ACCA Paper P1: Notes

Notes
ACCA Paper P1
Governance, Risk and Ethics
For exams in 2011

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ExPress Notes
ACCA P1 Professional Accountant
Contents
About ExPress Notes 3
1. Some Key Things to DO at Paper P1 7
2. Corporate Governance and Responsibility 10
3. Risk Management and Internal Control 22
4. Professional Values and Ethics 27
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ExPress Notes

Chapter 1
Some Key Points to DO at Paper P1
START
The Big Picture
 Use mnemonics to help recall lists of facts (but then apply them – see below!)
 Prioritise the three areas of the syllabus within your study:

o Corporate governance 40%
o Risk management 30%
o Ethics 30%.
 Give more time to studying corporate governance than the other two areas, since
there is more detail in this area to be learned. But make sure that you know all
three areas well before the exam. You will not pass with expert knowledge of one or
two of the core syllabus areas.
 Use facts and names from the scenario in your answer to show that you have applied
the knowledge that you have. The P1 syllabus learning outcomes are all at “level 3”
knowledge. This means that you get few (if any) marks for repeating or listing
knowledge – it has to be applied somehow to get decent marks.
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ExPress Notes

 Resist the temptation to write things you know. If it’s not relevant to a scenario in
the question, don’t use it.
 Be prepared to feel a little “cheated” by the exam itself, as you will not get the
opportunity to show off everything you have learned. It’s very hard not to show off
what you know, but it wastes time and annoys the marker, if it’s not relevant.
 Download the full text of the UK Combined Code on Corporate Governance (2006)
from http://www.frc.org.uk/CORPORATE/COMBINEDCODE.CFM. It’s well written and
brief. Reading the primary source document is less dull and academic than reading a
text book.
 Illustrate the relevance of your knowledge by reference to recent real business

events, where they are relevant. This shows that you understand that the subject
matter of P1 is evolving and relevant to real business.
 Watch the requirements of each question very carefully. If the examiner asks you to
“argue the case for...” you will not get good marks by presenting a balanced case of
arguments for and arguments against.
 Write in full, but short, sentences. Avoid bullet point lists in the exam.
 Present answers in the required format (eg letter, briefing notes, etc). You will lose
gift marks if you use a different format to the one that the examiner wants.
 Respect P1! It looks far less daunting than some other professional level papers, but
it is worthy of time.
 Practice writing answers in full, under exam conditions and exam time pressure.
Remember that you pass exams by what you write and how you write it. Reading
past answers won’t help you practice this core skill.
 Consider taking a course in effective English if you feel that your business English
isn’t good. A significant part of the professional marks are awarded for effective,
businesslike communication.
 Get feedback on your sample answers. Possibly the most difficult part of passing P1
is knowing what the “target” is. It’s very hard to work this out without tutor
feedback.
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ExPress Notes

 Download all the past questions and answers from the ACCA website. Read them all
through in full before the exam – it will help you think into the way the examiner
thinks and writes and allow you to copy his style effectively in the exam room.
 Download and read all the examiner’s reports from previous sittings.
 Keep calm! Paper P1 is a relatively easy paper to pass, if you’re fairly clear about
what the examiner is looking for.
 Book on an ExP course if you can possibly afford it.
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ExPress Notes

Chapter 2
Corporate Governance and

Responsibility
START
The Big Picture
Corporate governance is the system by which a business is managed in the best interests of
its stakeholders, the relationships between stakeholders and often constraining the
executive power of directors to reduce the chance of dysfunctional behaviour. The UK
Combined Code (2008 version) states “Good corporate governance should contribute to
better company performance by helping a board discharge its duties in the best interests of
shareholders; if it is ignored, the consequence may well be vulnerability or poor
performance. Good governance should facilitate efficient, effective and entrepreneurial
management that can deliver shareholder value over the longer term”.
It is underpinned by nine core concepts. In the exam, you may have to define these and
apply them. This is their inter-relationship and very abbreviated definitions. You should
attempt to remember fuller definitions from your course notes in addition to these.

