Preview

Accountants need to balance self interest and public interests. Successfully balancing this will lead to
economic rewards, self-regulation and autonomy.

Module 1: Accounting and Society 15 marks

Part A: Accountants as members of a profession

Public interest or self-interest? – pg 3

- Importance of accounting profession

- Accountants and serving the public interest (accuracy of information)
- Altruism (+ action that bring no benefit to individual and maybe at own expense)
- Enlightened self interest: Larson (1977) and West (2003)

Responsible decision making- pg 4

Components of external environment and list of accounting bodies and their functions – pg 5-7

(AASB, APESB, ASIC, ASX, AUASB, Corporations act 2001, CPA, FRC, IFAC, IFRS, etc)

Enlightened self-interest – pg 7

- Public + self interest

- Lee (1995) definition

Ideals of accounting – entrepreneurialism and professionalism – pg 8

- Ideals of accounting professionalism – Carnegie and Napier (2010) 4 Es (education, ethics,

expertise and entrepreneurship)
- De-professionalisation of accounting (only emphasis on entrepreneurship)

What is a profession? – pg, 9- 10

- Features, attributes and definition of profession (pg 10)

- Existence of a profession – Greenwood (1957) and 8 attributes of a profession – pg 10
- Benefits of autonomy- pg 11
- Self-regulation and co regulation – pg 11

The accounting profession – “Traditional” view and “Market control” view

- Traditional view of accounting profession (Ideal view) – pg 12

- Market control view (monopoly) – pg 12

Trust and professions

Arthur Anderson scandal led to Collapses of Enron, Worldcom, Hih –ex 1.4 pg 12-13
Ref ex. 2.13 pg 95, Q2.26 ans pg 384
How does the accounting profession meet the 8 attributes of a profession- pg 13-19

- 1. Systematic body of theory and knowledge – pg 13

- 2. Extensive education process – pg 14
- 3. An ideal of service to the community- pg 14
(Features/perspectives of service ideal – pg 14)
- 4. High degree of autonomy and independence- pg 15
(Co-regulation and professional discipline, Regulatory structure of CPA Australia and Co-
regulatory model for accounting profession in Australia )– pg 16
- 5. A code of ethics for members -pg 17
6.A distinctive ethos or culture – pg 17

CPA Australia -Vision - Our goal is to lead the future of the global accounting profession and develop

business professionals with tomorrow’s capabilities.

CPA Australia – Purpose - We’re partners for progress, strengthening trusted relationships with

members and communities.

CPA Australia –Ethos -The Ethos has the word INTEGRITY as its foundation

- 7. Application of professional judgement- pg 17-18

Situations to apply professional judgement – Q 1.5 pg 392
- 8. The existence of a governing body
(Role of governing body IFAC – pg 19)

Accounting professional and ethical standards board (APESB) – pg 19

- Organization which sets professional standards

- Role of APESB
- Force of law standards s296 and s307A- pg 20 Q1.7 ans
- (Sec.296 - compliance with accounting standards and regulation, the financial report must
comply with accounting standards)
- (Sec.307A- audit to be conducted in accordance with auditing standards)

Quality assurance process- pg 20

- Certificate of practice (members issued COP must sign yearly assurance of compliance with
quality control standards) and review done by CPA on a five year cyclical basis pg 19
- Accounting firm regulation (follow APES 320 quality control for firms and policies and
procedures) pg 21

Professional discipline- pg 23

Regulation of member conduct

- Complaints list against Members – pg 23

Penalties and appeals- pg 24

Part B: Interaction with society

Accountants key professional relationships- fig 1.4 pg 28

Accounting work environments (public, private, public sector, financial advice and not for profit
sector) – pg 29

a) Public practice types and roles –table 1.3 and 1.4 pg 29-30

Shift from compliance advice to profit oriented business advice in the case of SMEs – pg 31

Fortress enterprise mentality – pg 31

b) Private or business sector environment

CFO is being replaced by CVO- Chief Value Officer and its role- pg 32

PAIB roles in large businesses and SMEs table 1.5 – pg 31-32

Definition of SME as per IFAC- pg 32

c) Public sector environment (GBEs and SOEs) – pg 33

d) Financial advice (Additional certification such as financial adviser exam)-pg 34
e) Not-for-profit Sector Environment – pg 34

Social impact of accounting – pg 35

Key issues causing reduced credibility

- 1) Earnings Mgt. – pg 37
- (impact of higher and lower levels of depreciation- pg 38)
- 2) Creative accounting (capitalizing expenses and showing them as assets instead of writing
them off in the P&L)-pg 38
- 3) Poor audit quality – pg 38
- 4) Lack of auditor independence – pg 39
- 5) Financial accounting distortions/issues raised by IFAC (2003) – pg 39

Restoring credibility to accounting – pg 40

Technical skills, knowledge and experience (TSKE)

- Examples of technical skills – pg 41

Soft skills, knowledge and experience (SSKE)

- Examples of soft skills – pg 42

Module 2: Ethics Marks: 20

Part A: Professional ethics – pg 48

- 4 Ethical responsibilities of an accountant

Impact of ethical or unethical decisions

- As per APES 110,Role of members – pg 48

- ASIC surveillance in response to failure to report in accordance with acctg standards – pg 49
- Most frequent ethical issues encountered by accountants- fig 2.1 pg 52
- Reasons for misconduct- fig 2.2 pg 52
- Greenwashing is making misleading, false or exaggerated claims about environmental
consciousness – pg 53

