use the technology
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• Policy and procedures in place on say email, password and data security etc
Steps to overcome barriers to effective communication
Barriers to downward comm
1(One way flow of communication
without employees’ feedback
2)Multi-layers’ hierarchy message get
clanged on the way
Barriers to upward communication
1) May not passed to intended
recipients. Subordinates
reluctant to pass negative
information upward (for fear of
retaliation)
2) Not comfortable to talk to
managers (who have not earned
their trust)
May be edited along the way
because current recipient think
info not to his advantage
Barriers to lateral communication
1) Different perspective and goals
of diff departments
2) Lack of organization reward and
recognition
Overcome Barriers to downward comm
• Get their regular feedback
• Use different channels of communication by
group (meetings) of face to face
Overcome Barriers to upward comm
• Seniors must remain “open door policy”
and/or accessible to employees (say
Facebook or email) and get their regular
feedback
• Hold regular meetings and get feedback
Overcome barriers to lateral comm
1) Employees to understand goals of organ
2) Reward or recognize employees’ effort in
providing good information
1) Say if employee give good ideas and
implemented (cash awards like 3M)
2) Acknowledge it at least by replying
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formally to show they care.
Barriers to communications-snapshot
The circle: sender receive feedback at end of circle (very often too late (took long time and wrong message). Very
decentralized type of structure. Information pass around. Better for complex work environment as
decentralised networks tends to produce quicker solutions and fewer mistakes. A send message to B a
frog have four legs B say message to C frogs got legs D received as 4 legs….
The wheel : sender receive feedback from everyone and fast and more accurate. Most centralized like entrepreniural
structure. But the sender is overloaded – imagine company have such networks- the sender spends all his time replying
emails!!! Need to go home- so ineffective reply (input info) to members!!! But for companies that have simple or no
complex matters, this is good like small start up business.
The chain: sender receive no feedback (says Finance Minister want feedback on GST increase of new budget -he ask
Perm Secretary-who ask MAS chief who ask bank represntative who ask customer (households / people /man in the
street representative- bottom line no or wrong feedback from the people! Imagine the last person in the chain says
“15% GST very bad” then it is trnamitted to bank rep who edit and says “not so bad” then transmits to MAS chief who edit
it to “quite good” and Perm Sec receive message as “good” and the minister get angry and said what is the impact and u
tell me that WTF CYA mentality that increase GST by 15% and the people says xibei song!
The Y: Sender send to 3 persons or 3 groups which do not communicate with each other. Quite centralized and may be 3
persons or 3 divisions (division structure)
Centralized networks : Wheel and Y
Decentralized networks : Circle and chain
info pass slower
(info can pass quicker)-(Big guy can be overloaded hence info
But for simple problems, centralized is quicker))
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Section F
•Ethics
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Fraud
Why fraudulent behavior not acceptable
•Fraud or fraudulent behavior impair the accountant ability to provide a true
and fair view of the business financial performance and position (in other words the
accountant has no credibility due to low integrity)
What is fraud
•Fraud is an intentional deception made for personal gain or to damage another
individual
•Fraud is a crime and also a civil violation
•Common purpose of defrauding people or entities of money or valuables (assets)
•A hoax is a deception but no intention for personal gain or harm another individual
•Fraud can be committed thru many media:
– Mail, wire, phone and the internet (computer crime and internet
fraud)/Hackers steal credit cards info
• Tax fraud can be by false billing or forgery (say false declaration of GST
Accountant on trial for allegedly pocketing $40m
Ewe Pang Kooi was the managing partner of Ewe Loke & Partners and a director of E&M Management
Consultants. He allegedly spent the money he pocketed on gambling and repaying gambling debts.
Ewe Pang Kooi was the managing partner of Ewe Loke & Partners and a director of E&M Management
Consultants. He allegedly spent the money he pocketed on gambling and repaying gambling debts.
ST PHOTO: WONG KWAI CHOW
PUBLISHED JUL 4, 2018, 5:00 AM SGT
FACEBOOKTWITTEREMAIL
He faces 50 charges of CBT as an agent, which carries maximum sentence
of life in prison
pocketed more than $40 million from 21 companies he was liquidating, and another one which
he was managing the finances of, went on trial in the High Court yesterday.
Ewe Pang Kooi, 64, a permanent resident from Malaysia, allegedly spent the money on
gambling and repaying gambling debts. He also used the funds to return monies he had earlier taken
from other companies.
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Circumstances under which fraud is likely to arise
The environment with combination of 3 factors/fundamentals will allow fraudulent
behavior to thrive:
1) Dishonesty
2) Motivation
3) Opportunity coupled with inefficiencies in an accounting systems Identify combination of
these factors in the following circumstances:
• Weak internal control systems make it easier to commit fraud
No segregation of duties.
say only one bank signatory required
instead of two and no bank reconciliation
done or cash receipt not banked daily
• Ineffective management (say mgmt not
paying enough attention to internal controls
-weak control environment)
Allow un-authorized access to information
They are not aware of importance
or no ideas or use idiot relatives
• Ineffective accounting and finance department
– Not employing qualified people who can do the job
• Messy accounting records make it difficult to trace transactions not to mention frauds
• Periods of sustained financial losses
– Start to think of cheating GST refunds…..
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Circumstances with good chance fraud has/is taking place
• Existence of reward system for financial condition/performance
– Say sales person create fake invoices (or uncollectible sales) to get commission
– File fake purchase invoices for PIC claims
– Case of NUS don submitting false data for his research work published and was
withdrawn by the medical journal after detection
• Unnecessary complex corporate structure
– Purpose is to make it difficult to trace transactions
– The more spider web your structure look like,
the more difficult it is to trace
• Unusual transactions like excessive cash
payments/to unusual recipients (say in Timbuktu)
• Sudden unexplainable increase in income –
Say analytical trends or ratios cannot explain
• Unavailability of reports, documentation, etc
– They will delay as long as possible and then say “lost”
• Frequent changes in accountants and auditors- qualified accts will resign & not
compromise if not comfortable
• Periods of sustained financial losses (by business) or employees in situations of needs
for cash -Start of cheating GST refunds…..(in Singapore Marina Bay Sands is now the main
culprit?….)