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ExPress Notes

Neutral between all
Fairness legitimate
stakeholders
Straightforward,
Integrity
honest, fair dealing
Quality decision
making
Decisions based on
Judgement quality evidence
and rational criteria
Free from bias,
Independence/
disregarding
objectivity
matters irrelevant
REPUTATION
Truthfu, not
Honesty/ probity misleading. Fee
from "spin"
Presumption of full
Openness/
and frank
transparency
disclosure
Investor confidence
Acting in a timely
Responsibility fashion to correct
weaknesses
Answerable to
Accountability stakeholders for
actions/ decisions

Fairness Integrity Judgment
This is a neutral attitude Honesty, fair dealing and Making decisions that will
between stakeholders, truthfulness (IFAC definition) maximise organisation’s
having respect for rights and High moral character prosperity, using evidence-
views of any other group based decision making to
with a legitimate interest. reach good decisions.
Independence Responsibility Accountability

(objectivity)
This is the responsiveness to This is being answerable for
Objectivity is a state or the need for corrective the consequences of
quality that implies action. A director showing decisions and actions.
detachment, lack of bias, not responsibility is one who is
influenced by personal “taking ownership” of a
feelings, prejudices or problem in order to solve it.
emotions.
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ExPress Notes

Probity Reputation Openness/ transparency
Probity means truthfulness This is the view that other This is a default assumption
and not misleading people. people have of the business. that transparency is best.
It is linked to openness. A strong reputation will
contribute to share price and
thus to shareholders’ wealth.
KEY KNOWLEDGE
Agency Theory and Costs

Directors manage the business on behalf of the shareholders. This makes the directors
agents of the shareholders (who are the principal). The shareholders in a large business
cannot possibly have all the information available to the directors, for practical reasons and
also commercial sensitivity (a rival company would buy shares to get information about
competitors if full disclosure of all facts to principal were required).
This agency problem arises from the different self-interest of the principal (eg wants to
minimise costs and risk) and the agent (eg wants to maximise their own remuneration) and
the information asymmetry between them.
Examples of agency costs (costs that would not be incurred if the principal managed the
business themselves directly):
 Directors’ remuneration
 Internal audit department
 External audit fee.
KEY KNOWLEDGE
Transaction Cost Theory

Transaction cost theory explains why companies exist. If stakeholders in a company (eg
customers) were to try to engage in the company’s activities on their own, the costs would
be prohibitive. So companies naturally grow as a means of reducing individuals’ transaction
costs. As companies grow, however, agency costs tend to arise.
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ExPress Notes

KEY KNOWLEDGE
Stakeholders

Definition: Any person, group of people or entity that may be affected by the activities of
an organisation. Each stakeholder has their own wishes (stakeholder claims) which are
often in conflict with the wishes of other stakeholders. This is stakeholder conflict.
Johnson & Scholes classify different types of stakeholder using the ICE mnemonic:
Internal Within the business itself
Connected Outside the business itself, but closely affected, often with a direct
financial link
External Affected by the business but only remotely or non-financially.
Internal and connected stakeholders may be referred to as “narrow” and all stakeholders
including external stakeholders may be considered “wide” stakeholders.
Possible exam relevance:
 How well are the directors identifying stakeholders and prioritising the conflicting
claims of stakeholders?
 How legitimate is a claim of an individual stakeholder (ie how fair is their expectation
that they can influence the business?)
KEY KNOWLEDGE
Mendelow Matrix

This gives an indication of how directors of a business should prioritise their time and give
relative weighting to different stakeholder claims in the event of stakeholder conflict.
Level of interest
Level of influence
Low High
Low Minimal effort required Keep informed
High Keep satisfied Key players (core stakeholders)
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ExPress Notes

KEY KNOWLEDGE
Pervasive Issues in Corporate Governance

 A useful checklist for assessing the performance of a board of directors.

 Could be used to identify conflicting directors’ duties, eg in a takeover situation.
 Lots of scenarios when this could be useful, not least to possibly define what
constitutes good corporate governance.
 Fiduciary duties of directors (legal duty arising from trust law)

 Directors’ remuneration and rewards: alignment of directors’ interests to
stakeholders’ wishes
 Board composition and balance
 Reliability of financial reporting
 Risk management and internal control
 Rights and responsibilities of shareholders
 Business ethics
 Corporate social responsibility
 Compulsory and voluntary best practice: does the entity go beyond what is legally
required?
KEY KNOWLEDGE
Roles of Chairman and CEO

This is an important issue and a frequently occurring exam topic.
Chairman (the “head of state” of the CEO (the “prime minister” of the
company) company)
 Provide leadership to the board,  Execute the business plans

ensuring its effectiveness and setting determined by the board.
its agenda.  Provide leadership to the business,
 Ensuring the board receives accurate ensuring the effectiveness of
and timely information, so directors business operations and leading the
can’t be railroaded into following an process of setting strategy.
over-dominant CEO’s wishes.  Communicating effectively with
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ExPress Notes

