http://www.scribd.com/doc/91373118/Notes-for-Governance-Risk-and-Ethics-P1

A GOVERNANCE AND RESPONSIBILITY

1. The scope of governance a) Define and explain the meaning of corporate governance.

Definition of corporate governance- Corporate governance is a set of relationships between a company's directors, its

shareholders and other stakeholders. It is the system by which organizations are directed and controlled, in the interests of shareholders and stakeholders.

- It also provides structure through which the objectives of the company are set, and the means of obtaining these objectives and monitoring performance are determined.

Explain the meaning of governance:- Governance is the leadership and direction given to a company so that it achieves the

objectives of its existence.- Management is about making business decisions: governance is about monitoring and

controlling decisions. - Governance is not about formulating business strategy for the company. However, the

responsibility of the board and senior managers for deciding strategy is an aspect of governance.

Benefits to having GOOD corporate governance processes:- The company will have improved risk management system.- There will be clear accountability for executive decision making.- It focuses management attention on introducing appropriate systems ofinternal control.- It encourages ethical behavior and a CSR (Corporate Social Responsibility) perspective.- It can help safeguard the organization from the misuse of assets and possible fraud.- It can help to attract new investment into a company.- Seeks to put limits on excessive director remuneration.

Downside to   governance: - It could develop an excessively risk adverse culture amongst mangers.- There could be too much reporting and not enough time to seek and pursue profit making

activities.- It could damper entrepreneurial activities.- There could be too much excessive supervision, red tape and bureaucracy.- The cost of operating internal controls exceeds any possible benefits.- There is the possibility that the focus on meeting different stakeholder expectations will

confuse management as to their corporate responsibilities.

b) Explain, and analyse the issues raised by the development of the joint stock company as the dominant form of business organisation and the separation of ownership and control over business activity.

Joint stock companies have multiple shareholders. The shareholders own the company but generally do not run the company. There is a separation of ownership and control. In order to maintain control over the company, shareholders elect a board of directors who have oversight authority. The board then hires the CEO who is then responsible for putting together the management team to run the company.Since management does not have a vested interest in the company, they might not care as much whether the objectives of the company are met.

c) Analyse the purposes and objectives of corporate governance.

The purpose of corporate governance is to facilitate the effective, entrepreneurial and prudent management that can deliver the long-term success of the company.

Good corporate governance should contribute to better company performance by helping a board discharge its duties in the best interest of the shareholders. If it is ignored, the consequences may well be vulnerability or poor performance. Good governance should facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term.

Purpose of corporate governance- Set best practice guidelines, provide a framework for an organization to pursue its strategy in

an ethical and effective way.- Operate and adequate and appropriate system of control for risk management.- Attract new investment and safeguard resources owned by investors in a company- Improve corporate performance and accountability, increase shareholder’s value.

d) Explain, and apply in context of corporate governance, the key underpinning concepts of: Note: A good way to remember the key concepts of corporate governance is to think of the mnemonic HAIRDRIFT

i) Honestly/probity – Be honest that statements about the company are truthful. Not putting a spin on the facts.

ii) Accountability – The emphasis is the managers accountability to the shareholders, but also accountable to other possible stakeholders.

iii) Independence – The emphasis is making sure that there are truly non-executive directors on the board who are free to critique the job performance of management. Independence is not having a ‘conflict of interest’ issue.

iv) Responsibility – The board has a responsibility to oversee the work onmanagement. The board should also retain responsibility for certain key decisions, such as setting strategic objectives and approving critical capital investments.

v) Decision making / judgment – All directors are expected to have sound judgment and to be objective in making their judgments. The OECD says ‘the board should be able to exercise judgment on corporate affairs independent, in particular, from management.

vi) Reputation – A company’s reputation, if good, is built on success andmanagement competence. However, it might take years for a company to gain its reputation and only a day for it to get ruined. Companies that are badly governed can be at risk of losing goodwill – from investors, employees and customers.

