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CIMA F1 > A. Regulatory environment of financial reporting > Flashcards

A. Regulatory environment of financial reporting Flashcards

1
Q

Why is there a need for regulation?

A
  • make fin statements reliable
  • promote consistency and comparability
  • different countries subject to a variety of factors so regulation will vary country to country
  • common law vs code law used to calculate taxation
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2
Q

What elements does the regulatory environment consist of?

A
  • local law
  • local accounting standards
  • international accounting standards
  • conceptual frameworks e.g Statement of Principles in the UK
  • requirements of international bodies e.g EU, IOSCO
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3
Q

What is GAAP?

A

Generally accepted accounting practice

  • encompasses the conventions, rules and procedures necessary to define accepted accounting practice at a particular time
  • includes broad and detailed guidelines
  • includes local regs, accounting standards and any other local regs
  • vary country to country e.g UK GAAP, US GAAP
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4
Q

What influences the regulatory environment?

A

national company law
EU directives or other trading body directives
security exchange rules

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5
Q

What are the 2 approaches to accounting standards?

A

Principles-based

  • based on conceptual framework e.g IASB
  • accounting standards set on basis of framework

Rules-based

  • ‘cookbook’ approach
  • accounting standards are a set of mandatory rules
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6
Q

What is harmonisation vs standardisation of statements?

A

harmonisation: increasing the compatibility of accounting practices by setting bounds on their degree of variation
standardisation: rigid, narrower set of rules. Technically one correct method that can be identified for every aspect of accounting and then this can be imposed on all prepared of accounts

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7
Q

Why is there a need for harmonisation of accounting standards?

A

Due to variations between countries, full standardisation is unlikely.

  • different principles makes it harder for investors and analysts to interpret and compare info
  • lack of comparability could affect firm’s credibility
  • therefore companies use IFRS
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8
Q

What is IFRS?

A

IFRS=International financial reporting standards

  • established in March 2001
  • restructured into 2 main bodies:Trustees and the IASB
  • IFRS foundation is a non-profit making body with a number of trustees
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9
Q

What are IFRS trustees responsible for?

A
  • appointing members of the IASB, IFRSIC and IFRS Advisory Council
  • reviewing annually the strategy of the IASB and its effectiveness
  • approving annually the budget and funding of the IASB
  • reviewing strategic issues affecting accounting standards
  • promoting the IASB and its work and the rigorous application
  • establishing and amending operating procedures for the IASB, IFRS committee and IFRS Advisory Council
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10
Q

What is the IASB?

A

International Accounting Standards Board

  • number of members
  • responsible for developing international accounting standards (IFRS Standards)
  • all members have 5 year term, renewable once
  • complete responsibility for all technical matters, including prep and publication of IFRS Standards, Drafts, withdrawals and final interpretations
  • adopted all IASs that were previously issues by IASC
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11
Q

What does the IFRS Advisory Council do?

A
  • approx 30 members
  • forum for organisations and individuals to participate in the standard setting process
  • members appointed by trustees from various backgrounds
  • renewable term of 3 years
  • meet 3 times a year

Obvs:

  • give advice to IASB on agenda decisions and priorities in its work
  • inform the IASB of the views of orgs and individuals on the Council on major standard setting projects
  • give other advice to the Board or to the Trustees
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12
Q

What is the IFRS Interpretations Committee

A

-formally knows as IFRIC

2 main responsibilities:

  • review new financial reporting issues not specifically addressed in IFRS
  • CLARIFY issues where interpretations have developed, with a view to reaching a consensus on the most appropriate treatment
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13
Q

What is the IOSCO?

A

International Organisation of Securities Commissions

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14
Q

What does the IOSCO do?

A

representative body of the world’s securities markets regulators

  • financial info differences could reduce market efficiency
  • work with IASB since 1987
  • promote improvement of International Standards
  • since mid 90s, both worked on ‘core standards’ until 1999
  • ‘core standards’ used by listed companies who offer securities abroad
  • in May 2000, IOSCO reported to its members recommending they use IFRS when preparing statements
  • IOSCO reps also sit as observers on the IFrS Interpretations Committee
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15
Q

What is the IIRC?

