BA4 Flashcards
CIMA Code of Ethics Aims
- Identify personal responsibility of a management accountant
- Provide practical guidance to avoid ethical pitfalls
- General guidance on difficult ethical questions
Morals
Refer to individual’s personal belief system about right or wrong.
Ethics
Professional responsibility to act in line with best practice (not necessarily rightly or wrongly). It is a practical course of action.
Section 110 - Fundamental Principles
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behaviour
Methods for ‘Controlling’ Behaviour
- Criminal law, direct threat to public
- Civil law, damage/loss caused to other people or failure to comply with voluntary contract
- Regulations, rules of practice
- Code of practice, guidance for practitioners
FRC
Financial Reporting Council are the independent regulator for corporate reporting and governance.
Principles of Public Life
- Selflessness
- Integrity
- Objectivity
- Accountability
- Openness
- Honesty
- Leadership
IFAC Code
Developed in 2005 following a growing crisis of confidence in the accounting profession. It is mandatory for all member organisations or bodies of IFAC.
CIMA Code
First issued in 2006 and is based on IFAC Ethics:
1. Complying with Code
2. Professional Accountants in Business
3. Professional Accountants in Public Practice
It is mandatory for all member organisations or bodies of CIMA.
IFAC Values
- Respect
- Timeliness
- Courtesy
- Responsibility
- Reliability
Fundamental Principles: Integrity
- Professional competency
- Honesty
- Truthfulness
- Open-mindedness
- Straightforward and fair dealings
Fundamental Principles: Objectivity
Consider:
- Biases
- Conflicts of interest
- Undue influence of others
Safeguards:
- Withdrawing from engagement
- Introducing more supervision
- Terminating the relationship
- Discussing with higher management
Fundamental Principles: Professional Competence
Maintain competence and capabilities to act responsibly at all times through continuing professional development.
Fundamental Principles: Due Care
Communicate to clients and employers the limitations inherent in the provided services to avoid misinterpretation.
Fundamental Principles: Confidentiality
Do not:
- Disclose information outside the firm or employing organisation, including socially
- Use information for personal or third-party gain
Fundamental Principles: Professional Behaviour
Behaviour should not bring the individual, the profession, or CIMA into disrepute:
- Comply with relevant laws and regulations
- Avoid any action that discredits the profession
Disclosure of Confidential Information
- Permitted by law and authorised by employer (e.g. contracts)
- Required by law (e.g. evidence)
- Professional duty when not prohibited by law (e.g. regulation)
Independence
Of mind: Conclusion should be prepared without being affected by influences which would compromise professional judgment.
In appearance: Outcomes need to be seen as fair, especially when impacting employee compensations for example. Define the framework before provided outcomes.
Scepticism
Maintain a healthy mistrust of management and information provided by vested interests.
Accountability
Being responsible to someone and for something or, an action and being able to explain those actions.
Social Responsibility
A professional’s role within the wider community.
Hierarchy of Obligations
- The law
- Your profession (CIMA Code)
- Your company (Corporate Values)
Resolving Ethical Issues
- Transparency:
a) Do I mind who knows about my decision?
b) Can I openly defend my stance? - Effect:
a) Have I identified whom the decision affects?
b) Have I taken everything into account, including mitigating circumstances? - Fairness:
a) Will my decisions be judged by others to be fair?
Corporate Governance (3 Points)
A system of controls and procedures to balance wants of various stakeholders across the business. It is primarily concerned with public companies to ensure:
- Effective control
- Business efficacy
- Accountability
Company Law
Made up of ethical principles and standards of behaviour which are written laws.
Circumventing the Law
Directors can break the law as:
- Investors do not actively participate in the internal affairs of the company, especially when they are achieving growth
- Investors are a disprate body and are therefore not united in their opinion or approach
Combined Code/UK Corporate Governance Code (description)
Contains code of best practice that public companies mark themselves against in a ‘comply or explain’ model to demonstrate to the market they are upholding good principles of corporate governance.