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Different types of fraud
A) Misappropriation-not using the funds entrusted to you appropriately
1) Embezzlement/larceny is illegal use of funds **
by a person ho controls those funds say cashier
use money instead of banking in, try to put it back later
2) Misappropriation of funds
Criminal breach of trust CBT
Illegal uses of funds or assets is also called
misappropriation and is a felony (crime punishable
with prison term). CBT means criminal breach of trystorganization or individuals entrusted you with their
assets and you breach this trust criminally. Examples:
samples not distributed but taken home; use company car for private purposes; overrecording/not recording usage of materials; under-record cash receipts; issue goods but don’t
raise invoice;
•Example Over-recording of goods received. The warehouse staff deliberately
over-recorded goods received so that his good friend the supplier can invoice
more- it is an asset fraud because goods co paid for already ”stolen” even
before booked into warehouse
•Example Collusion to misappropriate assets. Purchasing officer
accept inferior goods not up to specifications- they choose
suppliers not meeting the higher standards after colluding
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with the QC manager to lower the specs
Different types of fraud
3) Internal theft – stealing of company assets by employee
Take company products without paying for it
Illegal uses of funds or assets is also called
misappropriation and is a felony
(crime punishable with prison term)
4) Payoffs and kickbacks- situations where employee accept cash or other benefits in
exchange for access to the company business
SCDF case where female purchasing
chiefs provide non-cash kickbacks
Very often co pay higher prices for products.
•Example Kickbacks
•The purchasing officer raised PO for a computer for $5000 (after supplier checked thst he asked for
$2000 grease monies) although market price RRP is $3000. The supplier pay $2000 to him as
kickbacks
•Also another common practice – go eat in a restaurant (opened by spouse) for $500 but get invoiced
$5,000
5) Skimming which occurs when employees take money from the receipts and don’t record
revenue on the books
say the cashier collect cash from scrap sales but did not issue receipt immediately or no issue
and pocket the monies (management hobby in PRC)
Teem and lading – when cash received from a debtor it is not recorded in the cashbooks
and is misappropriate. Later on when cash is received from another debtor, his account is not
credited but the first one. The second debtor a/c will be credited when a third debtor pay 334
in
Different type of fraud-Fraud-manipulation of financial statements
B Fraudulent reporting
Fraudulent reporting is when company intentionally mis-states information reported on the
financial statements by;
1) Overvalue assets
1) Did not provide sufficient inventory impairments
2) Did not provide sufficient fixed asset impairments
3) Under-provision of bad debts
4) Goods on consignment in outlets are considered as all sold
2) Understate liabilities
1)
2)
Did not record accruals say goods received but
suppliers’ invoices not received yet
Did not make sufficient tax or other provisions
3) Mis-apply accounting standards
1) Change of stock average method to FIFO to show
more profit
2) No accruals or matching concept as item 1 and 2 shows
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Implications of fraud for the co
1)
2)
Costs.
Overpaying for purchases etc
Loss of credibility for the organization
1) May affect the share price
2) Difficult to borrow funds from bankers etc
3) Indicate ineffective internal control systems
4) Auditors cannot wait to increase their fees as they will say the F/S totally “not true and fair” and
weak internal controls systems
1) Need to do more risks analysis and systems review
2) More substantive testing
5) Corporate governance issues
1) Listed co need to issue explanations if huge frauds
Role & duties of managers in fraud detection & prevention
•
Leadership role - leads by example (chinese proverb: top not straight bottom crooked) , By not
engaging in fraudulent practices. Also refused to submit to collusion pressure(CHC> 6 leaders
collude)
•
Update systems- monitor ICS & checks and prevent collusion. Serious response to auditors’
management letter. Also identify any new potential risks to the organization
•
Education to ensure all employees understand co do not encourage any fraudulent practices.
•
Reporting say by encouraging and protecting whistle blower culture
• In CHC, whistleblower suffered financial and personal damages due to collusion
•
Immediate action to investigate any reported incidents of fraud
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•
Co-ordinate with internal and external auditors . Serious response to auditor
Money laundering and tax evasion
• Money laundering is the process of concealing the source of obtained money- Illegal
obtained money is given the appearance that it come from a legitimate source
• Money laundered involved billions (IMF said 2-5% of world economy 1996)
• Efforts by governments and financial institutions to deter, prevent and apprehend money laundering.
Unfortunately, 2012 shows many top banks (HSBC and SCB) are knowingly involved. In 1997, NY Bank
executives planned and help Russian mafia laundered US$7 billions
• Tax evasion (illegal) often come together with money laundering because you don’t want
to pay tax on illegal sourced money or tax dodging . Do not confuse with tax avoidance
(legal). Problem is the difference is only hairline thin-difficult to assess and need to
convince big brother IRAS
Say you change your company structure to save on tax liabilities is an example of tax
avoidance
If you under-report your GST- this is evasion
Costs of money laundering and tax evasion
• Negative effects on economic development
–Undermine domestic capital formation
–Depress growth and divert capital away from development
• Compromise data privacy. Examples:
–They use bank accounts of desperate as conduit
–So they provide free internet sites to steal info
• Illegal activities
• narcotics trafficking, international organized crime, and corruption- all these also come with
high social costs (crimes –huge drug addiction problems)
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• Costs of enforcement of anti-money laundering laws
Discussion: Hsbc Money Laundering Probe –ST article
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LONDON -- Britain's revenue and customs service is examining allegations that criminals may have
used offshore accounts with HSBC, Europe's biggest bank, to launder money, it confirmed Friday.
Her Majesty's Revenue and Customs said in a statement that it had been contacted about a
leaked list of the bank's customers, and accusations in a British newspaper that the clients
include drug dealers and gun runners.
"We can confirm we have received the data and are studying it. We receive information from a
very wide range of sources which we use to ensure the tax rules are being respected," the HMRC
said.
In a report published Friday, the Daily Telegraph newspaper alleged that a list of the bank's
disclosed by a whistleblower had identified 4,388 people holding 699 million pounds ($438
million) in offshore current accounts, including criminals.
Banks have an obligation to notify authorities about suspicions over the source of cash
deposited in its accounts.
HSBC said it was committed to "the highest global standards, including the procedures for the
acceptance of clients" and confirmed that it had opened its own inquiry into the alleged data
breach.
"We are investigating the reports of an alleged loss of certain client data in Jersey as a matter of
urgency," the banks said in a statement.
However, it said it had so far not been contacted by the HMRC about any investigation into its
work. "Should we receive notification, we will cooperate fully with the authorities," the bank said.
Jersey, a British dependency off the coast of France which has its own currency and tax laws, is
a major offshore financial center.
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tax evasion-false entries in her returns-ST article
A REMISIER who under-reported her income to the taxman was jailed for a week and ordered to pay a penalty of
$192,927 yesterday. Teo Joo Hiang, 52, admitted to two charges of making false entries in her income tax returns for
the years of assessment 2009 and 2010. This is the first case where a remiser has been charged under the Income
Tax Act for tax evasion. She was unable to pay the penalty, which is three times the amount of tax evaded, and will
have to serve an additional five months and two weeks in jail. Investigations showed that she had declared a
brokerage income of $417,084, which was significantly lower than the $945,474 brokerage income she earned from
Phillip Securities. She had evaded a sum of $64,309 in taxes.