vii) Integrity – This is similar to honestly, but it also means behaving in accordance with high standards of behavior and a strict moral or ethical code of conduct. This means ‘doing the right thing.’ ‘Being a straight shooter.’

viii) FairnessThis means that all shareholders should receive fair treatmentfrom the directors (one share – one vote). This also means taking into account the other stakeholders of the company, such as suppliers, creditors, employees, local community, etc.

ix) Transparency / openness – This means not hiding ‘anything.’ Transparency means clarity. This involves full disclosure of material matters which could influence the decisions of stakeholders decisions, such as setting strategic objectives and approving critical capital investments.

e) Explain and assess the major areas of organisational life affected by issues in corporate governance.

i) Duties of directors and functions of the board (including performance measurement) – Directors have a fiduciary duty to act in the best interest of the company. They need to use their powers for proper purpose, avoid conflicts of interest and exercise a duty of care

ii) The composition and balance of the board (and board committees) – Boards must be balanced in terms of skill and talents from several specialisms relevant to the organization’s situation and also in terms of age (to ensure senior directors are brining on newer ones to help succession planning).

iii) Reliability of financial reporting and external auditing – The reliability of the financial reports is crucial to ensuring that management is held accountable. External auditors need to make sure that they are getting the right information in order to verify the reliability of the financial reports. External auditors cannot be fearful of asking awkward questions because of fear of losing the audit.

iv) Director’s remuneration and rewards –. Directors’ remuneration has to be seen as being fair. Excessive salaries and bonuses has been seen as one of the major corporate abuses for a number of years.

v) Responsibility of the board for risk management systems and internal control – Boards should meet regularly as to provide proper oversight for risk management and internal control systems. Without proper oversight, the organization may have inadequate systems in place for measuring and reporting on risks.

vi) The rights and responsibilities of shareholders, including institutional investors – Shareholders should have the right to receive all material information that may affect the value of their investment and to vote on measures affecting the organization’s governance

vii) Corporate social responsibility and business ethics – Corporate social responsibility and business ethics is an important part of the corporate governance debate. At this point, there is not any real consensus about these issues. The South African King report commented that “The relationship between a company and its stakeholders should be mutually beneficial.” “This inclusive approach is the way to create sustained business success and steady long-term growth in corporate value.”However, the Hampel report emphasized responsibility towards shareholders and states that it is impractical for boards to be given lots of responsibilities towards the wider stakeholder community

f) Compare, and distinguish between public, private and non-governmental organizations (NGO) sectors with regard to the issues raised by, and scope of, governance. THESE ANSWERS MIGHT NEED EXPANDING Public Sector – Governance requirements stress the need for assessing the effectiveness of policy and arrangements for dialogue with users of services. Private – The private sector is concerned with the continued existence of the company. Therefore, having good governance processes is of vital importance. NGOs – Non-governmental organizations provide services which are not normally provided by either public or private organizations. Therefore, they need governance processes which can ensure that they are providing the ‘best’ service possible.

g) Explain and evaluate the roles, interests and claims of, the internal parties involved in corporate governance.

Directors – Have an operational role in running the company, developing strategies, etc. Concerning corporate governance, directors have the role toact responsibly; to act with honesty; be accountable, etc. (HAIRDRIFT).

Company Secretaries – Company secretaries are an officer of the company and as such they have an operational role in the company. For example, company secretaries might sign some contracts, or declare some relevant matters to the proper authorities. They also have role to play in corporate governance by making sure that the directors are complying with corporate governance. Some of the functions / responsibilities of the company secretary are listed below:- Should be responsible for providing relevant, reliable and timely information to all

directors, so that they are able to make well-informed judgments in contributing to decision-making by the board.

- Should be an ‘expert’ on the regulations and corporate governance, so that he can advise the board on any matters in which a governance issue should be considered.