 Ensuring effective communication significant stakeholders.
with shareholders and that their  Cooperate in induction and
views are communicated to the board development, especially of NEDs and
as a whole. senior management staff
 Facilitate effective contribution from  Cooperate by providing any
non-executive directors (NEDs), necessary resources.
ensure constructive relations between  Cooperate in appraisal of board
execs and NEDs. members.
 Meet with the NEDs without the  Often conducts the appraisal meeting
executives present. of other executive directors.
 Facilitating appraisal of board  Cooperate with all the members of
members. the board.
 Generally required to conduct the
appraisal of the CEO each year.
 Encouraging active engagement by
all the members of the board.
 Ensure NEDs are properly chosen,
trained on induction and appraised.
 Ensure that all directors’ continuing
professional development is up-to-
date.
It is a core principle of many corporate governance codes that the chairman and CEO should
be different people.
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ExPress Notes

KEY KNOWLEDGE
Key Board Committees

Audit committee
Remuneration committee
Liaises with external auditor, is the
point of reference for the internal Responsible for advising on executive
auditor. Reviews the financial director remuneration, probably
through external benchmarking.
statements and in smaller entities
Determines the "cocktail" of
probably also does the tasks of the remuneration types for executive
risk management committee. driectors. Comprises only non‐
Comprises any non‐executive executive directors.
directors.
Risk committee
Nominations committee
Oversees risk management.
Recommends appointments to the
Responsible for embedding risk
board. Legally, shareholders
awareness in culture. Risk
appoint directors, but almost
manager reports to this
always follow board
committee. In smaller entities,
recommendations. Comprises
possibly part of audit committee.
mostly non‐executive directors.
Comprises mostly non‐executives.

KEY KNOWLEDGE
Role of Non‐Executive Directors

This is an important issue and a frequently occurring exam topic. A criticism made of non-
executive directors in the past is that they have been either symbolic only and contributing
very little, or have become so involved in the company’s affairs that they are effectively
executive directors. This may be a difficult balance to strike.
The board including some non-executive directors is required by almost all corporate
governance codes. Their role was clarified by the Tyson Report (UK).
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ExPress Notes

Non-executive directors
 have no executive (ie day-to-day management) responsibilities. Executive directors

are generally director of finance, director of HR (or some other stated area of
operational responsibility). Non-executive directors never have any specific portfolio
of responsibilities, other than the chairman’s responsibilities.
 have a key role in reducing conflicts of interest between management and
shareholders
 share the same legal duties and potential liabilities as full executive directors. This
enhances their responsibility and accountability, even though they are part-time.
 bring independent viewpoint as they are not full time employees. They are often
called independent directors as a result.
The role includes four principal areas of responsibility:
 People. They are responsible (perhaps via board committees) for selection,
remuneration and assessment of directors.
 Internal control and risk awareness. They will normally lead the company’s efforts to
ensure that data about risks is properly obtained, collated, assessed and action taken
upon it.
 Strategy. They contribute to strategy determination, mostly through an external
viewpoint and by challenging the executive directors’ decision making. Their
external experience is often useful.
 Scrutiny. They scrutinise the performance of management in meeting goals and
objectives and monitor it. Their role of scrutiny is such that their job is mostly to
challenge how decisions are made, rather than to make the decisions themselves.
KEY KNOWLEDGE
Unitary v Multi‐tier Board

Unitary and Multi-tier board structure
A unitary board is one where all directors, both executive and non-executive, participate in
the same board meeting. A multi-tier board often has a separate supervisory board.
Advantages of a unitary board structure (disadvantages of a multi-tier structure) include:
 All participants have equal legal responsibility for management of the company and
strategic performance.
 A single board promotes easier co-operation and co-ordination.
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ExPress Notes

 The presence of NEDs should lead to better decisions being made.
 Independent NEDs are less likely to be excluded from decision-making and given
restricted access to information.
Drawbacks of a unitary board structure (advantages of a unitary structure) include:
 A NED or independent director cannot be expected to both manage and monitor.