•The Inland Revenue Authority of Singapore's (Iras) prosecutor Vikna Rajah said the self-employed remisier made a
false entry in each of the returns of income for the years of assessment (YAs) 2009 and 2010.
•For YA 2009, she declared her income as $158,920 when in fact it was $269,258; and for YA 2010, $258,164 instead
of $676,216.
•This resulted in her being assessed to pay a lower amount of income tax.
•Two other charges were withdrawn and compounded, for which she paid an additional $93,380 financial penalty.
•Her lawyer Harbajan Singh said she had learnt a very painful lesson and had rendered full cooperation to the tax
authorities.
•In a statement yesterday, Iras reminded remisiers that they should include all income such as brokerage income,
performance bonus and bad debts recovered in their tax returns.
•They should claim only for tax deductions in respect of expenses that are incurred wholly and exclusively to
produce their income.
•These may include bad debts that are written off and entertainment expenses. Claims for such expenses must be
supported by invoices and receipts or other relevant documents.
•Teo could have been fined up to $10,000 and/or jailed for up to three years on each charge, as well as ordered to
pay a penalty of treble the amount of tax undercharged
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Sources of illegal monies
Quote; “Where does all the monies come from” movie Gatsby starring
Leornado (2013 movie). A poor north Dakota boy become a billionaire in
5 years- how does he do it? Which one below?
Corruption -extreme in newly industrializing countries and common in
developed countries!
– Probably due to lower ethics standards and consumerism culture (get
rich quick or tell yourself you need to survive)
• In PRC, serious problems of containment
• In India, it is also a hobbies to divert funds for private use
Frauds and tax evasion schemes (under-declare tax incomes)
– High tax rates may money-laundering tempting
Drugs trafficking
– Columbia, Mexico, Afghanistan, Burma-More attractive to grow drugs
than other crops -US pay both farmers and governmnet officials!
Individual criminal sources
– If you successful in bank heist, look for your investment banker!
International organized crimes
– Illegal gambling/Prostitution/Other criminal activities
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“Dummy guide on money laundering”
Common practice- 3 steps (refer diagram)
1) Get illegal funds (collection of dirty money)
from various sources and place your illegal funds
-introduce the funds into the financial systems (placement).
one common method is to use gamblers to go into casinos and clesan it
2) layering- many layers of transactions (camouflage the source of funds)- Use
complex financial transaction (like a spider web)
3) integration (return of illegal monies into the economy)-generate wealth or returns
from “investment”)- “round tripping- see CHC case”. Returns such as profits may be siphoned
back as clean money
Suggested methods to do it:
choose 1 or combination
1) Bank methods
2) Structuring (or smurfing)”
3) Currency exchanges
4) Double invoicing
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“Dummy guide on money laundering” part2
integration (return of illegal monies into the economy)
1) Bank methods –use offshore accounts
• Round tripping- deposit money into controlled foreign co in tax haven with minimal records, and transfer
back to home country as foreign direct investment with tax exemption status. “Refer to CHC case- $50m
monies siphoned out to Xtron in Malaysia and half siphoned back- monies used to pay for sleaze career of
pastor wife per prosecutor”
• Physically smuggle cash into a safe haven countries when banks are eager to help you open deposit
accounts (of course if you are in a rush, you can wire transfer!) . Use stupid singapore women as mules like
those Nigerian conmen who they “fall in love wwith” scam. Every year hundreds of cases in Singapore and
PRC also!
– Offshore banks in Caymans, Bahamas, Singapore? . Criteria – great bank secrecy or less rigorous money
laundering enforcement or government with an eye closed
2) Structuring-place money by structuring it or breaking it down into smaller
deposits of money
-Reduce suspicion (avoid anti-money laundering reporting requirements)
Use shell companies and trusts (no need to disclose true beneficial owner)
Use small amounts of cash to buy bearer instruments such as money orders, and then further breakdown
into even smaller …
3) Double invoicing- open a nite-club/real estate/oth cash intensive service co.
– Record your illegal monies (with legal monies) into your business cash accounts
• if you are nite club – include “gua hua”! $50k per gua hua are common per SinMin paper
• Wonder why so many PRC 28 years old real estate co CEO driving ferrari and living in 342
sentosa
cove?
• You can also pay black salaries –illegal workers w/o contract paid in cash
4) Currency exchanges – open offshore forex accounts. Top banks like HSBC/Barclays/Citibank etc has all been
•
•
Scope of criminal offences of ML
ML itself is a criminal offence unless you made:
– Authorized disclosure or reasonable excuse for not making disclosure
• Conceals/disguises/converts/transfer/remove criminal property
• Failure to report is a criminal offence if all conditions are met:
– Knows or suspect another person is engaged in ML
– Information came thru doing business in a regulated sector
– Immediate disclosure ids not made
• Tipping off the ML offender
– You inform the person reported fro ML offence
Prevention
• Accountants must learn to protect himself from criminal (felony) & civil
liability
– One common practice is to do due diligence checks and background checks on
suspicious persons of interest (like overseas nominees); using software like Artemis or
Innuige
• The compliance officer in the organization should:
– Be an experienced and senior person
– Have responsibility for:
• Ensuring individuals are adequately
implications (preceding slides)
• Receive and assess ML reports
• Make reports to FIU
trained
and
understand
ML
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Prevention and detection of money laundering
1) Proper record keeping of client identification records for a period of 5 years after the
relationship end (ACCA code of ethics)
2) Maintain essential client information such as certificate of incorporation,
passport and driving licence
3) Keep details of all suspicious transactions:
Type of trans/Persons/co’s involved/Values and quantities
Sources and destination of funds/With times and dates
Recognize suspicious/dubious transactions- suspicions means more than speculation but
not enough firm evidence to nail him
•Transactions that are not usual in nature and amount and/or recurring amounts to a particular
destination says-transfer to place where co have no business dealings
•Unable to provide sufficient verifications
•Accountant should have sufficient understanding of their clients and their business activities
to recognize dubious trans. and use background checks software like Artemis/Innuige
–Report knowledge or suspicion of ML activities
–Check out the details of the transactions if suspicious
•Accountant can use the guidelines from The Financial Action Task force (FATF) and the ACCA
codes of ethics to help them on money laundering issues. FATF is recognized as the
international standards in money laundering (also refer co’s act 1956, UK money laundering
regulations 2003 and 2007)
Member countries of FATF should follows its recommendations to impose a legal duty on an
accountant in practice to report any knowledge or suspicion of money laundering or terrorist
financings to an appropriate national authority
•The recommendations may apply to information obtained while carrying out professional
duties. This overrides the professional duty of confidentiality
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Case study: Tax Evasion
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Palm oil giant to pay $477m for tax evasion
JAKARTA - Indonesia's Supreme Court has ordered a major palm oil company to pay more than US$390
million (S$477 million) for tax evasion, in a case likely to set a precedent in South-east Asia's largest
economy.
