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P1 - Governance, Risk and Ethics > Short Definitions > Flashcards

Short Definitions Flashcards

1
Q

One of the 9 key concepts in corporate governance is “responsibility”
Explain what is meant by “responsibility”

A

– honesty in financial reporting
– the image of believable, reliable financial reporting in the minds of both internal and external stakeholders (probity)
– the base upon which the company’s ethical norms are built

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2
Q

What are the seven stages of taking a decision in a situation of ethical dilemma according to the American Accounting Association?

A 
– integrity
– objectivity
– competence
– confidentiality
– professional behaviour
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3
Q

The main principles of the UK Corporate Governance Code 2010 are sub-divided into 5 areas. What are those areas?

A 
– leadership
– effectiveness
– accountability
– remuneration
– relations with shareholders
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4
Q

Following the Sir David Walker and the FRC review of corporate governance in 2010 reached two main conclusions.
What were those two conclusions?

A

The two main conclusions drawn in 2010 by the Walker / FRC review were:
– much more attention needs to be paid to following the spirit of the Code as well as the letter, and
– the impact of shareholders in monitoring the Code would be improved by better interaction between the boards of listed companies and their shareholders

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5
Q

Give at least 4 examples of “agency costs”

A

– remuneration packages for directors
– incentive schemes for directors and senior management
– costs of communication of matters in financial reports
– costs of meetings with financial analysts and institutional shareholders
– costs associated with acceptance by the board of higher risk activities than shareholders are happy to accept
– costs of establishing and using monitoring procedures

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6
Q

What is meant by the expression “agency costs”

A

The expression agency costs refers to all those costs incurred by a principal associated with the monitoring of the behaviour of the agent and is often linked with a lack of trust in the good faith of the agents

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7
Q

In the context of agency theory, explain what is meant by the term “fiduciary relationship”

A

In the context of agency theory, a “fiduciary relationship” exists between a principal and an agent such that the agent has a duty to act in good faith in the interests of the principal. In addition, the agent should act with due skill, care and diligence when carrying out their delegated tasks

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8
Q

Define the term “stakeholder”

A

A stakeholder is any person or group that can affect or be affected by the policies or activities of an organisation

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9
Q

List 5 external stakeholders of a public company

A

– the auditors
– the regulators
– Government
– the Stock Exchange
– small investors – in there to make a quick profit on their investment (hopefully!)
– institutional investors – in there for the long term hoping for substantial capital growth

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10
Q

List 5 internal stakeholders of a public company

A

– the board of directors including executive and non-executive directors
– the company secretary
– the management (below board level – responsible for implementing the strategic decisions of the board)
– employees
– trade unions

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11
Q

One of the 9 key concepts in corporate governance is “integrity”
Explain what is meant by “integrity”

A

– the strict adherence to an appropriate moral or ethical code
– the highest standards of professionalism and business probity
– a basic element of any agency relationship

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12
Q

One of the 9 key concepts in corporate governance is “decision making using appropriate judgement”
Explain what is meant by “decision making using appropriate judgement”

A

– the ability to reach and communicate meaningful conclusions
– the ability to consider a number of alternative courses of action giving appropriate weight to each of those alternatives in reaching a decision
– the development of a non-judgemental, ethically moral approach to business and personal relationships

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13
Q

One of the 9 key concepts in corporate governance is “reputation”
Explain what is meant by “reputation”

A

– development and maintenance of personal reputation through personal conduct
– development and maintenance of an ethical corporate attitude
– development and maintenance of an ethical accountancy profession

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14
Q

One of the 9 key concepts in corporate governance is “accountability”
Explain what is meant by “accountability”

A

– accounting for the situation of the company as a result of acceptance of responsibility
– provision of clear, unambiguous communication with internal and external stakeholders
– development and maintenance of risk management and control systems

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15
Q

One of the 9 key concepts in corporate governance is “honesty” or “probity”
Explain what is meant by “honesty” or “probity”

A

– honesty in financial reporting
– the image of believable, reliable financial reporting in the minds of both internal and external stakeholders (probity)
– the base upon which the company’s ethical norms are built

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16
Q

One of the 9 key concepts in corporate governance is “independence”
Explain what is meant by “independence”

A

– neds being free from the influence of the executive board
– freedom of the executive board from the operational activities
– the ability of the board members to put the interests of the company ahead of their own personal interests

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17
Q

One of the 9 key concepts in corporate governance is “transparency”
Explain what is meant by “transparency”

A

– the creation of an open relationship with shareholders in an attempt to reduce agency costs
– the development of accounting systems to make this openness easier to achieve
– not withholding relevant information (except where necessary!)
– openness in strategic decision making thus assisting in the development of an appropriate culture throughout the organisation

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18
Q

One of the 9 key concepts in corporate governance is “fairness”
Explain what is meant by “fairness”

A

– a sense of equality in the company’s dealing with internal stakeholders
– a sense of even-handedness in dealing with the company’s external stakeholders
– an ability to reach an equitable decision in a situation involving ethical conflict

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19
Q

There are 9 identified key concepts in corporate governance. What are they?