- Although the chairman should be responsible for induction of new directors and continuing professional development of established directors, the company secretary is likely to be given the responsibility for organizing induction and, where appropriate, CPD for directors.

- The chairman is also responsible for the performance appraisal of the board, board committees and individual directors.

- The company secretary should be the first point of contact for any NED wanting assistance or information from the company.

Sub-board management – If a manager is not on the board, then he or she is considered to be part of sub-board management. This person might be the purchasing agent, human resource manager, etc. Concerning operational roles, directors develop strategies to achieve some objective, and it will be the sub-board managers who have to take the strategy and develop the tactics to achieve the objectives of the organization.

Employees– Employees have an operational role to carry out the tactical plans of the sub-board management. As far as corporate governance, the employees have the responsibility to comply with the corporate governance systems in place and adopt appropriate culture. They need to implement the risk management and control procedures and to report back if controls are not working as they should.

Unions – Unions have a responsibility to protect the interest of theemployees. As such, the ability of management to alter its working practices, for example, may depend on obtaining the cooperation and support of the trade unions.

h) Explain and evaluate the roles, interests and claims of, the external parties involved in corporate governance.

Shareholders (including shareholders’ rights and responsibilities) – The role of governance is to protect the rights of all shareholders, including the right to vote for board members, etc.

External Auditors – Auditors try to influence to the company to present reliable and accurate financial statements. Auditors can also influence by recommending ways to improve the strength of internal controls within the company. They can also provide other audit services such as social and environmental audits. They can also highlight governance and reporting issues of concern to investors.

Regulators – Regulators (i.e., SEC, etc.) have a role of making sure that public companies’ financial information is transparent, reliable and accurate. Regulation can be defined as any form of interference with the operation of the free market. This could involve regulating supply, price, profit, quantity, entry, exit, information, technology, or any other aspect of production and consumption in the market.

Government – Like regulators, the government has a role to make sure that regulators are doing their job in making sure that public companies are a biding by the laws and regulators of the country

Stock exchanges – Public companies list their shares on regulated stock exchanges, such as New York Stock Exchange, NASDAQ, American Stock Exchange, London Stock Exchange, and many others. Stock exchanges are privately owned and thus they need to protect their reputation. Stock exchanges are regulated and thus require listed companies to abide by governmental regulations. Stock exchanges are important because they provide regulatory frameworks in principles-based jurisdictions. Stock exchange regulation can therefore have a significant impact on the wary corporate governance is implemented and companies report.

Small investors (and minority rights) – The role of governance is to protect the interest of the minority shareholders; to make sure that their voices are heard and that they are treated equally

Institutional investors - (Analyze and discuss the role and influence of institutional investors in corporate governance systems and structures, for example, the roles and influences of pension funds, insurance companies and mutual funds) - Institutional investors manage funds of individual investors. They are organizations which pool large sums of money and invest those sums in security, real property and other investment assets. They can also include operating companies which decide to invest its profits to some degree in these types of assets.Major institutional investors are:- Pension funds.- Insurance companies.- Investment and unit trusts.- Venture capitalist organizations.

Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can actively engage in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management.

Intervention by institutional shareholders:Under extreme circumstances, the institutional shareholders may intervene more actively, by, for example, calling a company meeting in an attempt to unseat the board. Reasons why institutional investors might intervene:

- Concern about the strategy in terms of product, markets and investments.- Poor operational performance.- Management is dominated by a small group of executive directors, with NEDs failing to hold

them accountable.- Major failure of internal controls, particularly in the area such as health and safety, pollution or

quality- Failure to comply with laws and regulations or governance codes.- Excessive levels of director’s remunerations.- Poor attitudes towards corporate social responsibility.

i) Analyse and discuss the role and influence of institutional investors in corporate governance systems and structures, for example the roles and influences of pension funds, insurance companies and mutual funds.

2. Agency relationships and theories a) Define and explore agency theory.

Agency theory is a theory of the relationship between the principal and an agent.