The court found Asian Agri and more than a dozen of its subsidiaries guilty of "deliberately not filling tax
forms properly between 2002 and 2005", marking the country's first prosecution in a major corporate tax
case. Head judge Djoko Sarwoko said the company was ordered to pay back state losses of 1.26 trillion
rupiah (S$160 million) and was fined an additional 2.52 trillion rupiah to be paid within a year.
The court also sentenced the company's former tax manager, Suwir Laut, to two years' jail.
The case is seen as a breakthrough in a country where sweeping tax reforms introduced in recent years
have been met with hostile resistance from big business.
Judge Sarwoko said the ruling - made on Dec 18 but publicised only this week - would set a precedent for
at least nine major tax crime cases in the pipeline.
Asian Agri is one of Asia's biggest palm oil producers, exporting three million tonnes of palm oil in 2011
with more than 160,000 hectares of plantations on the island of Sumatra, according to its website.
It is a subsidiary of Royal Golden Eagte, a Singapore-based conglomerate of palm oil, pulp and oil and gas
firms owned by Mr Sukanto Tan-oto, Indonesia's seventh-richest tycoon according to Forbes.
The Asian Agri case began in 2006 when a former financial controller at the company, accused of
embezzling money from the firm, reported that the company had evaded tax.
The case was thrown back and forth between the Tax Office and the Attorney-General's Office, raising
criticisms that government institutions and law enforcers were reluctant to address major tax crimes.
AGENCE FRANCE-PRESSE
Question: what is tax evasion? Why this case is NOT tax avoidance?
Is tax evasion considered money laundering?
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Importance of ethics to individuals
What is ethics.
It is a view of what is right and wrong and generally speaking the higher more
noble concept of being moral
Doing the right things (without harm to others). The end justify the means? follow conscience?
– Your zealous religious leader ask you bomb UN but your heart says even 1 dead is not right?
– Or your frim is using child labour and you are keeping quiet?
– Your firm exploit labour by shifting production to Third world and pay them peanuts?
– Your firm make and sell weapons to Iran an advocate of “jihad’?
• this idea of ethics is often guided by individual core values
• Kharma if you opt to do wrong things?
• God take care of those who take care of themselves
•Ethics can be broadly defined as abiding by a set of written and unwritten rules (like core values) based
on both legality and morality
•Ethics is also related to culture. How the employees behave will be influenced by the culture in the
organization (i.e. the attitudes, values and beliefs and other assumptions that are inherent in the
organization). These affect employees to behave ethically. .
•Example if your organization has 3 types of employees in the Shenzhen plant – PRC Chinese, India
Indians and naïve Singaporeans. The Indians comes from India where kickbacks is the norm or national
culture? and have no problem dealing with PRC suppliers who “must” take care of them. The PRC
chinese will take care of their “connections’. Only the naïve Singaporean will “follow laws” and get
nothing (but highly ethical!). Everybody here believe the end justify the means-”they all think it is win-win
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situation”- Singaporean very smart or stupid? Surely ethical?
Whta is ethics and why it is impt to the organisation
The individual expectations of people (consumers and employers) has changed over the years
Consumers may choose to buy ethical thiongs or from ethical firms
Emplyees prefer to work in firms that exhibit ethical values. Even if they work in firms that have ethical standards, they will
not follow orders blindly as they need to do the “right things” and I cannot work with you if I cannot trust MF#? like you!
Organisations should see good ethics as beneficial and add to profitability rather than a burden
Firms with ethical framework as part of good corporate government and speaks well of the
management and the business as being well run
Employers are motivated to working is a such companies (“your companies sell tobacco killing millions of people
every year-murderer!” “you IMDB everythng is a scam”“we will only buy our farm products from Fairtrade producers”
Investors are assured about the orgn's approach to risk mgmt or their attitude (control environment)
Ethical stances (Johnson and Scholes)
Johnson and Scholes identified four ethical stances. And indeed these stances also have something to do with corporate social
responsibility (section B- shareholders’ and stakeholders’ models).
•
The first stance says that it is the purpose of companies to look after shareholders’ interests (recall the shareholders’ model
Sect. B), and in particular the maximisation of short-term profits (which in term increase share prices or shareholders’
value creation)
•
The second stance looks at the long-term interests of shareholders. This is more ethical simply because in the long run
unethical behaviour is more likely to be punished. If you are found to have cheated, or your products harm people, then the
short-term profits may be increased, but longer-term profits will be decreased when you are found out.
•
Third, multiple stakeholder obligations. In other words, widening obligations beyond just shareholders to stakeholders in
general (recall stakeholders’ model). So one has to take into account employees, suppliers, customers, the local population,
and government when making decisions about the company.
•
Finally there is the shaper of society where a company or organisation sets out to fundamentally change the way
society is run. Some companies, for example, may attempt to be very green and very ecologically respectable. But it’s
difficult to know to what extent they should be doing this. Are companies and individual organisations the proper bodies to
shape society? Should that not be government? Nevertheless there have been some examples of companies which
347have
taken particular ethical stances and which have had a profound influence on other companies in the economy.
What is Ethics? – Based on core values of you!
There are several approached to nake decisions when facing ethical dilemmas:
These approaches or you may take may make a different standpoint from flexible to extreme.
Consequentialist. Right or wrong decision depends on consequences/outcome of decision
•
•
Utilitariam. outcome is ‘the greatest good or the greatest number’. This might sound attractive
and logical, but could, for example, be used to justify killing someone and using their body parts to
save many others. So the approach of, say, one person dies to save six others is unlikely to be
acceptable to most of us.
Egoism. The outcome of any decision must be favourable to e individual. This type more
selfish (“everyone can die except me or my family”.
Absolutism. This approach argues that certain actions are inherently right or wrong
•
•
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An ansolutist (says a holy monk) will regard taking of a human li)fe as 100% un-acceptable (evn
if the man has killed a few robbers to save his wife and daughters from rape and torture)
Duty (deontological approach). Behaviour should be based on absolute moral values.
We have a duty to follow those values or codes. Once upon a time in China, woman marry men based on their
parents transactions (marry off the daughters or monies or any purpose) and woman just pray that the man who they
never meet happens to be gaofusway (says look like Tom Cruise?)
Pluralist approach. This approach try to cagters to all stakeholders' needs without seriously
compromising the needs of any one group
Says u want to open a mine near the coast and nearby fishing communities to get the mineral and earn huge
profits for shareholders. The local communities worry about the pollution caused by the and the fishes (all run
away). A pluralist approach is to open the mine and take all procedures to minise pollution and have
compensation for losses of income for the local residents
Relativist
•
Relativism.