A 
– honesty / probity
– accountability
– integrity
– responsibility
– decision making using appropriate judgement
– reputation
– independence
– fairness
– transparency
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20
Q

The concept of corporate governance involves both purposes and objectives. What is the primary objective of corporate governance?

A

The primary objective of corporate governance is to contribute to improved corporate performance and accountability in creating long-term shareholder value

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21
Q

The concept of corporate governance involves both purposes and objectives.
What is the basic purpose of corporate governance?

A

The basic purpose of corporate governance is to monitor those parties within a company which control the resources owned by investors

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22
Q

The Cadbury Report recognised that groups beyond a company’s shareholders were interested in a company’s activities. How are these “other groups” generally referred to?

A

Groups of persons, including shareholders, interested in a company’s welfare are collectively known as stakeholders

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23
Q

How is “Corporate Governance” defined?

A

Corporate Governance is defined as “the system by which companies are directed and controlled”

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24
Q

Social footprint evaluates sustainability in three areas of capital. What are those three areas?

A

– social capital
– human capital
– constructed capital

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25
Q

What is meant by the expression “environmental footprint”

A

By “environmental footprint” is meant the attempt to evaluate the extent of a company’s impact on the environment and, in particular, the company’s consumption of resource, the extent of harm to the environment caused by company emissions and a measure (quantitatively or qualitatively) of resource usage and pollution emitted

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26
Q

Environmental reporting is an increasingly fashionable topic and also environmental audits. What are the ten main areas to cover within an environmental audit?

A

– waste management and waste minimisation
– emissions into the air
– the protection of ground and groundwater
– the management of surface water
– the consumption of energy
– the protection of environmentally sensitive areas
– environmental emergencies
– the stewardship of products and services
– the control of visitors
– any issues particular to the locality

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27
Q

In the context of taking decisions in a position of ethical dilemma, Tucker’s model provides a fie question approach. What are those five steps?

A 
Tucker’s five step model involves:
– profitability
– legality
– fairness
– ethics
– environmental acceptability
28
Q

One of the offences under the Bribery Act is a failure by a company to institute procedures to prevent bribery. The Act identifies six principles to assist a company to decide if they need to implement changes to existing procedures. What are those six principles?

A

– proportionality
– company culture of total non-acceptance of bribery
– assessment of associated risks which could face the company
– communication of policies and procedures to all staff and sub-contractors
– due diligence on the character of those with whom the company is dealing
– monitoring and review of the company’s procedures to assess appropriateness and effectiveness

29
Q

What are the four offences identified by the Bribery Act?

A

– offering or giving a bribe
– asking for or accepting a bribe
– bribing a foreign public official
– failure to prevent bribery (a company offence)

30
Q

With reference to the philanthropic responsibility element of CSR, what three points could you make to illustrate the concept?

A

– a company, in trying to improve the lives of others, could take voluntary, discretionary action
– the granting or support of recreational facilities or as giving charitable cash donations
– sponsorship/promotion of cultural activities

31
Q

With reference to the ethical responsibility element of CSR, what three points could you make to illustrate the concept?

A

– the company needs to do what is right, just, fair and equitable
– by doing so, the company is affirming the acceptance by the company of its role in society
– acceptance of an ethical social concept goes beyond the simple compliance of economic and legal considerations

32
Q

With reference to the legal responsibility element of CSR, what two points could you make to illustrate the concept?

A

– a company must obey the laws of society if society is to continue and not disintegrate into anarchy
– companies are no different than natural persons in the accepted requirement of obedience of the law

33
Q

With reference to the economic responsibility element of CSR, what three points could you make to illustrate the concept?

