A. Role Of Finance Function Flashcards
What is the profit-seeking organisation?
What are their main & secondary objs?
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
What is the NFPO?
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
What are the three key roles the finance function plays?
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
What are ethics?
What are business ethics?
System of moral principles that examine the concept of right and wrong
The application of ethical values to business behaviour
What is an ethical dilemma?
Where can you find these in business operations?
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
Which is five of the IFAC is ethical principles is this the Cima code of ethics based on?
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
How can ethical behaviour maximise shareholder wealth?
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
What is the difference between a corporate ethics statement and a corporate ethics code?
Statement: broad generalisations
Code: specific rules
What is a stakeholder?
A group or individual who has an interest in what the organisation does or an expectation of the organisation
What is Mendelow’s power interest matrix?
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
What are the three different types of stakeholders?
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
What is CSR?
What are some examples?
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
What do you traditionalists argue about CSR?
companies should operate solely to make money for shareholders and it’s not the companies role to worry about social
What is the modern view about aligning values with that of CSR?
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
What lead to corporate governance?
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
What happened to Polly Peck International, the mirror group and BCCI?
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
What does corporate governance mean?
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
What are some symptoms of poor corporate governance?
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
What is the SOX act 2002?
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
What are the features of the UK corporate governance code?
Board of directors Directors powers and duties The relationship of the company with the directors Accountability of financial statements Roles and meetings and resolutions
Who is the body responsible for promoting high standards of corporate governance in the UK?
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
How often should the board use an AGM according to the corporate governance code?
Annually to construct a dialogue with shareholders
What are the roles of the board according to UK corporate governance?
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
Can the chairman and CEO be the same person?
Chairman: person responsible for leadership on board affectedness
CEO: person in charge of running company
Should be separated
What are NE Ds?
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
What are the UK corporate governance typical recommendations for non-executive directors?
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
What is the make up of the nominations committee?
At least half should be non-executive directors
Appointment of board made by a nominations committee
What is the make up of the remuneration committee?
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
What are the advantages and disadvantages of the remuneration committee?
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
What is the make up of an audit committee?
What is their role?
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
What are the five As of the information to impact framework?
Assembling information = reporting
analysing for insights = questioning
Advising to influence = developing solutions
Applying for impact = deploying solutions
Acumen
What does assembling information entail?
Reporting I.e Collate stated to prepare information about the organisation
Process might involve:
– cleaning data
– connecting different sources of data
What does analysing for insights include?
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
What does advising to influence entail?
Developing solutions i.e. communicate inside the entrance uses
Finance professionals then:
– communicate his insights
Dad contribute and objective and responsible perspective
What does applying for impact entail?
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
What does acumen entail?
Connects to different activities together
Prepare valuable information on the outcomes achieved to help inform future proposals
What are internal sources? Give some examples
Sources of data taken from a variety of areas such as: – sales ledger – purchase ledger – payroll system – fixed assets system – production – sales and marketing
What are external sources of data? Give some examples
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
What is ‘good’ information?
ACCURATE acronym
Accurate Complete Cost < benefit Understandable, Relevant Adaptable Timely, Easy to use
What is visualisation?
Using technology to turn increasing amounts of raw data into useful information for the organisation i.e. pictures and infographics
What is the difference between qualitative and quantitative information?
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
What mistakes could finance professionals make when analysing quantitative information?
Presentation of information
Failure to evaluate the figures using a suitable comparative or benchmark
Collection of data
Although it is difficult to record and process qualitative data, which qualitative factors still need to be considered when making a decision?
Effects on the environment
Legal effects
Political effects
Timing of decision