In limited companies, the directors and senior managers act as agents of the shareholders, who own the company.

Agency theory is based on the view that when an agent represents a principal, the self-interest of the agent is different from the interests of the principal. Without suitable controls and incentives, the agent will make decisions and actions that are in his or her own interest rather than those of the principal.

Agency theory is relevant to corporate governance because many of the measures recommended for good governance are concerned with controls and incentives that will persuade agents to act in the shareholders’ best interest. For example, controls are applied through accountability and incentives are given in remuneration packages.

b) Define and explain the key concepts in agency theory.i) Agents – The agents are the directors and senior management of thecompany. They

are selected and hired to run the company in the best interestof the shareholders.

ii) Principals – The principals are the shareholders. They elect the board andthe board hire the CEO who is in charge of putting the management teamtogether.

iii) Agency – An agency relationship arises when one or more persons (theprincipals) engage another person (the agent) to perform some service ontheir behalf that involves delegating some decision making authority to theagent (Jensen and Meckling )

iv) Agency costs – Agency costs are the costs of having an agent make decisions are behalf of a principal. Applying this to corporate governance, agency costs are the costs that the shareholders incur by having managers run the company instead of running the company themselves. There are threecosts associated with agency costs:

a) Cost of monitoring – The owners of the company have to establishsystems to monitor the actions and performance of management, to tryto ensure the management is acting in the best interest of the company.

b) Bonding costs – These are costs to provide incentives to managers toact in the best interest of the company

c) Residual loss – Costs to the shareholders of management decisionsthat are not in the best interest of the shareholders (but in the interest ofthe managers themselves).Agency costs = monitoring costs + bonding costs + residual costs.

v) Accountability – Agents should be held accountable for their decisions andactions. Accountability means:- Having to report back to the principal to give an account of what hasbeen achieved.- Having to answer questions from the principals about the performanceand

achievements.- Having the power to reward or punish the agent for good or badperformance.

Greater accountability should reduce agency problems because it providesmanagement with an incentive to achieve performance which is in the bestinterest of the shareholders. However, incentives should not be excessivewhere the cost of the incentive is greater than the benefit that the monitoringprovides.

vi) Fiduciary responsibilities - Fiduciary duty is a duty of the agent to act forthe good of the company. A person with fiduciary duty is in a position of trust.

However, the existence of fiduciary duty is not sufficient to insure thatthere is good corporate governance.Evan and Freeman argued that management bears a fiduciaryrelationship to stakeholders and to the corporation as an abstract entity.It must act in the interests of the corporation to ensure the survival ofthe firm, safeguarding the long-term stakes of each group.

The main fiduciary duties of directors are:- Act in the best interest of the company- Avoiding conflict of interest- Using powers of proper purpose- Having a duty of care

vii) Stakeholders– Stakeholders are parties (both internal and external) whohave an interest in well-being of the company. The different stakeholdersinclude: management, shareholders, vendors, creditors, board of directors,employees, regulators, pressure groups (like PETA, Green Peace, etc.),auditors, and the local community.

c) Explain and explore the nature of the principal- agent relationship in the context of corporate governance.

- Jensen and Meckling defined the agency relationship as a form of contract between the company’s owners and its managers, where the owners appoint an agent to manage the company on their behalf.

- The owners expect the agents to act in the best interest of the owners. Ideally, the ‘contract’ between the owners and managers should be sure that he managers always act in the between interest of the owners. However, it is impossible to arrange the ‘perfect contract’, because decisions by the managers affect their own personal welfare as well as the interest of the owners.

- This raises a fundamental question. How can managers, as agents of their company, be induced or persuaded to act in the best interests of the shareholders?

d) Analyse and critically evaluate the nature of agency accountability in agency relationships.