Part B: Ethical theories

Ethics of character-pg 58

Ethics of conduct

- Teleological and deontological theories – pg 58

<Read the Key Points- pg 65-66>

Part C: APES 110 Code of ethics for professional accountants pg 67

- NOCLAR and depending on the professional activity members should report. Withdrawing
from the engagement or resigning from the employing organization are not substitutes for
the other actions that are required under NOCLAR- pg 67
- IFAC definition of public interest-pg 68
- Examples of responsibilities as per IFAC- pg 68
- Obligation of members in serving the public interest- pg 69
- By applying the Code of Ethics, accountants will be acting in the public interest- pg 69

Part 1 of the code: Fundamental principles and conceptual framework

Fundamental principles s110-115 (Applicable for all CPA members) ref pg 70. q2.5 pg 397

- Conceptual framework sets out a framework for resolving ethical issues

- Integrity S.111 (Windal) and in accounting – pg 70
o Trust, honesty, honorable, reliable and straightforward in professional and business
relationships
o Shall not knowingly be associated with reports, returns, communications or other
information that the member believes the information contains materially false or
misleading statement and provided recklessly and omits or obscures required
information
- Objectivity S.112 – pg 71
o Free from bias
o Undue influence
o Conflict of interest
(Meaning of Arm’s length – pg 71
- Professional competence and due care S.113 – pg 71-72
 o How to have professional competence (professional knowledge and skill based on
current technical and professional standards and relevant legislation)
o How to have due care (by acting diligently-carefully, thoroughly and on a timely
basis and in accordance with applicable technical and professional standards)
- Confidentiality S.114 and examples when disclosure of confidential information is allowed –
the best option is to first seek consent from client or employer. If no consent given, seek
legal advice pg 72
- Professional behavior S.115 – pg 72
o Comply with relevant laws and regulations
o To act in public interest in all professional activities and business relationships
o Avoid any conduct that the member might discredit the profession
- Statements attributed to ethical principles- Q2.6 – pg 397

Conceptual framework s120

- Conceptual framework deals with how a member should consider resolving ethical
challenges they confront- pg 269
- Steps to consider when determining whether there are any threats to the fundamental
principles – pg 74
o Identify threats to compliance with the fundamental principles
o Evaluate threats
o Addressing threats to or reduce them to acceptable level

- Conceptual framework approach- fig 2.8 pg 75

Identifying different types of threats-pg 76

- Self-interest, self-review, advocacy, familiarity and intimidation

(ex. of different types of threats- ref. q2.9-2.10(pg 76-77) ans. pg 399-400)

Threats to compliance with the fundamental principles fall into one or more of the following
categories:

(a) Self-interest threat – the threat that a financial or other interest will inappropriately influence a
Member’s judgement or behaviour;

(b) Self-review threat – the threat that a Member will not appropriately evaluate the results of a
previous judgement made, or an activity performed by the Member, or by another individual within
the Member’s Firm or employing organisation, on which the Member will rely when forming a
judgement as part of performing a current activity;

(c) Advocacy threat – the threat that a Member will promote a client’s or employing organisation’s
position to the point that the Member’s objectivity is compromised;

(d) Familiarity threat – the threat that due to a long or close relationship with a client, or employing
organisation, a Member will be too sympathetic to their interests or too accepting of their work; and

(e) Intimidation threat – the threat that a Member will be deterred from acting objectively because
of actual or perceived pressures, including attempts to exercise undue influence over the Member.

- Examples of threats table 2.6 pg 77-78 (any question relating to threats pls refer to this table)

- Evaluating a threat is to determine whether a threat is at an acceptable level- pg 79

- Evaluating threats for members in business and members in practice table 2.7 - pg 79

Addressing threats- pg 80 (Eliminating, applying safeguards, decline)

Safeguards is defined as actions that the member takes to reduce threats to compliance with the
fundamental principles to an Acceptable level. Safeguards may assist in mitigating or reducing
threats.

Part 2 & 3 of the code (Applicable for members in business and practice)

- Part 2 deals with 7 common situations that members in business may need to deal with
- Part 3 deals with 8 common situations faced by members in public practice
- 1) Circumstances of conflict of interests (ss210,310) – tab 2.9 pg 81
(conflict of interests safeguards) tab 2.10 pg 82
- 2) Remuneration, incentives, fees and other forms of payment(ss.240,330)- pg. 83
- Contingent fees prohibited in certain circumstances- pg 84
(Self-interests threats) tab 2.11 pg 84, safeguards tab 2.12 pg 84
(Commissions and soft dollar Benefits) – pg 85
- 3) Inducements, gifts and hospitality(ss.250,340) - pg 85

(factors to consider whether there is a threat- tab 2.13 pg 86)

(safeguards related to inducements – tab 2.14 pg 86)

- 4) NOCLAR requirements (ss260, ss360) – pg 87-90

- Laws and regulations relating to an employing organization/client, some may have a direct
and material impact on financial statements, some may not impact the financial statements
but could impact the ability to do business or could involve material penalties- pg 87
- Applying the NOCLAR regime fig 2.9- Pg 88
- NOCLAR for senior members in practice- pg 89
- NOCLAR for members in public practice- Pg 90
- What happens when there is a NOCLAR by your client in a jurisdiction when there is no legal
requirement to keep client confidentiality? -Q2.18 pg 91 ref ans pg 403
(In such cases, the member can proceed to report the matter to the appropriate authority as
he has protection from the law but he must seek legal advice. As far as all matters other than
NOCLAR, the confidentiality agreement can’t be breached as the member has signed a
confidentiality clause.)