 The time requirements on non-executive directors may be onerous, meaning that
only weaker quality non-executive directors are willing to accept the role.
 There is no specific provision for employees to be represented on the management
board (this is common in countries where multi-tier boards are common)
 Emphasises the divide between the shareholders and the directors, as the
supervisory board is another layer between management and the shareholders.
KEY KNOWLEDGE
Director’s Remuneration

Directors’ pay is set by the remuneration committee, which is made up entirely of non-
executive directors. The aim is to pay a high enough amount to attract and retain the
directors who have the greatest potential to add value to the business. Directors’ salaries
are an agency cost that should be minimised as far as possible, of course.
It is necessary for the remuneration committee to incentivise directors in a way that will
align their wishes with those of shareholders. Shareholders are likely to want the following,
some of which pull in opposite directions!
 To take a level of risk that aligns with their own risk appetite (see notes below) and
discourage directors from taking excessive levels of risk with shareholders’ money.
 Encourage directors to take a longer-term view of the business
 Maximise current year earnings, subject to not disregarding the need to have some
view on the longer-term.
Note that if a stock market is acting rationally (or “efficiently”) then excessive risk taking
that adds only a small amount to earnings should result in a drop in the company’s share
price. So if the directors are paid only a commission based on current year profits, they will
have an incentive to take excessive risks with company assets. It’s relevant also to
remember that directors often change jobs every three to five years, so it’s necessary to
give them some incentive not to manage the company’s performance only to that time
horizon.
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ExPress Notes
In order to ensure that directors have a form of balanced scorecard with which to make
decisions, the remuneration committee will normally put together a cocktail of different
elements of remuneration to align shareholders’ and directors’ interests.
These may include:
 Basic salary
 Benefits-in-kind (BIKs) such as company cars and other short-term perks
 Pensions payable after retirement
 Share options, which are likely to have a lock-in vesting period and be dated over a
range of dates into the medium- and long-term
 Shares in the company itself
 Bonus linked to current year profit
 Discretionary bonuses based on year-end performance evaluation.
The relative mix within the remuneration package will hopefully align the directors’
incentives with the shareholders’ wishes.
Basic Profit Options Pensions Discretionary

salary and related pay and shares bonuses
BIKs
Discourages No effect No. Profits Yes. Excess Yes. Very Could do,
excessive will increase risks will high risks depending on
risk taking? with greater depress could how it’s
risks share price bankrupt the awarded
company
and lose
pension
Encourages No Yes Yes, though No effect Could do,
current year not without depending on
profit regard to how it’s
maximisation long-term awarded
effects
Encourages No No Yes, Yes Could do,
longer-term especially if depending on
view a range of how it’s
exercise awarded
dates is
given
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ExPress Notes

KEY KNOWLEDGE
Governance Disclosures

Most governance codes require disclosures concerning the following:
 Sustainability reporting
 Information about the board of directors
 An operating and financial review (OFR)
 Reports from the board committees.
 Details of relations with auditors including reasons for change.
 A statement that the directors have reviewed the effectiveness of internal controls.
 A statement of relations and dialogue with shareholders.
 A statement that the company is a going concern and the directors’ basis for
concluding that the company is a going concern.
 These are best practice disclosures. They are a useful checklist for evaluating if a
board is doing all that it reasonably can to ensure that its key stakeholders are kept
informed.
KEY KNOWLEDGE
Rules Based v Principles Based Corporate Governance

There are many different codes of corporate governance around the world. They may
broadly be categorized as those that focus on principles (some of which have supporting
rules) and those which are rules-based only with few or no overriding principles that
companies must follow. In reality, companies in a principles based jurisdiction will develop
their own policies and rules that must be followed. In a rules based approach, any non-
compliance is likely to be legally challenged by looking at the intention behind the law. This
means that there will always be some interaction between the two approaches.

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ExPress Notes

Principles based Rules based
Key features “Comply or explain” approach. Quasi-legal approach, with a series

Investors then decide if any of specific rules that all entities
breaches are satisfactorily must follow.
explained.
Strict liability approach to
Objectives stated, eg the CEO must compliance; non-compliance cannot
not be able to gain excessive power be justified on grounds of
and entities design their own compliance being not cost-
specific procedures to enact the beneficial.
principle.
Often legally enforced, eg via the
USA’s legal mechanisms and SFA
for companies with shares traded in
the USA.
Examples UK Combined Code 2006/ 2008 Sarbanes-Oxley Act (USA)