A

– shareholders demand a reasonable return
– employees want a safe environment and fair pay for their work
– customers are entitled to quality at a fair price

34
Q

List 4 reasons to support the idea of developing and applying a code of corporate governance

A

– reducing the incidence of fraud and corruption
– poor governance leads to poor performance
– a premium may be received on the event of a takeover if company is well governed
– institutional investors consider critically the existence of governance code compliance
– good governance reduces risk/helps to avoid disastrous potential losses

35
Q

One of the main principles of the UK Corporate Governance Code 2010 is “remuneration”
Provide 4 ideas to explain more fully this main principle

A

– remuneration levels should be sufficient to attract, retain directors of appropriate skills,
– a company should seek to avoid paying in excess of the levels needed to attract, retain and motivate
– portion of director’s remuneration should be linked to performance
– formal/transparent procedure for developing remuneration policy
– no director should be determining their own remuneration level

36
Q

One of the main principles of the UK Corporate Governance Code 2010 is “accountability”
Provide 3 ideas to explain more fully this main principle

A

the board should:
– present a balanced and understandable assessment of the company’s performance, position,
– establish formal/transparent procedures for consideration of their approach to the application of corporate reporting and risk management
– establish procedures for ensuring that an appropriate relationship is maintained with external auditor
– the board is responsible for determining the nature and extent of significant risks which it is willing to take in achieving its strategic objectives

37
Q

One of the main principles of the UK Corporate Governance Code 2010 is “effectiveness”
Provide 4 ideas to explain more fully this main principle

A

– the board and its sub-committees should have an appropriate balance of skills
– there should be a formal, thorough and transparent procedure for the appointment of new directors
– directors should be able to allocate sufficient time to company to discharge their responsibilities effectively
– directors should be: given a induction course when joining / be able to update their knowledge on regular basis

38
Q

One of the main principles of the UK Corporate Governance Code 2010 is “leadership”
Provide 4 ideas to explain more fully this main principle

A

– every company should be headed up by an effective board of directors, collectively responsible
– there should be a clear division of responsibilities at the head of the company.
– no individual director, nor group of directors, should have unlimited authority
– in a unitary board the NEDs should constructively challenge and assist in the development of strategy

39
Q

Within Kohlberg’s level 1, there are two stages. What is involved in each of those two stages?

A

Within Kohlberg’s level 1 the two stages are (1) obedience and punishment and (2) purpose and exchange

40
Q

The influence of accounting is claimed to be limited as regards ethical and other areas in five ways. What are those five ways?

A

– long-term relationships with clients
– a focus on growth and profit
– conflicts of interest when providing non-audit services
– the size of accountancy firms with an associated loss of the “personal touch”
– the extent of organisational reporting and in particular, the reporting by organisations in financial difficulty

41
Q

Define “professionalism”

A

“Professionalism” is defined as “taking action to support the public interest”

42
Q

Define “profession”

A

“Profession” is defined as “a body of theory and knowledge which is used to support the public interest”

43
Q

According to Gray, Owen and Adams there are seven positions on social responsibility. What are those seven positions?

A 
– pristine capitalist
– opportunist
– social contractor
– social ecologist
– socialist
– radical feminist
– committed ecologist
44
Q

Within Kohlberg’s level 3, there are two stages. What is involved in each of those two stages?

A

Within Kohlberg’s level 3 the two stages are (1) social contract and individual rights and (2) universal ethical principles

45
Q

Within Kohlberg’s level 2, there are two stages. What is involved in each of those two stages?

A

Within Kohlberg’s level 2 the two stages are (1) interpersonal accord and conformity and (2) social accord and system maintenance

46
Q

Lawrence Kohlberg’s theory involves three levels. What are those three levels?

A

Lawrence Kohlberg’s theory involves the three levels of:
– pre-conventional,
– conventional and
– post-conventional

47
Q

Under the teleological approach to an ethical dilemma, there are two perspectives from which the consequences may be viewed. What are those two perspectives?

A

Under the teleological approach to an ethical dilemma, the two perspectives from which the consequences may be viewed are “egoism” and “utilitarianism”

48
Q

What are the three tests to be applied when determining the moral acceptability of an action? If all three tests are satisfied, the action is classed as morally right

A

The three tests to be applied when determining the moral acceptability of an action are:
– consistency
– human dignity and
– universality

49
Q

What is meant by the expression “a teleological approach to ethics”?

A

The expression “a teleological approach to ethics” is alternatively described as a “consequentialist” approach where the ethics of a decision are dependent upon the outcome rather than the motivation for the decision. Another name for this approach is the “instrumental” approach

50
Q

What is meant by the expression “a deontological approach to ethics”?