Applicable to members in business (Code of ethics part 2)

- 5)Preparation and presentation of information s.220 pg 91

Pressures of earnings and balance sheet management- pg 91
Safeguards– pg 91
- 6) Acting with sufficient expertise (s.230) and safeguards-pg 92
- 7) Pressure to breach fundamental principles (s.270)-pg 92

Applicable to members in practice (Code of ethics part 3)

- 8) Professional appointments- pg 93
Matter of etiquette for proposed successor to communicate with predecessor
Where client consents for approval to contact previous auditor by new auditor-pg 94
Where clients do not consent for approval -pg 94 j
 Awareness of the principle of confidentiality even though consent has been given and should
be within the legal and ethical requirements-pg 94
Referrals should not be seen as invitation for takeover of the client- pg 94
- 9) Second opinions (s321) and safeguards- pg 94
Opinion shopping (For a favorable opinion)
Process of getting second opinion must be correctly followed-pg 94
- 10) Reviewing engagements within a practice (s.325)-pg 94
- 11) Custody of assets(s.350)- pg 95

Part 4: Applying the conceptual framework in the context of audit, review and assurance
engagement

Definition of independence- pg 95

- Independence is fundamental component of complying with fundamental principles of

integrity and objectivity -pg 95
- Independence of mind (internal to the practitioner) and in appearance (external to the
practitioner)-pg 95
- Common threats to independence and related safeguards(Audit & review engagement) –
tab 2.17 pg 99-100
- Why do non-audit services threaten independence? Q2.26 pg 102 Arthur Anderson case– pg
405-406

Part D: Ethical Decision Making

Influences on and individual – fig 2.11 pg 106

Whistleblowing- Ex. 2.17 pg 107

1. Individual factors – pg 107

- Cognitive ability to judge the ethical rightness of a situation
- Moral development
- Ethical courage
2. Organisational factors – pg 108
- Corporate culture
- Written policies, procedures and code of ethics- pg 108
- Areas which top management can influence organizational values-pg 108
- Consistency between words and actions of the top management- pg 108
3. Professional factors- pg 111
4. Societal factors- pg 111

Ethical decision-making models

- Heuristics – pg 113
1) APES GN 40 Ethical Conflicts in the Workplace – pg 113
- Structural approach to ethical decision making

2) Philosophical Model of Ethical Decision Making – pg 114 (4 questions to be answered)- pg 107

3) American Accounting Association Model – pg 115-116 ((7 steps of the model)

Module 3: Governance Concepts Marks : 25

- Governance is the system put in place to operate and control an organization- pg 121

Part A: Corporations

Key features of corporations and other companies

- Features of corporations (distinct advantages over sole traders and partnerships) – pg 123
- Types of corporations s.112 of the Corporations Act - table 3.1 pg 124
- Features of proprietary companies pg 124
a) Shares held privately by no more than 50 non-employees.
b) can’t offer shares/securities to the public.
c) shares can be issued to existing shareholders, employees or subsidiary companies.
d) may issue shares or corporate bonds to professional investors of not more than AUD$2
million in a 12 month period and to no more than 20 people
e) can be small or large proprietary companies qn 3.1 ans pg 412
Small proprietary company- if 2 of the 3 criteria are met- pg 412
1. Consolidated gross operating revenue is less than Aud 50 million
2. Consolidated gross assets are less than Aud 25 million
3. Company has less than 100 employees

Large proprietary company will be those that do not meet the above 3 requirements

- Features of public companies – pg 124

- Compliance requirements for all companies – No. of directors, Co secretary- tab 3.2 pg 125

Directors and other officers (duties of directors)

- List of 7 duties of directors – pg 126

- 1. Duty to avoid conflict of interest (DISCLOSE) –(refer examples of COI) pg 127
- 2. Duty to act in good faith in the corporation’s best interests – pg 127
- 3. Duty to exercise powers for proper purpose –(As per legislation and the constitution of
the corporation) pg 127
o E.g. of breach: Anti-competitive agreements
o Nominee directors (should act in the best interests of the corporation and not for
the interest of the nominator) – pg 127
- 4. Duty to retain discretionary powers (Jointly and severally responsible for mistake caused
by delegate, some duties are non-delegable) – pg 128
- Directors can be comfortable that they will not be exposed to vast array of mgt. induced
personal liabilities if below conditions are met
o Delegates, i.e managers need to be properly appointed by boards using
professionally accepted procedures as to competence and qualification of the
managers
o The board must carry out correct and on going oversight
- 5. Duty to act with care and diligence (duty of care based on type of director) – pg 128
o Apply the business judgement rule, 4 conditions
- 6. Duty to remain informed about company operations – pg 129
o Continuous disclosure regimes-pg 129
o Examples of information that could be market sensitive (ASX) – pg 129
o Situations where disclosure of information is required – pg 130
 - 7. Duty to prevent insolvent trading – pg 130
o Duty to ensure company can pay off debts
o Safe harbor provision (directors incurring debts while being insolvent) – pg 130
o Appointment of voluntary administrator (who takes full control of the company)
and to save the company and if not get better return for the creditors
o Last option is liquidation, that is winding up of the company
- Centro case (Relates to classification of $1.5 billion current liabilities to non-current. Failed
to disclose $1.75 billion of guarantees)
- James Hardie case (asbestos related claims, underfunded by $1.5 billion- pg 132, 133

Director Independence

- Features of independent directors (Not aligned with management or substantial

shareholder, free of any interests, position or relationship that might influence on issues
before the board, and acts in best interests of the company) – pg 134
- Categories of directors (Executive(ED) , non-independent and non executive director(NINED)
independent and non executive(INED)) – pg 134
- UK FRC’s independence requirements – pg 134-135
- Comparison of ASX Corp gov principles and recommendations with provision 10 of the FRC
in relation to director independence - q3.3 pg 412
- Company secretary role and responsibilities – pg 135, Q3.4 ans pg 413