A

The international integrated reporting council

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16
Q

What did the IIRC introduce?

A
  • coalition behind the introduction of Integrated Reports
  • promotes reporting on an entity’s ability to create value
  • considers needs of stakeholders and enables entity to disclose details regarding all aspects of VALUE CREATION e.g staff skillset, morale, IP
  • does not include merely financial info and results
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17
Q

What are the steps of the development of an IFRS standard?

A
  1. Establish an advisory COMMITTEE to give advice on issues
    - IASB consults committee and IFRS Advisory Committee
  2. IASB develops and publishes DISCUSSION PAPER for public comment
  3. Following receipt of public comments, EXPOSURE DRAFT is produced for public comment
    - based on earlier Discussion Paper and feedback
    - made for final review
  4. Following receipt and review of comments, approved IFRS will be PUBLISHED including date from which it will become effective
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18
Q

Role of national standard setters?

A
  • harmonisation process has gathered pace in last few years. From 2005, all European listed entities were required to adopt IFRS in their group financial statements and other countries decided to follow similar process
  • US committed to harmonise with the IFRS and US’s FASB
  • overall impact is that the trend towards closer international harmonisation of accounting practices is now set
  • will be harder for domestic standard setters to justify standards at odds with IFRS
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19
Q

Role of accounting standards setters and the IASB?

A
  • in Feb 2005, IASB issues memorandum setting out the responsibilities of the IASB and national standard setters
  • includes responsibilities of the IASB to ensure that it makes info available on a timely basis so that national standard setters can be informed of the IASB’s plans
  • national standard setters should deal with the domestic barriers to adopting or converging with the IFRS
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20
Q

How can countries choosing to adopt international standards apply them?

A
  • adoption of international standards as local GAAP:usually when standards have not been well developed already
  • International standards used as model to create local GAAP:to reflect country’s needs
  • international standards used as persuasive influence in preparing local GAAP:converge local to GAAP to ensure IFRS Standards compliance
  • might choose to prepare local GAAP independently
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21
Q

Who is responsible for developing standards?

A

IASB

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22
Q

Who gives guidance when setting standards?

A

IFRS Advisory Council

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23
Q

Who gives guidance on interpretation of standards?

A

IFRS Interpretations Committee

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24
Q

Who launched the Code of Ethics for CGMAs in 2015?

A

CIMA and AIPCA

  • good ethical behaviour may be above that required by law
  • guided by the spirit of the code
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25
Q

What should a CIMA member do if the Code or ethic support info cant resolve an ethical issue?

A
  • seek legal advice

- refer to CIMA charter, bylaws and regulations

26
Q

What do ethics do?

A

describe ‘how’ and entity does business, not what it does

27
Q

What are the 5 fundamental principles from the code?

A

Objectivity:no bias
Professional competence/due care:professional knowledge
Professional behaviour:relevant laws and regulations
Integrity:straightforward, honest
Confidentiality: respect confidential info

28
Q

Why is a principle based ethics approach used?

A
  • more flexible
  • applied to wider range of scenarios
  • encourages users to think about intent rather than ticking boxes
29
Q

What are the potential threats to the fundamental principles?

A

self interest threat
-personal financial or otherwise, conflict of interest

self-review threats
-re-evaluate own work

familiarity threats
-personal judgement compromised, sympathetic, gifts

intimidation threats
-deterred by actual or perceived threats

advocacy threats
-promoting position or opinion so objectivity is compromised

30
Q

What are safeguards?

A
  • reduce or prevent ethical issues from arising
  • eg whistleblowing or grievance procedures
  • take safeguard after significant threat is identified
31
Q

How do yo resolve and ethical dilemna?