There are many acceptable ethical standpoints or there is no universal moral
code with which to judge all actions. Provides some flexibility and more tolerance but might lead to
too little guidance as to what is acceptable and an ‘anything goes’ approach. However, this approach
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is capable of providing some level of tolerance and cooperation towards those with different values
Should the organization or the individual behave ethically?
•
•
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Ethics, the law and regulation. Let us look to this 3 areas for guidance when an orgn or
individual is having an ethical dilemma
Ethics are a set of rules on how we should behave. In addition to ethics we receive rules from laws
and from regulations, for example the regulations of a professional body such as ACCA.
This diagram shows how they may be related. We have to comply with the law, but then, in addition
we might have to comply with more demanding regulations and finally, we must comply with the
system of ethics. Again, the assumption is that ethics will impose higher demands and duties than
the law or regulations.
Ethics – what you
are based on your
core values
Regulations like
SGX Code of Corp
Governance,
ACCA codes,
The laws
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Should the organization or the individual behave ethically?
Why should managers behave ethically? Possible reasons: satisfy different stakeholders’ needs:
•the stakeholders’ want them to. 1) Need to attract ethical investors, 2) need to attract ethical
consumers/suppliers., 3) need to attract employees 4) public oversight committee/local community
•may want to avoid un-necessary/un-favourable media attention
Why should firms not behave ethically?
•1) hey do not have to provided they behave legally
•2) being ethical may have extra costs- say if cigarette companies want to be ethical – either they close
down or they buy huge insurance premiums and compensate any smokers who die because of lung
cancer due to smoking!
•3) there is no agreement on what is ethical? I sell to Iran because they are my “muslim bros”
•4) can be conflict of interests, e.g. by not producing cigarettes they may have to make employees
redundant-big employers in PRC and Indonesia. Suharto cronies try to use laws issue and impose
“labels” duties. The cigarette organization hit back by threatening to lay off the 1 million workers! .
Should firms be moral in their decision making?
•1) Depends on: owners' views
•2) what the stakeholders’ expect:
– society expects/reaction of customers/suppliers/investors. APP case of illegal logging has
make many customers/suppliers cut off their business dealings with them in recent years
•3) possible benefits from being moral. Story of fishermen in Yangtse being taught how to avid killing the
extinct pink dolphin by using alternative fishing method. Fairy tale ending where the fishermen improved
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their yields after working with environmental groups
Should the organization or the individual behave ethically?
Corporate code of ethics
•This can be defined as: a written set of guidelines issued by an organisation to its workers and
management to help them conduct their actions in accordance with its values and ethical standards.
A code that is implemented and supported by top management can bring the following advantages to
an organisation:
•Emphasises the organisation’s values. All employees understand the organization values and reduce
chances of making a wrong decision. Say if the co pride itself as an green co- they will get suppliers that
endorse environmental protection and sustainable development
•Guidance to employees and directors. Say directors are clear as to how much gifts or entertainment
they should accept from clients or to disclose to the co.
•Risk reduction through avoidance of regulatory and legal problems. Say if you are in PRC in the
1990s even big reputable Fortune 500 co’s do the “submarine import methods” which means you bribe
customs officials to evade huge customs duties on import materials. If there is a corporate code HQ may
be consulted!
•Good public relations and reputation. Having a code helps to educate not just your own staff but
also suppliers and customers to understand that u are a “straight” co and they should deal with you on
ethical basis and not cut corners/shortcuts
Fairtrade
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Ethical dilemma-Questions accountant ask in ethical issue
When in an ethical dilemma, an accountant should first ask these questions on the decision he may take;
Impact:
How are all parties affected by my decision?
Fairness:
Can I be considered fair to all parties? A reasonable 3rd party will conclude it is fair?
Transparency: Can I practise CYA on myself & my sub-ordinates? Can I defend myself if anything come
up? Other people may know about it! Can sleep well? Look at how “well” Najib defend himself on 1MDB
Then the following considerations:
Ethics v profit issue.Ethical behavior may reduce a firm's profits because:
•it may decide not to accept certain orders, e.g. with some governments, for some products or with some suppliers who
use immoral practices like child labour or sweat shops (u do not want to be seen supporting them
•it may decide not to take certain actions to win orders (e.g. personal payments to individuals)
•it may lead to more costly production processes, e.g. extensive pollution control
But ethical behaviour may increase profits, e.g. by attracting investors; attracting more customers; Attracting/retaining staff
In the final analysis, accountants should ask:
(after all you are responsible to your conscience, the laws, and the ethical codes)
•Is it illegal? If it is illegal, it is likely to be unethical? Does it agree with the organization code of ethics?
-Must declare if exceed a certain limit; Seek advice from/disclose to superiors
•Does it agree with a published code of ethics?
– Follows ACCA/ICPAS professional code of ethics. Say if your boss want to do money laundering,
then follow the guidance in earlier slides to cover yourself
•If doing all this cannot resolve your dilemma
•You must go back to fundamentals (it is not about being loyal to your manager or your spouse!) They are
the one that is greedy and started this dilemma in the first place!
– Follow your heart/conscience say boss ask you to put in fake purchases to get GST refunds
– Resign if you must! (choice have implications)
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Ethical dilemma-Examples of ethical problems facing managers
• Equal opportunities. E.g. in recruitment to reduce discrimination in race, sex, religious, age and
sexual orientation. Increasingly laws, certainly in the EU/US (gay marriages legally endorsed in more US
states!) are intervening in matters of employment to reduce the likelihood of discrimination. So the
religious people is fighting against powerful gay lobby groups to prevent gay marriages (no understand?gay marriages cannot produce babies lah- ethical issues because procreation is from GOD!!! And US bill
says “IN GOD WE TRUST”). Last year Citibank was sued by as female attractive employee because
she caused beelines – the company male colleagues have ethics problem not her the judge ruled.
• Familiarity threats. This means you have some kind of relationship with the other parties- previous
business deals, old friends/peers/relatives. Your mindset think that they are clean as they have been
before with you. They will try to trick you or seduc eyou to ’co-operate’. As another example, the
marketing people always play this tricks- “the shipment is urgent and can make huge profits- only $5m
but cannot wait for credit committee- you CFO overwrite it. They are ok guarantee because they do
business with us for many years” Then you approve and they abscond!
• Profit vs public goods.
Healthcare costs is now not affordable by most people-now u know
why!!! . No secret that pharmaceutical co collude with health officials. Drugs are expensive to develop
and cos need profits. However, what approach should be taken to providing medicine to people who
cannot afford to buy it at a price which yields a profit? In US, health comm. members join the big
companies after they left politics!
• Profit vs health and safety regulations.