Nature of corporations and division of corporate powers

- Definition of agency relationship – pg 136

- Situation of agency relationship in corporations – pg 136
- Powers of shareholders – pg 136 and q3.5 answer pg 413 (by section)
- Appointment of directors (By way of resolution passed in the general meeting or by directors
followed by subsequent resolution in the next AGM) – pg 136

Two strike rule for directors remuneration

- Two successive strikes of 25% or more of the votes for the acceptance of the remuneration
report will lead to a spill resolution. 50% or more of the votes at the spill resolution against
the remuneration report will lead to a spill meeting, where the directors have to offer
themselves for reelection and the spill meeting must be held within 90 days of the spill
resolution – pg 136
- Board powers pg 137
- CEO powers (Double agent role, agent to the shareholders and agent to the board) – pg 138

Theories of corporate governance

- Stewardship theory -pg 139

(Primary duty of directors is the interest of shareholders, directors will remain good stewards
and maintain their virtues over an extended period of time. Interests of other stakeholders are
addressed by relevant laws outside the boundaries of corporate governance)
- Agency theory – pg 139

(People have self-interested egoist approach, existence of relationship of agent and principal,
agents may pursue different goals from those of the principals due to which potential for conflict
arises, agents are in a position of power have better access and control over information
 (information asymmetry) and due to this they further their own interest. Interest alignment
(goal congruence) is a critical aspect of good governance

- Agency issues and costs – pg 140

o Monitoring costs (annual reporting and external auditing costs) incurred by
principal
o Bonding costs (costs to prove goal congruence ) incurred by the agent – pg 133 also
refer ex 3.5 pg 134
o Residual loss (excessive non-financial benefits, empire building, risk avoidance and
differing time horizons) incurred by the principal. Ex of residual loss- a) excessive
perquisites and non-financial benefits paid to directors and managers. This reduces
profitability and is borne by the principal. b) empire building- Where CEOS are more
interested in personal aggrandizement and have no congruence with the company
profitability. c) risk avoidance- managers may avoid high risk ventures to protect
their continued employment as they are comfortable with their fixed salaries. d)
differing time horizons- managers may be only interested in the firm until the
duration of their employment. If they are approaching retirement in the next two
years, they may seek to maximize gains based on those time frame

- Key aspects of agency relationships – Q 3.7 ans pg 414

- Stakeholder theory-pg 142
- CSR theory – pg 142-143

Part B: Corporate governance

- Governance is the system by which companies are directed and controlled, and
accountability and transparency are assured. -pg 145
- Governance= conformance + performance – pg 146
- Good corporate governance promotes investor confidence which is crucial for entities to
compete for capital

Governance and performance

- Good governance is a route to enhanced performance by way of clear roles of board and
mgt. Well constituted and high-performance oriented board can motivate mgt to greater
corporate performance - pg 147
- The role of accountants is to help the board make strategic decisions, understand its
appetite for risk and key drivers of performance-pg 147

Key components of Corp gov framework- (External gov. Internal Gov., Audit)- Ref fig 3.3 pg 148

Shareholders – pg 148
o Individual shareholders pg 149
o Institutional shareholders – pg 150
- Meaning of information asymmetry- Q3.8 Ans pg 414
- The board
- Role of board chair
o In UK, chair must be independent – pg 151
o In US, CEO and chair may be the same person, however this is changing – pg 151
- Primary functions of the board (Tricker model) – ref fig 3.4 pg 152
- Board responsibilities – tab 3.4 pg 152-153
 - The conformance and performance resp. of the board- pg 153 ref qn 3.9 ans pg 415
- Purpose of board committee – pg 153
- 5 Types of committees and composition of audit committees -pg 154-157
- Listed entities in the S&P all ordinates (500 Australian companies) required to have audit
committee – pg 154
- Listed entities in the ASX 300 index required to have audit committee and must comply with
structure and disclosure requirements of audit committee recommendation – pg 154
- As per SOX act all listed US companies must have an audit committee and comprise only
independent directors-pg 154
- Role and responsibilities of audit committee in US listed companies
- Benefits and limitations of audit committees – pg 155
- Enron audit committee shortfalls e.g. 3.8 – pg 156 Q3.10 answer pg 416
- Risk committee- pg 156
- Sustainability committee- pg 157
- Audit failure means negligence, incompetence, and lack of independence - pg 157
- Objective of regulation – pg 157
- Principles-based vs rules-based regulation – pg 158

Stakeholders

- Definition of stakeholders – pg 159

- Stakeholders’ fig 3.5 – pg 159
- Stakeholder relationships tab 3.5 pg 160-161
- Issues arising from stakeholder theory – pg 162
- Role of employees, suppliers and lenders, customers, management as stakeholders – pg 162-
163

Part C: Intl perspectives on Corporate Governance

Global push for improved governance

- Intense competition by large corporations- pg 166

- Need to attract lower cost of capital – pg 166
- Timely and easily accessible information- pg 166
- Shareholder activism (Aging population demands requirements of adequate retirement
financing, small shareholder ownership)-pg 166
- Global warming- pg 166
- UK corporate governance code- pg 167

Corporate governance events and responses worldwide- table 3.7 pg 167-168

Specific Australian changes since 2001

- Ramsay report (examines independence of auditors) – pg 168

- ASX Corporate Governance Principles and Recommendations – pg 169
- Corporate Law Economic Reform Program (CLERP) Act 2004 – pg 169
o Changes made post GFC:
 4 Audit reforms
 2 Financial reporting