Cadbury Committee Report
Set up by the FRC in 1991:
- Independent non-exec directors
- Exec directors should be vetted by nomination committee of non-exec directors
- Exec directors should have a contract of no more than 3-years
- Exec director pay should be agreed by a remuneration committee of non-exec directors
- There should be an audit committee of non-exec directors
- Chairman and chief exec should not be the same person
Greenbury Committee Report
Following excessive remuneration:
- Remuneration committee should consider shareholders and directors
- Directors should not receive discounted share options and annual bonuses are non-pensionable
- Shareholders should approve long-term director incentives
- Exec directors should not have notice periods of more than a year
- Annual report should include a statement of measures against the Greenbury code and state areas on non-compliance
Hampel Committee Report
Published in 1998:
- Exec and non-exec directors should owe the same corporate duties and be provided with more information and instruction as to their responsibilities
- Exec directors should have relevant experience
- Majority of non-exec directors should be independent and make up 1/3 of board positions
- Chairman and chief exec should not be the same person
- Directors should seek re-election every 3 years
- Exec directors should not have notice periods of more than a year
- Exec director pay should not be excessive and is decided by remuneration committee made up entirely of non-exec directors
Turnbull Report
Published in 1999, board of directors should:
- Evaluate likely risks facing the company
- Ensuring that effective safeguards and internal controls are in place to reduce risk
- Implement transparent internal controls including an assessment of annual risk
Higgs Report
Published in 2003 in the US following the collapse of Enron. Highlighted group responsibility of the board and encouraged greater involvement of non-exec directors.
Combined Code/UK Corporate Governance Code (provisions)
Revised ~two years:
- Chairman and chief exec are different people
- Chief exec should not go on to become chairman of the same company
- At least half of the board should be independent, non-exec directors
- Board appoints one independent, non exec director to be senior independent director
- Nomination committee for board appointments
- Annual report should describe performance of board, its committees and directors
- Remuneration committee should have at least three independent, non-exec directors
- Notice periods should be less than a year
- Board should review group’s system risk management annually and inform shareholders
- Audit committee should have three (two for small orgs) independent, non-exec directors
Companies Act (CA)
Published in 2006, directors must:
- Promote the success of the organisation (172)
- Use powers judiciously
- Exercise the same care, skill and diligence that would be used by a reasonably diligent person (174)
Organisation’s Constitution
- Memorandum of Association
- Articles of Association
- Shareholder Agreement (private orgs only)
Unitary Boards
There is only one board responsible for management and governance. Structures include:
- All executive, managerial role for all directors
- Majority exec, most are effectively company employees
- Majority non-exec, most are not employees
Other Boards
- Unitary with combined functions, chairman and chief exec are the same person
- Management boards are headed by the chief exec
- Supervisory board headed by the chairman
The Board
Are to provide entrepeneurial leadership within a framework of prudent and effective controls which enables risk to be assessed and managed.
Assurance
A practitioner will express a conclusion designed to enhance the confidence the intented user has in the responsible party.
External Audit - Objectives
- Give a true and fair view
- Are prepared in accordance with applicable financial reporting frameworks
- Obtain reasonable assurance that documents are whole and free from misstatement
- Report on wider findings
External Audit - 5 Elements
- Parties involved (preparers/management, users/shareholders, practitioner/auditors)
- Subject matter and financial statements
- Sufficient appropriate evidence
- Alignment with relevant financial reporting framework
- Report presented to shareholders
Audit Risk
Auditor may come to an incorrect opinion.
Inherent Risk
Susceptibility of a transaction, account balance, or other materials to misstate, despite internal controls being in place.
Control Risk
That the misstatement would not be prevented, detected or corrected by the accounting and internal control systems.
Detection Risk
Auditor’s procedures will not detect a misstatement that exists in an account balance or class of transaction that could be material.
External Audit
- Express opinion on truth of financial statements
- Reports to shareholders
- Publicly available
- Verifies truth and fairness of financial statements
- Appointed by the company shareholders
- Must be independent of the company
Internal Audit
- Improve the company’s operations by reviewing efficiency and effectiveness
- Reports to management or those in governance positions
- Not publicly available
- Wide in scope and dependent on management’s requirements
- Appointed by audit committee or board of directors
- Can be run by employees (little independence) or outsourced (more independence)
Errors of Omission
Transaction completely omitted from the ledger account.
Errors of Commission
Where one side of the transaction has been entered in the wrong account (but similar type to correct account). It would not affect the calculation of profit, nor the position shown on the statement of financial position.
Errors of Principle
Correct and incorrect accounts are of different types which would affect the profit calculation and position shown on the statement of financial position.
Error Prevention
Good governance, available documentation and a clear authorisation procedure.
Fraud
Intentional act involving deception to obtain an unjust or illegal advantage.
Milton Friedman
Argued that a corporation has no responsibility outside of making profit for shareholders. Social issues are the province of the state.