A

The expression “a deontological approach to ethics” is alternatively described as a “non- consequentialist” approach where the motivation or principle is important in determining the course of action to be followed rather than the consequences. Another name for this approach is the “normative” approach

51
Q

In the context of ethical theories, what are the characteristics of an relativism belief system?

A

– a wide variety of acknowledged ethical beliefs and practices
– such that what is correct in any given situation is dependent upon the prevailing conditions

52
Q

In the context of ethical theories, what are the characteristics of an absolutism belief system?

A

– unchanging and unquestionable set of moral rights or precepts
– which hold true in all situations
– and are common to all societies

53
Q

What are the nine business risks mentioned in the ACCA study guide?

A 
– business probity
– reputation
– technological
– health and safety
– liquidity
– credit
– legal
– market
– derivatives
54
Q

hat are the key principles of Enterprise Risk Management?

A

– consideration of risk management in the context of the company’s business strategy
– risk management is everyone’s responsibility with leadership from the top
– the creation of a risk aware culture
– a comprehensive approach to risk management
– consideration of risks at all levels – strategic, tactical and operational
– a focussed strategy of embedding risk within the company culture

55
Q

Define “Enterprise Risk Management”

A

“the process effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives”

56
Q

In the context of risk management, we come across the acronym ALARP
What does the acronym stand for?

A

In the context of risk management, the acronym ALARP stands for As Low As Reasonably Practicable

57
Q

The audit committee has the responsibility for overseeing the company’s relations with its external auditors. Specifically, what is involved in this responsibility?

A

– recommending on the appointment, re-appointment or removal of the auditors
– oversee the selection process when new auditors are being considered
– approve the terms of the external auditor’s engagement and their remuneration
– establish procedures for ensuring annually the independence and objectivity of the external auditors
– review the scope of the audit with the auditor, and satisfy themselves that the proposed scope is sufficient
– ensure that the company is ready for the visit of the auditors
– carry out a post completion audit review

58
Q

In addition to the five ethical threats to an external auditor’s independence, a number of other matters will point to a lack of independence. Name five other matters

A

– fee received from client exceeds maximum guideline
– beneficial interest in the success of the company (by way of shareholding)
– loans to / from the company
– gifts and benefits received from the company
– family members or close personal friends in position of influence at the company

59
Q

What are the five identified ethical threats to an external auditor’s independence?

A 
– advocacy
– self-interest
– intimidation
– familiarity
– self-review
(Asifs – those famous Pakistani cricketers)
60
Q

An internal auditor will adopt the same seven procedures in (a) risk management and (b) internal control improvement.
What are those seven procedures?

A 
– analyse
– identify
– report
– design
– recommend
– implement
– evaluate
61
Q

A mnemonic applicable for remembering the characteristics of “good” information is “accurate” To what do the letters in “accurate” refer?

A 
The letters in “accurate”, used for remembering the characteristics of “good” information, refer to the following:
– accurate
– complete
– cost-beneficial
– user-targeted
– relevant
– authoritative
– timely
– easy to use
62
Q

The Auditing Practices Board lists 8 internal controls, mnemonified as Oap Spasm. What are those 8 internal controls?

A 
– organisational
– arithmetic and accounting
– personnel
– supervision
– physical
– authorisation and approval
– segregation
– management
63
Q

The definition of “an internal control system” as provided by the Auditing Practices Board in the UK starts as “one which includes all the policies and procedures (internal records) adopted by the directors and management of an entity to succeed in their objective of ensuring, as far as practicable” How does it continue?

A

“…ensuring, as far as practicable, the orderly and efficient conduct of its business including adherence to internal policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records and the timely preparation of financial information”

64
Q

In the context of risk management, what are the four identified ways available to a company to manage any risk which faces the company?

A 
The four identified ways of managing risk are:
– transfer
– avoid
– reduce
– accept
65
Q

What is a “whistle-blower”?

A

A whistle-blower is a person who notifies relevant authorities about perceived breaches of external or internal rules or regulations

66
Q

The role of neds and, in particular, the audit committee is summarised by my mnemonic “Clarissa” To what do the letters in Clarissa refer?

A

Create a culture of discipline&control
Lend an air of credibility to the fin statements
Assist the CFO by providing a forum
Review the fin statements for potential improvements in presentation and disclosure
Independent attitude brought to their office
Strengthen the role of the internal auditors
Strengthen the role of the external auditors
Assist in dispute resolution between executive board and external auditors

P1 - Governance, Risk and Ethics (1 decks)

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