Alternative International Approaches to Governance

 - Types of market-based and relationship-based systems – pg 170
- Characteristics of market-based systems – pg 170
- Why is it important to have full disclosure and transparency of information amongst all
shareholders? - Q3.11 pg 171 ans pg 416
- Strengths and weaknesses of market-based systems –pg 172 Q3.13 ans pg 416

Part D: Codes and guidance

G20 /OECD Principles of Corporate Governance

- The principles are not written for companies or directors but as guidance material for
governments to make laws and regulations- pg 178
- Principles I-VI – pg 178 to 185
- ASX Corporate Governance Principles – pg 187
- There are 8 principles and 35 recommendations and 3 additional recommendations
- Noncompliance is generally permitted but must be identified and explained In the
company’s corporate governance statement which is disclosed in its annual report/website
- Principle 1 (7 Recommendation): Lay solid foundations for mgt and oversight – pg 188-189
- Principle 2 (6 Recomm) : Structure the board to be effective and add value– pg 189, 190
o 2.1 Must have a nomination committee – pg 189
o 2.5 The majority of directors should be independent. The chair of the board should
be an independent director and not the same as the CEO.
o Factors relevant to assessing independence of directors- fig 3.6 pg 190
- Principle 3 (4 recomm) : Culture of acting lawfully, ethically and responsibly – pg 191
- Principle 4(3 recommendations): Safeguard the integrity of corporate reports – pg 191-192
o 4.1 Must have an audit committee – pg 191
o The audit committee must have at least 3 members, all of whom are non-executive
directors and a majority of whom are independent directors
o 4.2 Before approving the financial statements, the board must receive from its CEO
and CFO a declaration that financial records have been properly maintained and
financial statements comply with the appropriate accounting standards and give a
true and fair view of the financial position and the performance of the entity
- Principle 5(3 recommendations): Timely and balanced disclosure (material effect of value of
securities) – pg 192, 193
- Principle 6(5 recommendations): Respect the rights of security holders – pg 193
- Principle 7(4 recommendations): Recognize and manage risk– pg 193,194
o 7.1 Must have a committee to oversee risk – pg 193
o 7.3 should disclose it has an internal audit function- pg 194
- Principle 8(3 recommendations): Remunerate fairly and responsibly – pg 194
o 8.1 Must have a remuneration committee – pg 194
- Additional recommendations – pg 195
o 9.1 Listed entities with directors who do not speak language meetings are held or
documents are written should disclose the processes
o 9.2 Meetings for listed entities established outside of Australia are held at
reasonable place and time
o 9.3 Attendance of auditors to meetings for listed entities established outside of
Australia

Part E: Non-corporates and governance

Family-owned businesses and SMEs – pg 196

- Agency problem is not normally an issue for family-owned businesses and small companies
as ownership and mgt are the same, hence the principal agent relationship does not exist
- Conflict between family members cause significant risks
- Involvement of external accountants can overcome some of the resource limitations in
ensuring good corporate governance

Not-for-profit organizations

(a) Charities and other NFP organizations such as

b) sports and recreation clubs,

c) community service organizations,

d) professional and business associations

e) social organizations

- Similarities between NFPs and profit-oriented entities (solvency, strategy and performance,
committee structure for large NFPs, director liability) – pg 197

Results of better governance by public sector enterprises – pg 200

6 Core values for public sector employees- pg 203

Module 4: Governance in Practice Marks: 25

Part A: Corporate governance success factors

- Reducing the risk of financial failure – pg 218

Common causes of corporate failure

- 6 Main causes of governance failure – pg 218 (1) Poor strategic decisions, 2) greed and
desire for power, 3) overexpansion and ill judged acquisitions, 4) dominant CEOs, 5) failure
of internal control and 6) ineffective boards)
- Corporate culture of Enron – pg 219
- Series of corporate failure cases documented by KPMG – pg 219
- 9 principal causes of corporate failure as per KPMG- pg 219
- Other issues linked to governance failures
- a) remuneration- (Linking too much remuneration to excessive risk taking without punishing
failures)
- b) willful blindness
- c) poor risk management (Lack of understanding of complex financial instruments)
- How does remuneration contribute to corporate failures?-pg 220
(1) Linking too much remuneration to excessive risk taking, focusing remuneration too
closely on short term performance while ignoring long term sustainable and reliable
growth and profits. No punishment of failures.
(2) Excessive remuneration leads to lower profits available for the shareholders. This is the
residual loss agency costs.
- Willful blindness (refers to situations where individuals seek to avoid their legal liability for a
wrongful act by deliberately putting themselves in a position where they are unaware of
facts that will make them liable.) – pg 220
- Poor risk management (ex. barings bank collapse and the LIBOR scandal) – pg 220

Selection, monitoring, evaluation and cessation of board appointments

- Appointment of directors – pg 221

- Election of directors – pg 221
- Staggering and De-staggering– pg 221

(Advantages of staggering approach ensures preservation of corporate memory and consistent

decision making. Benefit of destaggered approach is it enhances director accountability and
shareholder power)

- Election exemption exists for managing director/CEO and may never face a shareholder
election -pg 222
- Departures – pg 223
- 3 ways of Removal of directors – pg 223
- How voting is carried out and notice period required for removal of directors- pg 224
- Two-strikes rule relating to remuneration (spill the board)–pg 224 ,[Link] 225 q4.1- pg 419
- Disqualif. can be automatic or by a court order or through regulatory agencies– pg 225-226
 - When a person is declared bankrupt, or has committed criminal offences involving breaches
of laws governing corporations will be automatically disqualified for a period of 5 yrs- Also
offences relating to dishonesty will usually automatically disqualify a person from serving as
director. -pg 226
- Disqualification may also occur because of an order of the court due to misbehavior of
director and could be as long as 20 yrs
- Ethics of disqualification – pg 226
- Diff. between disqualification by courts (ASC) and automatic disqualification. –pg 226 ref
q4.2- pg 419

Diversity – fairness and performance

- Advantages. of gender diversity (as per research, at least some female representation in the
board outperformed those with no women on board in terms of share price performance) –
pg 228
- Gender diversity also achieves sound economic reasons as well as social justice rationale
- Diverse boards can have a positive impact- pg 228
- Clawback refers to the ability of a company to recover previously paid bonuses or incentives
from an employee if certain negative conditions are met, like misconduct or poor
performance
- Malus means reducing or adjusting an employees bonus or incentive pay before it vests,
typically due to negative company performance or specific triggers, essentially acting as a
“negative bonus”.