In the context of agency, accountability means that the agent is answerable under his contract to his principal and must account for the resources of his principal and the money he has gained working on his principal’s behalf.Two issues with the idea of agents being held accountable:1) How does the principal enforce this accountability?2) What if the agent is accountable to parties other than his/her principal? – How does he/she

reconcile possible conflicting duties

e) Explain and analyse the following other theories used to explain aspects of the agency relationship.

i) Transaction costs theoryTransaction cost theory was developed by Coase and Williamson is an economic theory. Is based on the idea that companies have to decide which activities are needed to be performed ‘in house’ and which activities it can buy from external sources. It attempts to provide an explanation of the actions and decisions of managers that are not consistent with rationality and profit maximization. Williamson argued that the actions and decisions of managers are based on a combination of bounded rationality and opportunism.

Bounded rationality means that the manager will have limited understanding of alternatives. This may imply that they will play it safe and concentrate only on safe markets.

Opportunism means that managers make decisions based on their own personal interest

Conclusion: Managers should be controlled to prevent them from acting in their own interests rather than in the best interest of the shareholders. This theory is consistent with agency theory and provides a theoretical justification for the need for rules or principles of good corporate governance. Need to make sure that the objectives of management and the shareholders are congruent

ii) Stakeholder theory

Companies provide not only wealth to the shareholders, but they provide jobs to a employees and contribute the national and local economies.

Companies are corporate citizens and thus they have a responsibility to societyThere is a close link between stakeholder theory and CSR.

In addition to providing returns to shareholders, companies have a responsibility to its employees, customers, governments, communities, suppliers, lenders and the general public.

Accountability is an important aspect of responsibility. This means that companies not only should report to its shareholders, but also provide information to its stakeholders, either by producing more reports or by including more information in its annual reports. This might explain the publication by some companies of an annual sustainability report and employee reports for the benefit of the company’s employees.

Mendelow’s power/interest matrix

Interest is horizontal, and power is vertical.

Four quadrants – Ignore, Keep informed, Keep satisfied, and Key Players

Ignore quadrant – Stakeholders who are in this category can be ignored by the company. In this quadrant might be the government, or some shareholders, or employees who really don’t have any power

or interest. However, this does not take into account any moral or ethical considerations. It is simply the stance to take if strategic positioning is the most important objective.Keep Informed – Most shareholders would fall into this quadrant. You need to keep shareholders informed of what’s going on (e.g., annual report), but they don’t exert much power. However, stakeholders in this quadrant can increase their overall influence by forming coalitions with other stakeholders in order to exert a greater pressure and thereby make themselves more powerful.Keep Satisfied – In this quadrant the stakeholder doesn’t have much interest but does have strong power over the company. All these stakeholders need to do to become influential is to re-awaken their interest. This will move them across to the right and into the high influence sector, and so the management strategy for these stakeholders is to ‘keep satisfied.Key players – Key players are those who have the greatest influence on the company. This question here is how many competing stakeholders reside in that quadrant of the map. If there is only one (e.g., management) then there is unlikely to be any conflict in a given decision-making situation. If there are several, then there are likely to be difficulties in decision-making and ambiguity over strategic direction.

Different categories of Stakeholders: As far as stakeholders, have to understand the differences on how to categorize stakeholders. Including:

Internal and external stakeholders. This is probably the easiest distinction between stakeholders. Internal stakeholders will typically include employees and management.

- External stakeholders will include customers, competitors, suppliers, and so on

Some stakeholders might be more difficult to categorize, such as trade unions that may have elements of both.Narrow and wide   (Evans and Freeman) .

- Narrow are those that are most affected by the org. policies and will usually include shareholders, management, employees, suppliers, and customers who are dependent upon the organization’s output.

- Wide are those not so much affected, including government, less-dependable customers, the wider community, etc.

The Evans and Freeman model may lead some to conclude that an organization has a higher degree of responsibility and accountability to its narrower stakeholders.

Primary vs. secondary (Clarkson)- A primary stakeholder is one without whose continuous participate on the corporation cannot

survive as a ‘going concern.’ So primary are those that do influence the company and those that do not (i.e. shareholders, customers, suppliers and government (tax and legislation)).