New drugs are being tested and often they may not passed
FDA but drug co’s have deep pocket to get FDA officials close an eye- does it matter if only 10/1000
persons get poisoned/side effects? New drugs (or new planes) are tested very extensively, but at some
point a line is drawn & the products are launched. If more testing were carried out the product might be
slightly safer, but more testing takes more delays in product launch.
• Payments – extortion, bribery, grease money, gifts
• Extortion involve using violation, intimidation, blackmail - Most people think extortion is wrong
• Bribery is unethical as money given to bring on an illegal or dishonest act. It is unethical but some
people think no choice like in India/PRC!!!
• Grease money to “grease” an official to expedite licence or trans.-Unethical? Grease money is more
controversial. This is where you provide money to jump queue (bad habit but does not equal murder!)
It is used to speed up legal transactions.
Ethical dilemma-Examples of ethical problems facing managers
• Gifts are normal business practice in some cultures like PRC. Need to set policies on nature and and
limit and disclosure.
• Recall YHS case whether director give chocolates to secretary out of co’s funds. Many are in-between
– how much is acceptable – 1 kg of gold or 1 gm? Hehehe…Najib was caught with RM 2.1B in his
personal accounts and he claimed the monies was a gift from a Saudi prince! (Malaysia no stupid- so
they sacked him)
• In Singapore – very sensitive to gifts regardless of value especially civil Service. In PRC nortmally any
gifts less than RMB10,000 considered trivial. Malaysia- sibeisong when it come to gifts!
• Per Straits time report – Najib got US$900million cash gift from “Saudis royals” and the Malaysian
Attorney General said ok no issue- this guy cannot pass ACCA ethics for sure! This may set
precedence that in Malaysia collecting gifts is a national hobby lah. Song bo?
• If somebody come up to you sometimes in your career to give you gifts- accept or don’t accept?
• As a professional. You must consider the risks- ask yourself why they give you (what is the motive or
intention), the amount considered material?
• If they give you a trivial gift of low value and their intention is hospitality (say welcome gift) then there
is little risks and no consequences.
• There is this case of the PRC businessman giving US$30,000 Rolex watches to 3 Australian
politicians. They accepted it thinking it is fake Rolex worth about US$200-300. Later when they found
out that it is worth US$30,000 all 3 politicians returned the gifts, obviously thinking that this PRC guy
must have evil intentions.
•
he Ethics of Gifts & Hospitality
•
The giving and accepting of gifts and hospitality has an important role in facilitating business
relationships and practice. A meal out with a supplier can help build a relationship, a pen with your firm's
name on it can remind a customer of you when they need a quote
When giving or accepting gifts and hospitality, organisations & their employees need to bear in
mind:
•
When is a gift appropriate or inappropriate?
•
When is a gift a bribe? (i.e. given to influence your decision)
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Ethical dilemma-Gifts and hospitality
•
let considers some of the ethical issues around the giving and accepting of corporate gifts and
hospitality and outlines good practice
•
The acceptance of gifts, services and hospitality can leave an organisation vulnerable to accusations
of unfairness, partiality or deceit or even unlawful conduct Commercial relationships may be subject to bias
and an organisations reputation for doing business ethically may be put at risk.
•
Companies which operate outside their home market need to be particularly aware of cross-cultural
differences in what is considered appropriate m gift giving and accepting. Although m some markets gifts
and hospitality are a prevalent and fundamental part of business transactions, the extraterritorial reach of
the UK Bribery Act 12010) has made the giving and accepting of gifts and hospitality a real concern for
businesses and their employees around the world.
•
Gifts aad hospitality under the UK. Bribe Act (2010)
•
The UK Bribery Act (2010) has extraterritorial reach - an organisation that has business operations of
any sort m the UK can be prosecuted under the Act regardless of where m the work) the organisation is
based or the bribery occurs
•
The Act does recognise that corporate gifts and hospitality play an important part in business, and
provides guidance for organisations as to what is considered appropriate and what nay be construed as a
bribe when givng or accepting gifts/hospitality For example, bribery may be disguised through frequent or
‘lavish' gift giving/ hospitality.
•
In October 2012 the SFO extended Its guidance on gifts and hospitality to include "legitimate business
expenditure'' Whist recognised as an inevitable and important part of doing business, the guidance warns
that "bribes are sometimes disguised as legitimate business expenditure".
•
Under Section One of the Act, ” intent to induce improper conduct” is a test of whether or not
gifts/hospitality can be interpreted as a bribe. Offers of gifts/hospitality must be made in good faith and are
not considered legitimate if the intention behind the offer is to advantage the individuai making the offer Le.
the offer is made with the intent that the person who accepts the gift/hospitality will perform a function
improperly and partially.
•
Another test the Act applies is the principle of ‘proportionality'. Gifts/hospitality are less likely to be
construed as a bribe where they are proportionate to the nature, scale and complexity of an organisation's
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business activities (see more on proportionality below).
Ethical dilemma-Gifts and hospitality
•
Inappropriate scale (principle of proportionality); What constitutes a lavish' gift or hospitality' Some
companies adopt a no to all gifgts/hospitality approach. Others put a monetary limit on the value of
gifts/hospitality that can be given or accepted. It is worth noting that different monetary value limits may be
set for gilts and for hospitality Gifts/hospitality that is offered to an employee and is above the stated value
will need line managers' approval before the gifts/hospitalitty can be accepted.
•
This can be difficult to judge. For example, the duties of senior staff may require them to attend or
sponsor events where hospitality is generous What may seem minor to a senior manager could be
significantly more valuable to a junior employee. Stipulating different monetary values for different
management levels can become complicated to justify.
•
Companies help prevent the* employees giving or accepting inappropriate gifts/hospitality by providing
guidance, usually in the company code of ethics. The code will outline the company's position on gifts
and hospitality and set out good practice for employees Codes of ethics will often reference a gifts and
hospitality policy. Many examples of guidance on gifts and hospitality in company codes and policies can
be found in Googles.
SUMMARY- Ethical dilemma-throughout allaspect of the orgn
Accounting issues
• Creative accounting to shows higher or lower profit/Directors' pay arrangements/Insider trading
Production issues
• Should we produce certain products like tobacco or guns or gambling?
• Should the products be tested on animals? or stem cells research?
Sales and marketing issues
• Price fixing and anti-competitive practices
• Target advertising on children eg. Macdonalds or Toy producers promote aexpensive toys
Personnel issues
• Discrimination practices/Kick-backpractices(sellpositions/jobs)/Unfair employment contracts/child labour
Now you use the ethics approaches we have learnt to draw conclusions on above issues.