Remuneration for directors

- Non-executive directors (Remuneration based on time dedicated to the corporation and not
on performance achieved, nor incentive based). This is to maintain independence – pg 231
- Executive directors and other senior executives (fixed and at risk remuneration components)
- pg 231-232
- Who should be on the remuneration committee – pg 232

(as per FRC, only independent directors should be in the remuneration committee. As per
ASX Principles, permit executives to be in the remuneration committee but Principle 8 states
that no individual director or senior executive should be involved in deciding his/her own
remuneration)-pg 232

- Performance-based remuneration, clawback– pg 232

- Noticeable reduction in the size of golden handshakes recently. Laws have been changed so
that any termination payment exceedingly more than 100% of the executives 12-month
fixed pay would need shareholder approval– pg 233
- Lessons from the GFC- pg 234
- Directors and members compliance with the corporations act- pg 235-236
- Window dressing (to make financial statements look more favorable to stakeholders than
they otherwise might if the company had accounted for transactions appropriately) – pg 236
- Earnings management (deferring or bringing forward income or expenses so that the
business engineers a more positive financial result. It is presenting the company’s results in a
misleading way) – pg 236
-

Auditing the financial statements

 - The role of auditors of general-purpose financial statements – pg 236
- Audit quality – pg 238

4.2 Improving corporate governance

a) Risk management – pg 240

 Maximize opportunities and minimize losses

 The culture, processes and structures to optimize the management of potential
opportunities and adverse effects
 To identify, analyze, evaluate, treat, monitor and communicate the information gathered for
the benefit of the company
 As per OECD, the failure to properly identify and manage risks was central to the GFC
 Good risk control should give superior performance but bad risk understanding have
resulted in financial disasters

Meaning of internal control- pg 241

 Reliability of financial reporting

 Effectiveness and efficiency of operations
 Compliance with laws and regulations
 SOX 404 requirements to be complied with for US listed companies

b) Independence of the chair of the board – pg 242

 As far as possible as per OECD, CEO and the chair of the board should be separated. If they
are not separate person’s, by designating a lead non-executive director to convene or chair
the sessions
 If not separated, it is important to explain the measures to avoid conflicts of interest to
ensure integrity of the chairman function
 In Australia as per ASX CGC recommendation 2.5, the chair of the board of a listed entity
should be an independent director and the same person should not be the CEO of the entity

Part B: Operational obligations and oversight

Proof, penalty and redress- Criminal and Civil – pg 251-252

- Civil law deals with disputes between individuals or organizations (Civil rights, breaches of
contract) while criminal law focusses on offenses against the society as a whole (murder,
drug supply, corporate crime)
- Criminal prosecution (against the accused) has to prove beyond reasonable doubt.
- Civil cases, the plaintiff must establish their case on balance of probabilities
- Plaintiff means a person who brings a case against another in a court of law.
- Once a criminal case has been proved beyond reasonable doubt, civil action can’t be
commenced because the level of proof for civil cases is lower. Criminal cases always have
state authority as the prosecutor.
- Civil (balance of probabilities). The person with the case that is determined to be stronger in
relation to the relevant law will win. Neither party will be punished by jail or fines in a civil
case as these apply only in criminal cases. In civil cases the court may award damages to the
injured party or apply injunctions, or make orders such as rescission (Revoking or annulling)
 of contracts. In recent decades, civil penalties or pecuniary penalties are being applied.
Pecuniary penalties are payable to the STATE, just like fines in criminal cases
- Injunction means a court order compelling a party to undertake or refrain from undertaking
a specific act

Differences between Pecuniary penalties & fines – pg 253

Redress vs Penalties – pg 253

Fines and penalty units- the value of a penalty unit is $313, so if 5000 penalty units is equal to AUD
$1,565,000 – pg 254

Legal compliance and governance

- Costs associated with wrongdoings – pg 255

- why have a compliance program as per professor Fels – pg 256
- Purpose and benefits of compliance programs – pg 256
- Occupational health and safety, fair working condition and leave entitlements – pg 257-260
- Employee obligations to employers- pg 261

Trade unions – pg 261

 Trade unions achieve collective representation of employee interests through collective

bargaining with employers
 Industrial action can take form by go-slow, work to rule (workers performing their duties
with over attention to strict detail compared to normal workplace practices causing
deliberate difficulties for employers) and strikes

Protecting the goods and services market

- Competition policy (Deter monopolistic and anti-competitive practices) – pg 262

- Requirements of workable competition – pg 262
- Competitive advantage – pg 263
- Downside of monopoly and benefits of competition- pg 263-264
- Legislation and regulators of countries – pg 264 (Aus competition & consumer commission)