Enlightened Self Interest
- Corporations perceived as ethical are rewarded with extra customers
- Employees are attracted to work for socially responsible companies
- Voluntary commitments may forestall legislation and prevent government intervention
- Positive contributions lead to a more rounded society and more stable customer base
Carroll’s Model
- Economic, the business must stay afloat
- Legal, the business must follow laws
- Ethical, doing what is right - not just what is legally required
- Philanthropic, actions desired rather than required
Social Responsiveness
- Reaction, corporation denies any responsibility for social issues
- Defence, corporation admits responsibility but fights it to do the minimum
- Accommodation, corporation accepts responsibility and does what is demanded
- Proaction, corporation seeks to go beyond industry norms
CSR Strategy
- Identify stakeholders
- Classify stakeholders
- Establish stakeholders’ claims
- Assess importance of stakeholders
- Decide upon response to social pressure
Global Reporting Initiative (GRI)
International independent organisation that helps business, governments and other organisations understand and communicate their impact on critical sustainability issues.
G4 Sustainability Reporting Guidlines
- Economic
- Environmental
- Social (labour, human rights, society, product responsibility)
GRI Content Principles
- Stakeholder inclusiveness
- Sustainability context
- Materiality
- Completeness
GRI Quality Principles
- Accuracy
- Balance
- Clarity
- Comparability
- Reliability
- Timeliness
Internal Stakeholder
Intimately connected to the organisation and are likely to have a strong influence, such as managers or employees.
Connected Stakeholder
Either invest in or have dealings with the firm, such as shareholders, customers, suppliers and finance providers.
External Stakeholders
Do not have a direct link but can have an influence on activities, such as the wider community, environmental pressure groups, government and trade unions.
Stakeholder Analysis
- Who are the stakeholders?
- What are their needs?
ILO Conventions
Establish norms covering all aspects of working conditions and industrial relations. Binding agreement.
The ILO Tripartite Declaration of Principles Concerning Multinational Enterprise and Social Policy
Global intrument designed to provide guidance to government, employer and worker organisations in areas of employment, training, conditions of work and industrial relations. Non-binding agreement.
The ILO Declaration on Fundamental Principles and Rights at Work
Based on ILO Conventions, it is a mechanism for annual review. Non-binding agreement.
The 1992 Rio Declaration
Sets out 27 principles defining the rights and responsibilities of states in relation to human development and well-being.
The Johannesburg Declaration on Sustainable Development (2002)
States that the private sector has a ‘duty to contribute to the evolution of equitable and sustainable communities and societies’, and that ‘there is a need for private sector corporations to enforce corporate accountability’.
UN Global Compact
10 Principles which companies are invited to embrace, support and enact:
- Human rights (6)
- Environment (3)
- Anti-corruption (1)
OECD Guidlines
Non-binding recommendations from governments to address concerns of the negative impact multi-national organisations were having globally, particularly on developing countries.
A Contract
Legally enforceable agreement.
Subject to Contract
Parties have agreed in principle to the terms but the matter is still in the negotiation stage and therefore not legally binding.
A Deed
Formalise transactions which are signed and also attested to by a witness.
An Offer
A statement of the terms on which the offeror is willing to be bound to and, if accepted, an agreement is made. The offeror may revoke the offer at any point until acceptance/signature, and the offeree can reject the offer.
Consideration
Price by which one party bought the other party’s act of promise. In most jurisdictions a consideration is required, but a contract made by deed does not require one (unless its terms state otherwise). The parties do not need to agree equal consideration, and if a contract is under deed then a promise by one party will be sufficient in creating a legally binding agreement.
Executory Consideration
An act/promise to be fulfilled in the future.
Executed Consideration
An act/promise that has been fulfilled.
Past Consideration
Have no value and are therefore not a consideration as the work is already done.
Misrepresentation
If one party mislead the other then the contract may be voidable. It does not include overly optimistic statements, opinions honestly held, or expressions of hope of intention.
Silence
Cannot amount to misrepresentation as there is no duty to disclose facts.
Express Terms
Are explicitly mentioned and agreed to by the parties at the time of contracting, either in writing or orally.
Implied Terms
Not mentioned expressly by any contracting party but are in fact included as the contract does not make commercial sense without them:
- Implied by courts
- Implied by legislation
- Implied by custom and usage
Terms
Can be classified as conditions or warranties.
A Condition
Fundamental term going to the very root of the contract, they are the primary obligations of the parties. It may not lead to outright termination, but the innocent party would have a right to choose how to proceed.
A Condition
Fundamental term going to the very root of the contract, they are the primary obligations of the parties. It may not lead to outright termination, but the innocent party would have a right to choose how to proceed.
A Warranty
Term of relatively minor importance where the innocent party are not entitled to repudiate the contract but may be able to claim damages.
Simple Contract
Does not need to be in any particular form to be binding.
Summary Dismissal
Dismissal without notice.