- Secondary are those that the org. does not directly depend upon for its immediate survival (e.g. broad communities and perhaps management, since management can be replaced.

Active and passive stakeholders (Mahoney) Active stakeholders are those who seek to participate in the organization’s activities. These stakeholders may or may not be part of the formal structure. Management and employees obviously fall in to this active category, but so may some parties from outside an organization, such as regulators, environmental pressure groups, and possibly large investors (i.e. institutional investors)

3. The board of directors

a) Explain and evaluate the roles and responsibilities of boards of directors.

b) Describe, distinguish between and evaluate the cases for and against, unitary and two-tier board structures.

c) Describe the characteristics, board composition and types of, directors (including defining executive and non-executive directors (NED).

d) Describe and assess the purposes, roles and responsibilities of NEDs.

e) Describe and analyse the general principles of legal and regulatory frameworks within which directors operate on corporate boards:

i) legal rights and responsibilities,

ii) time-limited appointments

iii) retirement by rotation,

iv) service contracts,

v) removal,

vi) disqualification

vii) conflict and disclosure of interests

viii)insider dealing/trading

f) Define, explore and compare the roles of the chief executive officer and company chairman.

g) Describe and assess the importance and execution of, induction and continuing professional development of directors on boards of directors.

h) Explain and analyse the frameworks for assessing the performance of boards and individual directors (including NEDs) on boards.

i) Explain the meanings of ‘diversity’ and critically evaluate issues of diversity on boards of directors.

4. Board committees

a) Explain and assess the importance, roles and accountabilities of, board committees in corporate governance.

b) Explain and evaluate the role and purpose of the following committees in effective corporate governance:

i) Remuneration committees

ii) Nominations committees

iii) Risk committees.

iv) Audit committees

5. Directors’ remuneration

a) Describe and assess the general principles of

remuneration.

i) purposes

ii) components

iii) links to strategy

iv) links to labour market conditions.

b) Explain and assess the effect of various components of remuneration packages on directors’ behaviour.

i) basic salary

ii) performance related

iii) shares and share options

iv) loyalty bonuses

v) benefits in kind

vi) pension benefits

c) Explain and analyse the legal, ethical, competitive and regulatory issues associated with directors’ remuneration.

6. Different approaches to corporate governance

a) Describe and compare the essentials of ‘rules’ and ‘principles’ based approaches to corporate governance. Includes discussion of ‘comply or explain’.

b) Describe and analyse the different models of business ownership that influence different governance regimes (e.g. family firms versus joint stock company-based models).

c) Describe and critically evaluate the reasons behind the development and use of codes of practice in corporate governance (acknowledging national differences and convergence).

d) Explain and briefly explore the development of corporate governance codes in principles-based jurisdictions.

i) impetus and background

ii) major corporate governance codes

iii) effects of

e) Explain and explore the Sarbanes-Oxley Act (2002) as an example of a rules-based

approach to corporate governance.

i) impetus and background

ii) main provisions/contents

iii) effects of

f) Describe and explore the objectives, content and limitations of, corporate governance codes intended to apply to multiple national jurisdictions.

i) Organisation for economic cooperation and development (OECD) Report (2004)

ii) International corporate governance network (ICGN) Report (2005)

7. Corporate governance and corporate social responsibility

a) Explain and explore social responsibility in the context of corporate governance.

b) Discuss and critically assess the concept of stakeholders and stakeholding in organisations and how this can affect strategy and corporate governance.

c) Analyse and evaluate issues of ‘ownership,’ ‘property’ and the responsibilities of ownership in the context of shareholding.

d) Explain the concept of the organisation as a corporate citizen of society with rights and responsibilities.

