A. Role Of Finance Function

Question 1

What is the profit-seeking organisation?

What are their main & secondary objs?

Answer 1

I.e. businesses including companies partnerships and sole traders

Main objective: maximise wealth of owners
Secondary objective: detailed objectives as to how to maximise on the wealth

Question 2

What is the NFPO?

Answer 2

Not for profit organisations including public sector organisations (Schools and hospitals)and private sector organisations (charities and clubs)

Main objective: maximise benefit to beneficiaries secondary objective: economy, efficiency, effectiveness

Question 3

What are the three key roles the finance function plays?

Answer 3

ENABLES an organisation to create and preserve value through:
– planning
– forecasting
– resource allocation

SHAPES how an organisation create and preserved value through:

• Performance management
• Control

NARRATES an organisation create and present value:
– financial reporting

Question 4

What are ethics?

What are business ethics?

Answer 4

System of moral principles that examine the concept of right and wrong

The application of ethical values to business behaviour

Question 5

What is an ethical dilemma?

Where can you find these in business operations?

Answer 5

It involves a situation where the decision maker must decide what is the right or wrong thing to do

These can be found in:

• accounting issues
• Production issues
• Sales and marketing issues
• HR issues

Question 6

Which is five of the IFAC is ethical principles is this the Cima code of ethics based on?

Answer 6

Integrity: honesty
Confidentiality: respecting confidential nature
Professional competence and due care: maintaining professional knowledge
Objectivity: not aligned bias
Professional behaviour: comply with relevant laws and regulation

Question 7

How can ethical behaviour maximise shareholder wealth?

Answer 7

Ethical behaviour is likely to be favoured by:
– customers: high sales volumes and all prices e.g Fairtrade
– employees: attract/retention of the best employees and increase productivity
– business collaborator: increase opportunities are profitable projects

Ethical behaviour reduces risk and gives access to cheaper funds

Unethical behaviour will be discovered in the long run and leading to reputational damage or legal charges

Question 8

What is the difference between a corporate ethics statement and a corporate ethics code?

Answer 8

Statement: broad generalisations

Code: specific rules

Question 9

What is a stakeholder?

Answer 9

A group or individual who has an interest in what the organisation does or an expectation of the organisation

Question 10

What is Mendelow’s power interest matrix?

Answer 10

It helps to select to the dominant stakeholder is in cases where stakeholder needs might conflict

It is a 2 x 2square
Level of power on the left low vs high
Level of interest horizontally low versus high
By plotting the stakeholders in the matrix you can determine who the dominant stakeholder i.e. key player is

Question 11

What are the three different types of stakeholders?

Answer 11

Internal: intimately connected to the organisation e.g. employees directors

Connected: investor have dealings with the firm e.g. shareholders, customers, suppliers

External stakeholders: can influence or be influenced by these activities e.g. government, trade unions, environmental pressure groups

Question 12

What is CSR?

What are some examples?

Answer 12

Corporate social responsibility refers to the idea that a company should be sensitive to the needs and wants of the stakeholders and its business operations, not just the shareholders

Environmental impact, whole impact on consumers, for treatment of employees, animal experimentation, safety of products

Question 13

What do you traditionalists argue about CSR?

Answer 13

companies should operate solely to make money for shareholders and it’s not the companies role to worry about social

Question 14

What is the modern view about aligning values with that of CSR?

Answer 14

That the company can improve this reputation, increase profitability and ensure it has a long-term future due to the following:
– differentiation
– high calibre staff
– brand strengthening
– lower costs
– new market opportunities

Question 15

What lead to corporate governance?

Answer 15

The succession of public scandals

In the early 90s, the collapse of the London stock exchange list of companies Polly Peck International, Mirror group collapse, and the liquidation of BCCI led to the formation of the UK corporate governance code

More recently the 2008 financial crisis which claimed Lehman Bros, northern rock and many other so-called revised and radical changes on medication assessed

Need arises as there is a separation of ownership and control: shareholders versus directors i.e. agency problem

Question 16

What happened to Polly Peck International, the mirror group and BCCI?

Answer 16

Polly Peck International
-company collapsed in 1991 after the theft by owner Nadir of 29m was discovered

The Mirror group
– 1991 collapse due to 440m diverted from pension scheme by owner Robert Maxwell
-Enquiry from that Maxwell and city institutions were to blame

BCCI
– in 1991 was forced to close doors by bank of England and mid fraud identification
– 35 local UK council lost approximately 90 million in investments

Question 17

What does corporate governance mean?

Answer 17

It is the set of principles and policies by which a company is directed, administered and controlled myself

It includes the appropriate role of the board of directors and auditors of the company

Controls businesses so all stakeholders objectives are achieved

Question 18

What are some symptoms of poor corporate governance?

Answer 18

Domination of the board
No involvement of the board
Inadequate control function
Lack of supervision
Lack of independent scrutiny by External/internal auditors
Lack of contact with shareholders
Emphasis on short-term profitability
Excluding financial statements and information

Question 19

What is the SOX act 2002?

Answer 19

US legal requirement excellent
corporate governance regulations introduced due to the Enron and WorldCom scandals
Only applicable in the US and for US-based companies

Key points:
Auditor independence
Audit committee
Internal control report
Increased financial disclosures
US stock exchange regulations

Question 20

What are the features of the UK corporate governance code?