Wrongful Dismissal
Where the employer terminates the contract, usually resulting in summary dismissal.
Unfair Dismissal
Employer terminates the contract without justification. The employee can attempt to prove unfair dismissal in the courts to receive compensation.
Analysing Cases of Dismissal
- Conduct
- Capability
- Breach of statutory duties
- Redundancy
- Other, e.g. dishonesty
Diversity & Discrimination
- Direct, e.g. only accepting applications from men
- Indirect, e.g. requiring men to be clean shaven may disadvantage those from religious groups
Disciplinary Procedures
Written rules and processes that take place if those rules are breached. Staff should be briefed on these rules and procedures.
Corruption & Bribery (Facilitation & Conflict of Interest)
- Bribery, the giving or receiving something of value to influence a transaction
- Facilitation payments, additional fees to encourage officials to perform functions they wouldn’t normally perform
- Conflict of interest, where an employee has a duty to act on behalf of an employee AND has an economic or personal interest in the transaction
Money Laundering
- Placement
- Layering
- Integration
Sole Tradership / Practitionership
One person is fully responsible for putting in the capital and expertise of the business. If the business fails, that person is fully liable for the debts of the business.
Partnerships (sometimes Firms)
Multiple persons working on a business in common with a view to profit. No formalities are required to form general partnerships.
Limited Liability Partnerships (LLPs)
Require documentation and registration to form and are typical for larger firms who need a more formal partnership agreement. An LLP is a seperate entity so outside parties contract with the LLP, not its members. The tax burden falls on individual partners, not the LLP as a whole.
LLP vs LTD
LLPs are much more flexible than a company as there are no complex statutory requirements for meetings of members, board of directors, etc. The LLPs largely organise themselves between partners, and if they do have a written agreement it can be confidential and not made public.
Corporation
In law a person in its own right. It can own property, sue counterparties and accumulate debt.
Limited Liability
Members of a corporation have limited liability in that it is the company that is liable for its debts, not the members. Unless the company has been run dishonestly, shareholders/directors/managers will not be culpable for making customers whole.
Unlimited Liability
Other side of limited liability, the company has unlimited liability and creditors may pursue their claims against the company and its assets.
Perpetual Succession
Because the company owns all the assets, if one member or shareholder leaves the organisation then there is need to transfer any part of its assets.
Holding (Subsidiary) Companies
A company that owns shares in a subsidiary company and influences it by either controlling the composition of the board of directors or holding more than half the equity share capital.
Quoted Companies
Public companies whose securities are listed for buying or selling on a recognised stock exchange.
Community Interest Companies (C.I.C)
To establish social enterprises, the company’s objective must be considered by a reasonable person to be to the benefit of the community and any surpluses made by the company should be re-invested for the purposes of the company.
European Companies
Operate in at least two member states of the EU but given tax laws are not harmonised across the bloc they have not proved overly popular.
Small Companies
Need not report their annual reports or be professionally audited if:
- Turnover does not exceed $6.5M
- Balance sheet assets do not exceed $3.26M
- No more than 50 employees on average
- Sales of less that $350k do not require an audit
Registering a Company
Documents submitted to central registration office (Registrar of Companies):
- Proposed name of the company
- Memorandum of association which records the intention of each initial subscriber
- Type of company
- Details of the registered office
- Share capital (how many, class of shares, nominal value)
- Names of directors
- Names of shareholders
- Registration fee
Off-the-shelf-companies
Companies ready-made with nondescriptive names which can be easily changed:
- Cheap
- Trade immediately
- No problem of preincorporation contracts
Articles of Association (Actions)
Regulate the internal affairs of the company:
- Meetings
- Voting and other rights of shareholders
- Transfer of shares
- Dividends
- Position of directors and their powers of management
Certificate of Incorporation
- Registrar inspects documents to ensure that Companies Act is fulfilled
- Registrar issues certificate which is conclusive evidence of incorporation
- Company exists from the date of the certificate of incorporation
Companies Limited by Shares - Disadvantages
- On formation there are lots of administrative processes which can deter
- Disclosure requirements need to be registered at an office and be available for public inspection
- Many administrative requiresments are imposes such as keeping accounts
Companies Limited by Shares - Advantages
- Limited liability
- Perpetual Succession
- Agreement to the transfer of interests
Articles of Association (Description)
Describes the relationship between the company and its shareholders.
Memorandum of Association
Describes the company’s contractual ability.
Company Limited by Guarantee
Members guarantee the company’s debts up to a certain limit and they are required to file annual returns at the Registrar’s office and have their accounts audited.