8. Governance: reporting and disclosure

a) Explain and assess the general principles of disclosure and communication with shareholders.

b) Explain and analyse ‘best practice’ corporate governance disclosure requirements.

c) Define and distinguish between mandatory and voluntary disclosure

c) Define and distinguish between mandatory and voluntary disclosure of corporate information in the normal reporting cycle.

d) Explain and explore the nature of, and reasons and motivations for, voluntary disclosure in a principles-based reporting environment (compared to, for example, the reporting regime in the USA).

e) Explain and analyse the purposes of the annual

general meeting and extraordinary general

meetings for information exchange between

board and shareholders.

f) Describe and assess the role of proxy voting in corporate governance..

B INTERNAL CONTROL AND REVIEW

1. Management control systems in corporate governance

a) Define and explain internal management control.

b) Explain and explore the importance of internal control and risk management in corporate governance.

c) Describe the objectives of internal control systems.

d) Identify, explain and evaluate the corporate governance and executive management roles in risk management (in particular the separation between responsibilities for ensuring that adequate risk

management systems are in place and the application of risk management systems and practices in the organisation).

e) Identify and assess the importance of the elements or components of internal control systems.

2. Internal control, audit and compliance in corporate governance

a) Describe the function and importance of internal audit.

b) Explain, and discuss the importance of, auditor independence in all client-auditor situations (including internal audit).

c) Explain, and assess the nature and sources of risks to, auditor independence. Assess the hazard of auditor capture.

d) Explain and evaluate the importance of compliance and the role of the internal audit function in internal control.

e) Explore and evaluate the effectiveness of internal control systems.

f) Describe and analyse the work of the internal audit committee in overseeing the internal audit function.

g) Explain and explore the importance and characteristics of, the audit committee’s relationship with external auditors.

3. Internal control and reporting

a) Describe and assess the need to report on internal controls to shareholders.

b) Describe the content of a report on internal control and audit.

c) Explain and assess how internal controls underpin and provide information for accurate financial reporting..

4. Management information in audit and internal control

a) Explain and assess the need for adequate information flows to management for the purposes of the management of internal control and risk.

b) Evaluate the qualities and characteristics of information required in internal control and risk management and monitoring.

C IDENTIFYING AND ASSESSING RISK

1. Risk and the risk management process

a) Define and explain risk in the context of corporate governance.

b) Define and describe management responsibilities in risk management.

c) Explain the dynamic nature of risk assessment.

d) Explain the importance and nature of management responses to changing risk assessments.

e) Explain risk appetite and how this affects risk policy.

2. Categories of risk

a) Define and compare (distinguish between) strategic and operational risks.

b) Define and explain the sources and impacts of common business risks.

i) market

ii) credit

iii) liquidity

iv) technological

v) legal

vi) health, safety and environmental

vii) reputation

viii)business probity

ix) derivatives

c) Describe and evaluate the nature and importance of business and financial risks.

d) Recognise and analyse the sector or industry specific nature of many business risks.

3. Identification, assessment and measurement of risk

a) Identify, and assess the impact upon, the stakeholders involved in business risk.

b) Explain and analyse the concepts of assessing the severity and probability of risk events.

c) Describe and evaluate a framework for board level consideration of risk.

d) Describe the process of and importance of, externally reporting on internal control and risk.

e) Explain the sources, and assess the importance of, accurate information for risk management.

f) Explain and assess the ALARP (as low as reasonably practicable) principle in risk assessment and how this relates to severity and probability.

g) Evaluate the difficulties of risk perception including the concepts of objective and subjective risk perception.

h) Explain and evaluate the concepts of related and correlated risk factors.

D CONTROLLING AND MANAGING RISK

1. Targeting and monitoring of risk

a) Explain and assess the role of a risk manager in identifying and monitoring risk.

b) Explain and evaluate the role of the risk committee in identifying and monitoring risk.

c) Describe and assess the role of internal or external risk auditing in monitoring risk.