Regulating anti-competitive behaviour

- 1) Abuse of market power – pg 264,

a) Eliminating or substantially damaging a competitor

b) preventing the entry of a person into that market

c) deterring or preventing a person from engaging in competitive conduct

Predatory pricing (Supply of goods and services below cost price over a period of time)- pg
265
- 2) Mergers and acquisitions (Regulations are in place that prohibit or limit M&A unless they
are formally approved) – pg 267
- 3) Cartel conduct and collusive behavior – pg 267
- In Australia, cartel conduct in recent times are subject to criminal sanctions such as fines and
jail terms
- Cartel behavior is categorized into below 4 types of conduct
(Output restrictions, market sharing, bid-rigging, price-fixing)– pg 268
 - 4) Unilateral restrictions on supply (exclusive dealing) – pg 270 / third line forcing
- 5) Resale price maintenance – pg 271
(Loss leaders and problems for manufacturers of the loss leader product)– pg 271
- Caveat emptor to Consumer protection – pg 273
- Misleading conduct (Half-truths or omissions of relevant info) and representations – pg 274
- Puffery (Extreme exaggeration) & Unconscionable conduct – pg 275
- Data privacy- pg 278

Part C: Protecting financial markets and value in corporations

Role of markets

- Financial markets – pg 280

- Governance observations for corporations listed on the stock market – pg 280
- Role of market regulators (Austrac, Apra, Asx, Asic, Cfr, Rba) – pg 281

Protecting financial markets – pg 283

Insider trading- pg 283

- Stakeholders with inside knowledge – pg 284/ Chinese walls

- Tests to determine insider trading and high risk of insider trading – pg 284
- Reasons for protection rules on insider trading – pg 285

Market manipulation

- Definition – pg 285
- Types of market manipulation activities- pg 286
- Churning – pg 286, Pools, runs – pg 287
- Misuse of fundraising documents (what is a prospectus) – pg 287
- Bribery and corruption – pg 288, Rogue trading (barings bank, nick leeson) – pg 290
- Ponzi schemes – pg 290, Phoenix companies – pg 291
- SLACIP act- pg 292
- Shareholder representation –table 4.7- pg 293
- Whistleblower protection – pg 299
- Whistleblowers who are protected – pg 300
- IFRS S1 and S2 disclosure relating to sustainability related financial information- pg 302
Module 5: Corporate Accountability Marks: 15

Preview

- Definitions and examples of key terms – tab 5.1 pg 310

(Meaning of sustainability, CSR, sustainable development and ESG)
- Difference between CSR (What needs to be done) and ESG (How well it was done, measured
by ratings)- pg 311
- ESG focusses on the measurement and assessment & quantification of (E) + (S) + (G)
aspects of the organization. It is the metrics by which CSR is measured
- 17 sustainable development goals- fig.5.1 – pg 311
- Definition of sustainable development (Brundtland Report) – pg 311

Part A: Financial reporting and its limitations

Scope of reporting

- Objective of financial reporting – pg 313

- Focus of financial reporting – pg 313
- Primary audience for financial reporting are shareholders and debt capital providers– pg 313
- Questions not answered by financial reporting – pg 313

IFRS S1 and IFRS S2, these 2 standards that provide guidance for the disclosure of sustainability
related financial information, and disclosures of climate related risks and opportunities.

Fundamental qualitative characteristics of financial reporting/five elements of financial acctg (assets,

liabilities, equity, income, expense) – pg 314

Social capital and natural capital- pg 316

Entity assumption – pg 317

Part B: The changing reporting landscape

Sustainability Incentives

- Environmental issues impacting company profitability (WBCSD) – pg 319

- Consumer preferences aligning to environmentally friendly products and increased
regulations (By way of fines or cleanup costs) have now directly impacted on company
profitability. The financial position is also impacted due to impairment of value of land, due
to contamination, plant write offs as a result of changes to clean production capacity,
changes in net realizable value of stock due to changes in customer preferences for
environmental harmless products

Brand and reputation- pg 320

- Impact of social and environmental performance on brand and reputation

- Negative publicity due to the use of child labor and poor working conditions in the late 1990s
impacted on the reputation and brands of many MNCs such as Nike, Gap, Reebok, H&M.

Risk management incentives

- CSR helps in reducing risk (insurance costs reduces) – pg 321

- Lower financing costs due to improved risk assessments
-
 - Direct costs impositions such as clean up orders, levies and remediation expenses, indirect
costs from loss of business due to increased risks and opportunity cost of waste production
and treatment. All of these can be kept low with CSR
- EY report on adoption of TCFD by more than 500 companies found that most companies
don’t engage adequately with climate risks thus exposing themselves to lower valuations
- External benefits of CSR reporting can
1) lower cost of capital by
a) signaling the quality of the company
b) Expanding company’s disclosure to support stakeholder decision making and
c)reducing the uncertainty in assessing the company’s performance – pg 322
2) CSR reporting improves analysts’ coverage and forecast
3) CSR reporting improves general perception of the company

Socially responsible investments – pg 322

Negative screening avoids the worst performers- tab 5.2 pg 323

Social enterprises, 3 models, (Innovation, employment and give back model)– pg 324

Business roundtable’s updated statement of purpose of a corporation – pg 325

Shareholder primacy vs social contract- table 5.3– pg 326

Good faith requirement – pg 327

Corporate social responsibility – pg 328

Externalities can be defined as an impact that an entity has on parties that are external to the org.
where such external parties did not agree or take part in the actions causing the decision leading to
the cost or benefit. Externalities can be viewed as positive (Benefits) or negative (costs)

By placing costs on emissions, a government effectively acts to INTERNALISE costs that would
otherwise be externalities to an entity

Externalities – pg 328,Q5.3 ans pg 424 (positive and negative externalities)