A

-exists when one or more principles are threatened or professional integrity is compromised

  1. Gather relevant information and document following steps
  2. Raise concern internally
    - manager, trusted colleague, internal whistleblowing, dont raise with client of money laundering
  3. If they have not been addressed, report externally
    - auditor, industry or regulatory authority, get legal advice
  4. If you’re still unable to resolve, remove yourself form the situation
    - leave team, resign if necessary, seek legal advice
32
Q

What is corporate governance?

A

means by which a company is directed or controlled

  • particularly important for publicly traded companies as their health affects economies
  • mixture of segregation of roles and committees of drs and NEDS
33
Q

What was the Enron scandal?

A

2000 US Energy company

2001: filed for bankruptcy
- investigation revealed accounting fraud in statments
- their auditors were accused of obstruction of justice and forced to stop auditing
- example of abuse of trust placed in management (either through direct extraction or manipulation of share prices)
2002: SOX introduced

34
Q

History of Corp Gov in the US

A
  • Enron problems had to be financed through increased borrowing so they created subsidiaries to hide borrowing
  • many cases of auditors and clients being too close
  • SOX created the Public Company Accounting Oversight Board to police auditing and enforce independence
35
Q

History of Corp Gov in the UK

A
  • Guiness, Robert Maxwell scandal highlighted mismanagement
  • Cadbury and Greenbury reports relate to corp govt of publicly listed companies, merged into Combined Code
  • Combined Code developed into UK Corp Govt in 1998
36
Q

History of Corp Gov in the Europe

A

2003: European Commission announced they did not believe it necessary to formulate a separate code of European
- up to individual states
- sees need for common approach regarding matters such as NEDs, info on remuneration and greater disclosure of financial info

37
Q

Approaches to corp govt

A

Rules: instils code into law, penalties
Principles:spirit of law, comply or explain

38
Q

What factors affect the approach of corporate governance?

A
  • dominant ownership structure (bank, family, multiple shareholder)
  • legal system and its power/ability
  • govt structure and policies
  • state of economy
  • culture and history
  • levels of capital inflow or investment coming into the country
  • global economic and political climate
39
Q

What is ‘comply or explain’?

A

principle based code where entity must state that it has complied with requirements or explain why it could not do so in annual report
-shareholders draw conclusions regarding compliance

40
Q

Arguments for rules based approach

A

Org’s perspective

  • clarity
  • standardisation for all companies
  • binding requirements

Wider stakeholder perspective

  • standardisation across all companies
  • sanctions are deterrents
  • greater confidence in regulatory compliance
41
Q

Arguments against rules based approach

A

Org’s perspective

  • exploitation of loopholes
  • underlying belief in code
  • flexibility lost
  • checklist approach

Wider stakeholder perspective

  • ‘regulation overload’ burden on businesses
  • legal costs
  • limits to improvements
  • box ticking rather than compliance
42
Q

Who has to follow UK Corp Gov code?

A

UK listed entities must include in their annual report:

-comply or explain

43
Q

What are the main provisions of the UK Corp Gov Code?

A

Leadership

Effectiveness

Accountability

Remuneration

Relations with Shareholders

44
Q

What are the Leadership provisions of UK Corp Gov?

A

Leadership

  • headed by effective board
  • clear division between Chairman and CEO
  • no dominance
  • NEDs challenge and develop strategy proposals
45
Q

What are the Effectiveness provisions of UK Corp Gov?

A

Effectiveness

  • board should be skilled, experienced, independent
  • formal and rigorous procedure for new directors
  • directors should receive induction and regular updates
  • should be supplied with quality and timely info
  • board subject to annual evaluation
  • all directors should be submitted for re-election at regular intervals
46
Q

What are the Accountability provisions of UK Corp Gov?

A

Accountability

  • board should present fair, balanced assessment of position and prospects
  • board is responsible for determining risks in strategy
  • board should maintain sound risk management and internal controls
  • establish arrangements for corp reporting, risk management and internal control principles
47
Q

What are the Remuneration provisions of UK Corp Gov?