Answer 20

Board of directors
Directors powers and duties
The relationship of the company with the directors
Accountability of financial statements
Roles and meetings and resolutions

Question 21

Who is the body responsible for promoting high standards of corporate governance in the UK?

Answer 21

The financial reporting Council (FRC)

Or LSE listed companies are required to apply these principles

Have to produced disclosure statement confirming compliance with the code and explaining any departures

Smaller listed companies can take a more flexible approach

Question 22

How often should the board use an AGM according to the corporate governance code?

Answer 22

Annually to construct a dialogue with shareholders

Question 23

What are the roles of the board according to UK corporate governance?

Answer 23

Effective board
Meet regularly
Should identify the chairman, deputy chairman, CEO, senior independent directors and the members and chairs of the board committee
Disclose the number of meetings hold directors in attendance

Question 24

Can the chairman and CEO be the same person?

Answer 24

Chairman: person responsible for leadership on board affectedness
CEO: person in charge of running company

Should be separated

Question 25

What are NE Ds?

Answer 25

Directors were involved in the execution of day-to-day management decisions are called executive directors

Those who primarily only attend board meetings are known as non-executive directors

Should be independent of execs I.e must not:
-Have been an employee last five years
– have had material business interests and company in the last three years
– participating companies share options
– have close family ties with the company directors
– serve as an NED for more than nine years with the same company
-Hold cross directorships

Question 26

What are the UK corporate governance typical recommendations for non-executive directors?

Answer 26

At least half the board should comprise of independent NEDs
A smaller company should have at lEast 2 NEDs
One of the NEDs should be appointed the senior independent director who shareholders contact with any concerns

Question 27

What is the make up of the nominations committee?

Answer 27

At least half should be non-executive directors

Appointment of board made by a nominations committee

Question 28

What is the make up of the remuneration committee?

Answer 28

All non-executive directors
At least three 4 350 companies, at least two for smaller companies

No direct should be involved in setting the level of their own remuneration
Chairman can be a member but cannot chair the meeting
chair must’ve been a committee member for at least 12 months

Question 29

What are the advantages and disadvantages of the remuneration committee?

Answer 29

Advantages:
– avoids agency problem
– leave the board free to make strategic decisions

Disadvantages:
– danger that non-execs may recommend high remuneration in the hopes that execs will recommend high remuneration for them
– cost involved in preparing and holding meetings

Question 30

What is the make up of an audit committee?

What is their role?

Answer 30

Your committee should consist solely of independent non-execs
At least 3 for FTSE 350
At least two for smaller listed companies

It’s as interface between board of directors and internal and external auditors:
-review work and Effectiveness of internal audit function
– monitor external auditors independence
– shortlist external audit firms
-Your accounting policies and financial statements
– review control and risk systems
– liaise with external auditors

Question 31

What are the five As of the information to impact framework?

Answer 31

Assembling information = reporting
analysing for insights = questioning
Advising to influence = developing solutions
Applying for impact = deploying solutions
Acumen

Question 32

What does assembling information entail?

Answer 32

Reporting I.e Collate stated to prepare information about the organisation

Process might involve:
– cleaning data
– connecting different sources of data

Question 33

What does analysing for insights include?

Answer 33

Questioning i.e. provides insight to users by analysing information

Analyse financial and non-financial information to draw out patterns and relevant insights for those using formation

Question 34

What does advising to influence entail?

Answer 34

Developing solutions i.e. communicate inside the entrance uses

Finance professionals then:
– communicate his insights
Dad contribute and objective and responsible perspective

Question 35

What does applying for impact entail?

Answer 35

Deploying solutions: supports the implementation of decisions to achieve the desired impact

apply relation to harnessed value through the impact on:
– strategic plans
-budgeting and resource allocation
-performance measures
– performance reviews

Question 36

What does acumen entail?

Answer 36

Connects to different activities together

Prepare valuable information on the outcomes achieved to help inform future proposals

Question 37

What are internal sources? Give some examples

Answer 37

Sources of data taken from a variety of areas such as:
– sales ledger
– purchase ledger
– payroll system
– fixed assets system
– production
– sales and marketing

Question 38

What are external sources of data? Give some examples

Answer 38

Data obtained from:
– suppliers
– customers
– newspapers, journals and Internet
– the government

Limitations include accuracy, out of data, reputable, might not meet needs, difficulty in covering

Question 39

What is ‘good’ information?

Answer 39

ACCURATE acronym

Accurate
Complete
Cost < benefit
Understandable, Relevant
Adaptable
Timely, Easy to use

Question 40

What is visualisation?

Answer 40

Using technology to turn increasing amounts of raw data into useful information for the organisation i.e. pictures and infographics

Question 41

What is the difference between qualitative and quantitative information?

Answer 41

Quantitative information is information that we can normally be expressed in Numerical terms

Qualitative information is information that cannot normally be expressed in numerical terms (subjective) e.g opinions of customer, supplier, employee
- reduce subjectivity through using trends

Question 42

What mistakes could finance professionals make when analysing quantitative information?

Answer 42

Presentation of information
Failure to evaluate the figures using a suitable comparative or benchmark
Collection of data

Question 43

Although it is difficult to record and process qualitative data, which qualitative factors still need to be considered when making a decision?

Answer 43

Effects on the environment
Legal effects
Political effects
Timing of decision