The summary of ACCA P1 Governance, risk and ethics

Governance

Agency theory - directors act as agents of shareholders
Potential problem - strategy to benefit directors, not shareholders, different attitude to risk (not their investment), short-termism
Goal congruence - incentives to align interests (profit related pay and share option schemes)

Rules or principles-based approaches
Rules - SOX, legally enforced, section 404 ICFR penalises SMEs
Principles - UK Combined Code of CG, comply or explain, SMEs more leeway, not legally compulsory, market benefits or penalties for non-complier

CG concepts - HAIR DRIFT
Honesty- truth, not misleading
Accountability - directors accountable to shareholders, stakeholders
Independence - NEDs free from conflict of interests
Responsibility - directors responsible to stakeholders
Decision taking - improve wealth of an entity
Reputation - ability to comply with CG concepts
Integrity - honesty and balance, trustworthy
Fairness - take into account legitimate interests
Transparency - full disclosure of material matters

CG purposes -PIGCREW

Practice methods - governance provides practice methods to aid those who are managing a company
Investment - governance creates assurance and trust thereby attracting investment
Growth - governance creates conditions for growth of the economy
Control - it is set in place to control excessive behaviour in the organisation
Rules - it creates rules within which the organisation is operated
Employment - it creates employment as well as deals with several employment issues
Wealth - it supports a wealth-creating capitalist system

Chairman - role (Higgs report) - RAISE DIP
Run the board
Active engagement by board members
Induction programme
Sufficient time for complex decision
Effective communications with shareholders
Development needs for directors
Information provided accurately and timely
Performance evaluation

NEDs - role (Higgs report)
StRiP Performance

Strategy - contribute strategy success
Risk - adequate ICs and risk man-t system in place
People - appointment and remuneration of EDs, contractual and disciplinary issues
Performance - hold EDs to account for decisions taken and results obtained, represent shareholders interests

Audit committee - 100% NEDs, 1 - financial experience
role - CLARISSA

Create a climate of discipline and control
Lend credibility in FS
Assist CFO to provide forum
Review FS to improve quality
Independent judgement
Strengthen position of internal auditor
Strengthen position of external auditor
Assist in resolution of EA and board

Risk man-t committee - majority of NEDs, 1 - from AC, 1 - risk expert
role

Assess ICs
Performs risk assessment of key operations
Oversees implementation and effective operation of risk strategy

Nomination committee - majority of NEDs
role

Identify appropriate people to join board
Determine packages and their compositions for prospective EDs

Remuneration committee - majority of NEDs
role

Determine appropriate packages and their compositions for EDs
Cross directorship and cross shareholdership are prohibited

Turnbull criteria to assess the need for IA dept

Scale, diversity and complexity of company's operations
Number of employees
Cost-benefit
Changes in organisational structure
Changes in key risks
Problem with ICs
Increased # of unexplained or unacceptable events

Turnbull guidance for sound ICs (sound = effective)

Principles of ICs embedded to activities (not stand alone)
Quickly response to risks
Immediate reporting to man-t

Public sector organisations

Hospitals, schools, local government authorities, state-controlled companies, NGOs
Purpose - implement government policy. It cannot be left for profit (eg. loss-making route may be retained to support economic development in a region)
Focus - value for money (EEE)
Agency relationship - man-t as an agent for taxpayers
Problem - strategic objectives hardly to define and monitor their achievements

Charities & voluntary organisations
Accountability relationship - charity - donor - purpose of donation and actual use of it

Risk

Strategic risk

responsible - board
arises from fundamental decisions related to organisation's objectives
Business and Non-business
Business - product and service related (marketing and development, economic risk, technological risk)
Non-business not related to product and service (long-term financing)

UK Cadbury report - matters:
significant acquisition and disposal
investments
capital projects
treasury policies

Managing - if problem is global (raw material supplier uncertainty), - not avoided in short term, - redesign production - reduce or eliminate risk in long-term
Avoid risk - lost business opportunity - competitor may take up these opportunities and boost its business

Operational risk
responsible - risk committee - line managers - employees
arises from internal resources, systems, processes, employees risks
stoppage line - machine failure
key staff leaving - dissatisfied
lost of sales - poor quality

Managing - controls to detect or correct problem - to reduce or eliminate risk

Guide to risks - FROP LIFE

Financial risk
Reputation
Operational
Product
Legal & political
Information technology
Fraud
Entrepreneurial or economic

Risk framework - ALARM

Appetite
List (risk register)
Assess (TARA)
Response
Monitor

TARA

High probability * High impact = Avoid
High probability * Low impact = Transfer
Low probability * High impact = Reduce
Low probability * Low impact = Accept

ERM model 
COSO's enterprise risk man-t
8 components

1 - Internal environment - tune of organisation influencing risk appetite, attitude to risk man-t & ethical values (criticism - external environment ignored)
2 - Objective setting - to support company's mission (consistent with risk appetite)
3 - Event identification - which may affect achievements of objectives. Negative impact - risks, positive impact - opportunities
4 - Risk assessment - probability and impact of risks
5 - Risk response - reduce, accept, transfer, avoid
6 - Control activities - policies & procedures to check effectiveness of risk responses
7- Implementation & communication - data - man-t & staff responsibility
8 - Monitoring - modified if necessary

Ethics

Gray, Owen & Adams - 7 positions on CSR
PRESSSD

Pristine capitalist - shareholders most important
Radical feminist - do not fellow male dominate, soft treatment of female
Expedients - opportunities for business > SR is secondary
Social contract - entity exists till it serves the society
Social ecologist - recognise social & environmental footprint
Socialist - SR is first, good production is second
Deep ecologist - attention to nature, save planet for the future generations

AAA model

FEN ABCD

Fact
Ethic
Norm
Alternative course
Best course
Consequence
Decision

Tucker's model - 5 questions

Please Look For Red Shoes

Profitable?
Legal?
Fair?
Right?
Sustainable? (or environmental)?

Mendelow framework

influence of stakeholder = Power * Interest

Low power * Low interest = Minimal effort
Low power * Hight interest = Keep informed
High power * Low interest = Keep satisfied
High power * High interest = Key players

Instrumental & normative motivations of stakeholder theory

Instrumental - take into account stakeholders opinion only if they are consistent with other, more important objectives (profit maximisation, gaining market share, etc.)

Normative - Kant's theory based, moral framework, see shareholders as ends in themselves, not to achievements of other ends)

Category of stakeholders - PINK LAVR

Primary / secondary
Internal/ external
Narrow / wide
Known / unknown
Legitimate / unlegitimate
Active / passive
Voluntary / involuntary
Recognised / unrecognised

Approaches to CSR - PRAD

proactive - promote interests of stakeholders & stakeholders
reactive - avoid CSR, try to hide from stakeholders / society
accommodative - balance the interests of shareholders with other stakeholders
defensive - rely only on legally established rules to take minimal CSR

CSR - PELE

Philanthropic - what is desirable?
Ethics - what is right?
Legal - compliance with law
Economy - focus on profitability

Kohlberg's stages of moral development

3 levels (6 stages)

Level 1 - Pre-conventional
1. Obedience & punishment orientation (How to avoid punishment)
2. Self-interest orientation (What's in it for me?)

Level 2 - Conventional
3. Interpersonal accord & conformity (social norms, good boy/girl attitude)
4. Authority & social-order maintaining orientation (Law & order morality)

Level 3. Post-conventional
5. Social contract orientation
6. Universal ethical principles

How to gain professional marks in ACCA P level exams