A

Remuneration

  • attract good directors
  • structured and linked to corporate or indiv performance
  • formal and transparent procedure for policy development
  • no director involved in own remuneration
48
Q

What are the Relations with Shareholders provisions of UK Corp Gov?

A

Relations with Shareholders

  • dialogue based on mutual understanding of objs
  • board is responsible for ensuring satisfactory dialogue
  • board should use AGM to communicate with investors and to encourage their participation
49
Q

What is the OECD?

A
  • 34 countries who want a free market with one set of rules for corp gov
  • scandals lead to corp gov dev due to pressures from stock exchanges
50
Q

Why did the OECD develop the Principles of Corporate Governance?

A
  • to assist member and non-member govts in efforts to improve corp govt framework
  • provide guidance and suggestions for SEs, invetors and corporations that have role in process of developing good corp gov
  • published 1995, revised in 2004
  • focus on publicly traded entities
51
Q

What are the 6 OECD Princples?

A
  1. Effective corp gov
  2. Shareholder rights of ownership
  3. Fair treatment of shareholders
  4. Stakeholders’ role and rights
  5. Disclosure and transparency
  6. Responsibilities of the board

EVERY SNAKE FEARS SNAKES DONT RUN

52
Q

What are the key responsibilities/roles of directors according to the UK Corp Gov Code?

A
  • provide entrepreneurial leadership
  • represent company view and account to public
  • decide on a formal schedule of matters to be reserved for board decision
  • determine the company’s mission and purpose
  • select and appoint CEO, chairman and other board members
  • set the company’s values and standards
  • ensure management is performing properly
  • establish internal controls that enable risk to be assessed
  • ensure necessary financial and human resources are in place
  • ensure obligations to stakeholders are met
  • for listed companies:appoint NEDS & RAN committees
  • assess own performance and report annually
  • submit themselves for re-election at regular intervals (FTSE350 annually)
53
Q

How can a company maintain Independence of the board?

A
  • half independent NEDs excluding chair
  • one NED should be senior independent director who is directly available for concerns
  • primary fiduciary duty NEDs owe is to company shareholders
  • need to find balance between industry experienced NEDs and those who are independent
54
Q

Reasons for NED independence?

A
  • provide detached and objective view on board decisions
  • provide expertise and communicate effectively
  • provide shareholders with an independent voice on the board
  • to provide confidence in corporate governance
  • to reduce accusations of self-interest in behaviour of executives
55
Q

What is internal audit?

A

employees who conduct audit procedures as per the instructions of the directors

  • investigate performance and effectiveness of internal control systems
  • recommend improvements to processes with the aim of reducing risk of fraud and error
56
Q

What does an Audit committee consist of?

A

NEDS who view affairs in a detached and independent way

-liaise between board of directors and external auditors

57
Q

What is best practice for a listed entity’s audit committee?

A
  • committee of at least 3 NEDs (smaller entities 2)

- at lease one member should have recent and relevant financial experience

58
Q

What are the objectives of an audit committee?

A
  • increase public confidence
  • assist directors in meeting responsibilities of fin reporting
  • strengthen the independent position of an entity’s external auditor by being channel of communication
59
Q

What are the benefits of an Audit Committee?

A
  • improved credibility
  • increased public confidence in audit opinion
  • stronger control environment
  • internal audit function reports to audit comm
  • skills of members is resource to company
  • easier and cheaper to arrange finance
  • less burdensome to meet listing requirements is audit committee is already established
60
Q

Issues of Audit Committee?

A
  • difficulties recruiting the right NED who have relevant skills, experience and sufficient time
  • cost:NEDs are normally remunerated and fees can be quite expensive
61
Q

How can companies minimise risk?

A
  • incorporate internal controls into entity’s system and procedures
  • director’s responsibilities to implement internal controls and monitor applications
  • auditors are not responsible for design and implementation of systems,
  • only responsibly for reducing risk of misstatement of financial statements
  • incorporate this into their overall risk assessment which allows them to design their further audit procedures

CIMA F1 (4 decks)

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