Part C: Theories linked to CSR

Enlightened self-interest- pg 332

- How CSR improves shareholder value – pg 332

Normative Stakeholder theory- pg 333

- All stakeholders treated fairly

Managerial stakeholder theory – pg 334

- Focuses on stakeholders who have power and influence – pg 334 (also ref. q5.5 pg 425)

Social contract

- Legitimacy theory & Lindblom – pg 335

- Manipulating public perception of an organization – pg 335
- Survival depends on socially desirable ends – pg 335
- Institutional theory, institutionalization and isomorphic process – pg 335-336
 - CSR theories summary – pg 336

Part D: The Emergence of CSR

- CSR is still not compulsory, however greater emphasis on broader accountability has been
accompanied by an increase in CSR reporting- pg 338

Environmental sustainability

- Definition – pg 338
- 4 Key environmental sustainability issues – pg 339
(climate change, waste, pollution, biodiversity)
- Biodiversity means variety of life on earth- pg 339

Social sustainability

- Definition – pg 340
- 3 key social sustainability issues – pg 340
(child labor, ethical trading, supply chain management)

Economic sustainability

- Definition – pg 341
- Issues in economic sustainability – pg 341
- 3 key economic sustainability issues- pg 341
(long term viability of businesses, stability of economic system, transparency)

Linking environmental economic and social sustainability

 They are the three pillars of sustainability -pg 342

 An organization should consider all 3 pillars in its sustainable business strategy and risk
management

Board of directors responsibility for sustainability and organizational initiatives

- There is a business case for operating in an environmentally and socially sustainable manner
- Increased demand for reporting from society (Modern Slavery Act, Greenhouse gas
emissions) -pg 343
- Evidence of positive relationships between a business’s credibility on sustainability issues
and its ability to win and retain customers
- Limitation of traditional financial reporting – pg 343
- Integrated reporting initiative -pg 343
- Social enterprises and B corporation certification (a new type of company that uses the
power of business to solve social and environmental problems)- pg 344

Introduction to the key concepts

- Accountability – pg 344
- Definition of sustainability reporting- pg 345
- Natural capital – pg 345
- Natural capital accounting – pg 345
- Integrated reporting – pg 345
- Integrated thinking – pg 345
- Targets- pg 345
 - Metrics- pg 345

What is measurable?

- Measurement/reporting for sustainability issues – pg 346 (Quantification, monetisation,

narrative reporting)
- Measuring for social, environmental and sustainability reporting – pg 346-349

Social reporting – pg 346, 347

- Labor practices and workplace, human rights, society, product responsibilities

Environmental reporting

- Areas that have seen greater development and need further improvement – pg 347-348

(materials usage, resource usage, emissions, effluents and waste, transport usage)

Economic reporting

- (market share, quality rankings, customer and employee satisfaction, turnover rates and
innovation) – pg 349

Part E: Corp. governance and CSR reporting

- Compliance with IFRS S1 and S2

Mandatory reporting in Australia under below circumstances

- Corporations Act (report environmental issues) – see fig 5.4 pg 353

(Section 299(1)(f) & Section 299A- pg 353
Section 299(1)(f) is MANDATORY only to entities that are subject to any particular and
significant environmental regulation which should be mentioned in the Directors report
- Section 296 (accounting standards IAS 37 and IAS 16) – pg 353- 354 is MANDATORY to all
corporations in Australia and is disclosed in the notes to the accounts
- Corporate groups which meet the National Greenhouse and Energy Reporting Act (NGER
Act) threshold must report – pg 354
- Modern slavery act 2018 (For entities having consolidated revenue in excess of (AUD
100million) – pg 356
- National pollutant inventory – pg 356
- Work, health and safety act- pg 356
- Dow Jones sustainability indices- pg 358
- Equator principles- pg 359
- Global Reporting Initiative (GRI) -pg 361
- 3 GRI standards- GRI 1- Foundation, GRI 2- General disclosures GRI 3- Material topics
- ISO- International Organization for Standardization- pg 362
- Social audits- pg 364
- Why would an organization do a social audit- pg 366 Q5.9 answer pg 426
- ISO 14000 and ISO 26000 – Pg 366

Environmental management accounting and environmental costs – pg 367

- IFAC definition of environmental management accounting- pg 367

- 4 types of environmental costs
 (prevention, appraisal, internal failure, external failure costs) – pg 367
- Hidden costs assigned as overheads in different product lines- pg 367
- Circular economy (Reduce, reuse, recycle, redesign, repair, renew and recover- pg 368

Climate change reporting

- Climate change accounting techniques – pg 373

(carbon taxation and cap-and- trade or emissions trading schemes)(ETS), excess allowances
can be banked and used to satisfy compliance requirements in subsequent years– pg
373,374
- Accounting for levels of emissions, offsets for carbon absorbed by a forest controlled by an
organization – pg 375
- IFAC has developed a resource for accountants. Companies can report on different scopes
(scope 1-3)
- Scope 1- direct emissions generated by an organization
- Scope 2- Indirect emissions based on energy consumptions
- Scope 3- Indirect emissions arising from the organization’s impact on the wider economy

Section B- Strategy on how to answer the questions in the exam

1) read the question twice

2) identify the relevant parts of the question in the notes
3) go to the book on the correct page relating to the question
4) read the portions of the book which will give clues to the answer
5) then read the case slowly and 2 times ideally with the relevant questions in mind,
6) mark the answers available in the case
7)present the answers in a proper way quoting relevant sections or laws available in the book
8) Give recommendations which normally are committees, having policies n procedures in place etc
and other recommendations available from the notes and book

Misleading conduct- lying (usually in advertisements)

Unconscionable conduct-cheating