2. Methods of controlling and reducing risk

a) Explain the importance of risk awareness at all levels in an organisation.

b) Describe and analyse the concept of embedding risk in an organisation’s systems and procedures.

c) Describe and evaluate the concept of embedding risk in an organisation’s culture and values.

d) Explain and analyse the concepts of spreading and diversifying risk and when this would be appropriate.

e) Identify and assess how business organizations use policies and techniques to mitigate various types of business and financial risks.

3. Risk avoidance, retention and modelling

a) Explain, and assess the importance of, risk transference, avoidance, reduction and acceptance.

b) Explain and evaluate the different attitudes to risk and how these can affect strategy.

c) Explain and assess the necessity of incurring risk as part of competitively managing a business organisation.

d) Explain and assess attitudes towards risk and the ways in which risk varies in relation to the size, structure and development of an organisation

E PROFESSIONAL VALUES AND ETHICS

1. Ethical theories

a) Explain and distinguish between the ethical theories of relativism and absolutism.

b) Explain, in an accounting and governance context, Kohlberg’s stages of human moral development.

c) Describe and distinguish between deontological and teleological/consequentialist approaches to ethics.

d) Apply commonly used ethical decision-making models in accounting and professional contexts

i) American Accounting Association model

ii) Tucker’s 5-question model

2. Different approaches to ethics and social responsibility.

a) Describe and evaluate Gray, Owen & Adams (1996) seven positions on social responsibility.

b) Describe and evaluate other constructions of corporate and personal ethical stance:

i) short-term shareholder interests

ii) long-term shareholder interests

iii) multiple stakeholder obligations

iv) shaper of society

c) Describe and analyse the variables determining the cultural context of ethics and corporate social responsibility (CSR).

3. Professions and the public interest

a) Explain and explore the nature of a ‘profession’ and ‘professionalism’.

b) Describe and assess what is meant by ‘the public interest’.

c) Describe the role of, and assess the widespread influence of, accounting as a profession in the organisational context.

d) Analyse the role of accounting as a profession in society.

e) Recognise accounting’s role as a value-laden profession capable of influencing the distribution of power and wealth in society.

f) Describe and critically evaluate issues surrounding accounting and acting against the public interest.

4. Professional practice and codes of ethics

a) Describe and explore the areas of behaviour covered by corporate codes of ethics.

b) Describe and assess the content of, and principles behind, professional codes of ethics.

c) Describe and assess the codes of ethics relevant to accounting professionals such as the IESBA (IFAC) or professional body codes.

5. Conflicts of interest and the consequences of unethical behaviour

a) Describe and evaluate issues associated with conflicts of interest and ethical conflict resolution.

b) Explain and evaluate the nature and impacts of ethical threats and safeguards.

c) Explain and explore how threats to independence can affect ethical behaviour.

d) Explain and explore 'bribery' and 'corruption' in the context of corporate governance, and assess how these can undermine confidence and trust.

e) Describe and assess best practice measures for reducing and combating bribery and corruption, and the barriers to implementing such measures.

6. Ethical characteristics of professionalism

a) Explain and analyse the content and nature of ethical decision-making using content from Kohlberg’s framework as appropriate.

b) Explain and analyse issues related to the application of ethical behaviour in a professional context.

c) Describe and discuss ‘rules based’ and ‘principles based’ approaches to resolving ethical dilemmas encountered in professional accounting.

7. Social and environmental issues in the conduct of business and ethical behaviour

a) Describe and assess the social and environmental effects that economic activity can have (in terms of social and environmental ‘footprints’ and environmental reporting)).

b) Explain and assess the concept of sustainability and evaluate the issues concerning accounting for sustainability (including the contribution of ‘full cost’ accounting).

c) Describe the main features of internal management systems for underpinning environmental accounting such as EMAS and ISO 14000.

d) Explain and assess the typical contents of a social and environmental report, and discuss the usefulness of this information to stakeholders.

e) Explain the nature of social and environmental audit and evaluate the contribution it can make to the development of environmental accounting.