356
You may look to IFAXC guidance
Guidance-Fundamental principle of code of ethics
•
•
•
•
•
•
•
•
•
•
Integrity- truthful and fair, Straight forward and honest in all professional and
business relationship. In the real world, heavy entertainment expenses and I
scratch your back you scratch my back
Objectivity -Findings and judgement should be solely based on sound research.
You s/be able to “standby what you say”
Professional competence- Should be up-to-date in your areas of expertise . seek
expert advice if outside your scope
According to the IFAC cod eof ethics if a public accountant do 2 clients which
have conflicting interests, then the public accountant may considered Not
objective
Confidentiality
– Do not disclose client confidential information to third parties
Professional behaviour -Avoid action that discredits the profession and comply
with relevant laws and regulations
IFAC has 3 sections on ethics
Part A – deals with fundamental principles
Part B deals with professional accountants in public practice (Practising member)
Part C deals with professional accountants in business
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– Non practising member
Guidance-Organization values promoting ethical behavior
• A set of standards or guidelines or core values that determine the behavior of individuals in the
organization & helps promote ethical environment of respect based on integrity :
• In other words, the corporate code of ethics s/be about the minimum acceptable standards of
behavior and conduct expected of the employees. And they should encompass the following
values:
• Openness in sharing ideas and info freely between managers and staff. For example, employees must
be open with their managers if an accounting error is found. Trying to cover it up could not be considered
ethical. (and also stupid because the error will show up next month- this month forgot to accrue costs of
$1m means profit overstated $1m next month your boss get barbecued! Know why?)
• Trust refer to sharing confidential information. Managers need to earn the trust of the subordinates by
knowledge and experience and direction employees must be trusted with conf. info. If employees cannot
trust their managers, because of their poor knowledge and experience they cannot give good guidance
and direction 9happen in many family business why the position is given to blood relations not based on
qualifications!)
• Honesty & integrity means compliance with ethical standards. In other-words, be honest with
colleagues, customers &
suppliers. Straight forward and honest in all professional and business
relationship
• Respect for employees and treat them equally. This will encourage the proper treatment of stakeholders
and reduce the chance that they are treated unethically.
– Tell this to SMEs employers who enjoy terrorizing FTs [One room 8 FTs/unpaid salaries/overtime
etc
• Empowerment means give independence and power to carry out their duties. Employees should be
empowered to ‘do the right thing’ and to refuse to behave in a way they know to be contrary to the
organisation’s ethical code. If a manger delegate a task, they should empower the subordinate.
– Say internal auditor are empowered when they report directly to HO w/o reservations
• Accountability means responsibility for the consequences of the decision that one make – people do
not avoid issues or obligations . If you are given something to do, you should try to do it to the best of
your ability. And if you s…up you accept responsibility- say if u cover up the $1m error and mistake
exposed in next month you should accept responsibility (protecting your staff and superiors instead
358 of
getting a scapegoat!)
The professional accountants
• What is a profession? Profession different from other occupation:
• Period of training (and certification or qualifying scheme) - Recognized degree level
3-4 years for specialized skills
All professions need a period of certified training- lawyers, doctors, architects. This process
of certification (like ISCA Qualifying Scheme) is required so you can have “licence to tan tuo
looi”..
Period to qualify-5 years for CPA 5+1 for doctors certification 5-7 years
Professional body for members
Rules of a professional association (this is the “corporate governance” or “club
rules”) that is binding on members. Recently many naughty doctors and lawyers are
sanctioned by their professional association. (look at accountants all good boys?)
Restrictions to entry and CPE and code of ethics etc
Platform for peer review, draft FRS discussions etc
• Professional behavior (do not discredit the profession and always act in public
interest)
• All professional accountants accept responsibility to act in the public interests
– No badmouth on other members when advertising
• Just confine to sell what you are good at
–Accts must always act in public interest. Say if he come across some criminal activities
that may hurt public interest if he do not disclose his client misbehavior (confidentially issue.
(Say if he found out that his client a top Ponzi operator and more people are being conned
everyday – he should not just whistleblow but call in MAS/CAD/…
–When doing financial reporting- Disclosure/Comply with accounting standards including
IFAC ethics, Must not harm society/Comply with relevant laws
• Every professional body must have a code of ethics (like the ACCA code of ethics)
because ethics is a very relevant comtemporary issues. You must pass online ethics test or
no diploma for u!
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Promoting ethical behavior
The individual accountant -as the conscience of the organization. Very often boss want to do
unethical dealings- do something about it! Convince him of the consequences. Say SMEs bosses in
Singapore have some of these temptations;
1) Cheat on GST to claim refunds as they often suffer cash flows problems or do other tax evasion scheme. Some even work
with vendors to cheat on PIC schmes
2) Cheating on employees- fail to comply with labour laws (underpay or no overtime, overworked, no CPF contributions…)
laundering opportunities (with so many Indian and PRC guan er tai….), many local SMEs bosses (especially those money
no enough type) often receive offer of huge commissions. All they need to do is to let these peiople use their company bank
accounts as a conduit. One of my client has been offered 8% or $8k on each $100k succesfully “transferred”. My client took
my advice after I warn him about possible MAS queries…
•
Be objective and truthful in recording and reporting and comply with SGX/LSE rulings, FRS
etc. Some authorities “comply or explain” rule
•
Follow of code of conduct and ethics.ACCA/ISCA etc
•
The organization (corporate code of ethics)
Set of guidelines issued by an orgn to management and staff to help them conduct their actions in
accordance with its values and ethical standards
Minimum. acceptable standards of behavior & conduct expected of them (the employees)
*Emphasizes the organization’s values (refer slide 85)
*Guidance to employees and directors
*Reduce risks by avoiding legal and regulatory problems
*Good public relations and reputation
•
The accountant can promote the following ethical values in their orgn:
honesty
openness
transparency
trust
empowerment
respect
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Promoting ethical behavior
•
•
•
•
The Practising accountant and conflict of interest ICAEW SECTION 220 Conflicts of Interest
220.1 A professional accountant in public practice should take reasonable steps to identify
circumstances that could pose a conflict of interest. Such circumstances may give rise to
threats to compliance with the fundamental principles. For e.g, a threat to objectivity may be
created when a professional accountant in public practice competes directly with a client or has a joint
venture or similar arrangement with a major competitor of a client. A threat to objectivity or
confidentiality may also be created when a professional accountant in public practice performs
services for clients whose interests are in conflict or the clients are in dispute with each other in
relation to the matter or transaction in question.
220.2 A professional accountant in public practice should evaluate the significance of any threats.
Evaluation includes considering, before accepting or continuing a client relationship or specific
engagement, whether the professional accountant in public practice has any business interests, or
relationships with the client or a third party that could give rise to threats. If threats are other than
clearly insignificant, safeguards should be considered and applied as necessary to eliminate them or
reduce them to an acceptable level. 220.3 Depending upon the circumstances giving rise to the
conflict, safeguards should ordinarily include the professional accountant in public practice: (a)
Notifying the client of the firm’s business interest or activities that may represent a conflict of interest,
and obtaining their consent to act in such circumstances; or (b) Notifying all known relevant parties
that the professional accountant in public practice is acting for two or more parties in respect of a
matter where their respective interests are in conflict, and obtaining their consent to so act; or (c)
Notifying the client that the professional accountant in public practice does not act exclusively
for any one client in the provision of proposed services (for example, in a particular market
sector or with respect to a specific service) & obtaining their consent to so act.
220.6 Where a professional accountant in public practice has requested consent from a client
to act for another party (which may or may not be an existing client) in respect of a matter
where the respective interests are in conflict and that consent has been refused by the client,
then the professional accountant in public practice must not continue to act for one of the
parties in the matter giving rise to the conflict of interest.
361
IFAC guidance (Professional code of ethics)
International federation of accountants (IFAC) is a global organization of the
accountancy profession with affiliation in over 120 countries and jurisdictions to protect
public interest. It aims to do so by: .
• encouraging high quality practices by all accountants in the world
• Having standard-setting boards that developed international standards on ethics,
auditing and assurance, education and public sector accounting standards
• issuing guidance to professional accountants in SMEs and developing countries
IFAC code of ethics: good example of a professional ethical guide
The code states that the accountancy profession has a responsibility to act in the public
interest. It do so by:
• It established detailed guidance on fundamental principles and ethics
– Integrity, Objectivity, Confidentiality and Professional behavior and
professional competence and due care
• It framework requires accountants to identify, evaluate and address the threats
to compliance, applying safeguards to eliminate the threats or reduce them to
an acceptable level
• For example on professional behavior- accountants are supposed to be
independent (fundamental principle of independence) – how can auditor be
independent if it receive audit fees from the client?
– Fundamental principle- be independent in dealing with client
– Potential threat- - fees paid by client may impair the auditor’s jugdement or action
– Safeguard- limit the fees coming from any one client that may unduly threatened
the auditor’s independence (say if client threaten to leave due to dispute and
auditor need the money from this client)
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ACCA guidance
ACCA Code of ethics and conduct. Fundamental principles are as follows:
1) Integrity means members s/be honest and straightforward (nothing to hide). If they
see something not right, they should speak up. They should not hide it or be ambiguous (just
state things plainly) (Scenario- if the purchasing officer is related to chairman but buying
everything much above market prices…….)
2) Objectivity means should focus on facts only- no feeling! This means no bias, conflicts of
interest and undue influence
3) Professional competence and due care- he must competent at all time to carry his works.
Members up to date on legislation and recent developments (like budget amendments and/or
new IAS). Do not accept works or projects where they are not qualified or do not have the
resources - Exercise due diligence and care at all times
4) Confidentiality- maintain strict confidentiality on client information especially privileged
info like price-sensitive type. Only disclose if they have legal or professional duties to do so
Examples
1) if client is suspected of money laundering and you are subpoenaed to provide certain
information
2) In fact many companies now made it law for people who knows of money laundering to
report it
5) Professional behaviour means accountant should comply with the law and should avoid
any action which discredits the profession
• Example if they advertise their services they should not even imply other members are bad
or not as good. Just sell what you are good (no need to talk about others or your peers)
• Not seen as frequenting MBS/RWS?
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• Or getting drunk at Liat Towers?
IFAC APPROACH- safeguards
IFAC code set out the approach that accountantd dhould take to ethical issues
1. identify threats
2. evasluate signiuficant of threats
3. identify and apply safeguards
SAFEGUARDS are steps that the accountant can take to eliminate the threat or reduce it to
acceptable level
•
If safeguards are available, the accountant should elimiate the activities or interests causing
the threats
•
If it is not possible to eliminate, decline or disconmtinue the engagement
Safegauards are of 2 categories per IFAC
a) Safeguards created by te profession, legislation or regulation
•
Education and training / CPE
•
Corporate governanbce regulations like SGX
•
Professional standards
•
Monitoring of professional work like delegate audit work
•
External review
•
Disciplinary proceedings
b) Safeguards within the work environment
Review procedures
consultation with independent 3rd parties
rotation of senior staff
discussion with those charged with corporate governance like audit committee
disclosing fees to audit committees
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IDENTIFY THREATS EXAMPLES (EXTRACT ACCA ARTICLE)
You must be fasmiliar witht he following key threats to ethical behaviours; they should should attempt to
avoid these threats:
Independence threat
Self-review
Advocacy
Example scenario
Possible answer
New audit client wishing to purchase
The due diligence review may lead to a selfexisting client
review threat as the firm will be reviewing
fin statements on which it has already given an
opinion and may be reluctant to highlight errors
Above client seeking financing advice for the acquisition
Self-interest
Management
Familiarity
Intimidation
Advocacy threats may arise if the firm
appears to be promoting the client in
negotiations with the bank
Overdue fees
Overdue fees could in effect amount to a loan to the
client. In such as case the auditor may be tempted to
provide a favourable opinion in order to increase the
chance of fee recoverability
Owner managed business requesting audit Providing business advice may result in the firm
and business advice taking decisions which are the
responsibility of the client
Prior year audit manager (Bob) is
Bob will have a previous working relationship with the
being considered for the finance
audit team causing them to trust him more and
director role at client
therefore lose professional scepticism
Bob will also know the firms audit procedures and be able
to circumvent them
As above
Junior members may feel intimidated Bob as he was
previously their manager and fail to challenge him
properly
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How to deal with unethical and illegsl conduct
You may have come across your direcdtors being tempted to behave unethoically or already become an
unethical mcreature. How are you doing to deal with them after this lesson?
Suggested aspproach
Step 1
Consult with the company governance officer or in charge of ethics or momey laundering officers
they can be the compliance officer or the BOD or audit committee
If the problem still not solved then do stgep 2
Step 2
Seek legal advice and/or from the professional body like ISCA
If the problem still not solved then do step 3
Step 3
Consider reporting to the relevant authorities
withdraw from engsagement (or resign if you must)
Says your boss want to commit GST fraud (falsify refunds) or money laundering
Step 1 talk to audit committee and compliance officers (after you shows them the huindred of cases of
GST cheats or money laundering offences)
they can be the compliance officer or the BOD or audit committee
If the problem still not solved (they still you to co-operate else get fired) then do step 2
Step 2
Call your lecturer or ISCA/ACCA
If the problem still not solved (ISCA says this monmey lsaudering transsactions cross borders -too
complicated but advice you to seek further advice!)
Step 3
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Reporting to the relevant authorities IRAS/MAS/Bank. Resign if you must
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