OECD guidance
Relative Allows common sense judgment. Clear and unambiguous. In an

advantages environment where directors are
Leaves stakeholders to assess if
often criticized, it’s fairer to
non-compliance with every rule is a
directors to give clear rules for
problem or not.
them to follow.
Allows flexibility between
Clarity gives consistency of
companies, so companies are
compliance between companies.
addressing their own business-
specific risks. Lack of exemption via “comply or
explain” gives greater confidence in
Lists of rules are unlikely to
compliance.
anticipate every possible situation.
Wider, clear principles are less
likely to have loopholes in
regulation than detailed rules.
Rules-based compliance becomes a
form of bureaucratic filling exercise.
Principles based compliance
requires companies to think and
analyse their own risks.
Prevents wastage of resources with
heavy compliance costs for small
risks.
Requires compliance with the spirit
of the law, rather than the minutiae
of its wording.
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ExPress Notes

Chapter 3
Risk Management and Internal

Control
START
The Big Picture
Risk can be a good thing in business – do not say in the exam that risk must be eliminated.
Some risk is necessary for companies to be able to generate a return greater than the risk
free return. However, risk that adds nothing to value is risk that ought to be identified and
eliminated where possible. This is the process of risk management.
There are a number of approaches to risk management that have been identified such as:
 The Turnbull Report in the UK (now part of the Combined Code 2006)
 The COSO (Committee of Sponsoring Organisations) framework.
The COSO Framework provides a good system for tackling questions in the exam as it takes
a step-by-step approach. This is the system we will focus on.
You can obtain a considerable amount of free reading on enterprise risk management from
COSO’s website at http://www.coso.org/default.htm.
The “COSO cube” diagram below indicates how enterprise risk management is something
that ought to pervade the entire organisation. It has eight key steps in risk management,
which should happen automatically all around the company, at all levels of operation from
top level strategy formation to operations and compliance. It should also cut across all
strategic business units within the entity.
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ExPress Notes

Internal environment: The internal environment encompasses the tone of an

organization, and sets the basis for how risk is viewed and addressed by an entity’s people,
including risk management philosophy and risk appetite, integrity and ethical values, and the
environment in which they operate.
Objective setting: Objectives must exist before management can identify potential events
affecting their achievement. Enterprise risk management ensures that management has in
place a process to set objectives and that the chosen objectives support and align with the
entity’s mission and are consistent with its risk appetite. This involves identifying the
stakeholders and understanding the risk appetite of shareholders in particular. Management
must ensure that the level of risk taken by the business is the level of risk that the
shareholders would wish.
Event identification: Internal and external events affecting achievement of an entity’s

objectives must be identified, distinguishing between risks and opportunities. Opportunities
are channeled back to management’s strategy or objective-setting processes.
Risk assessment: Risks are analysed, considering likelihood and impact, as a basis for
determining how they should be managed.
Risk response: Management selects risk responses – avoiding, accepting, reducing, or

transferring/sharing risk (the “TARA” responses). This develops a set of actions to align
risks with the entity’s risk tolerances and risk appetite.
Control activities: Policies and procedures are established and implemented to help
ensure the risk responses are effectively carried out. In the exam, you may use the
SOAPSPAM mnemonic to help generate ideas for control activities.
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ExPress Notes

Information and communication: Relevant information is identified, captured, and
communicated in a form and timeframe that enable people to carry out their responsibilities.
Effective communication also occurs in a broader sense, flowing down, across, and up the
entity.
Monitoring: The entirety of enterprise risk management is monitored and modifications

made as necessary. Monitoring is accomplished through ongoing management activities,
separate evaluations, or both. Monitoring means that the risk management system itself
should remain effective over time and will be continuing to identify the most serious and up-
to-date risks.
KEY KNOWLEDGE
Risk Responses

Probability of event happening
High Low
Expected impact Low Reduce Accept

on the business
High Avoid Transfer
Reduce: Implement control procedures to reduce the incidence of the risk event.
Avoid: Do not undertake the activity if possible. If it’s unavoidable, choose the
next best response.
Accept: It’s unlikely to be cost-beneficial to attempt to further reduce this risk
Transfer/ share: For example, by insurance.
In the exam, state why the facts of the case suggest that your classification of probability of
occurrence and expected impact on the business is appropriate, then conclude on an
appropriate TARA response and give an example of at least one way to make this happen,
eg by implementing stronger controls over inventory if theft is considered high probability
and low impact.
Risks that are avoided are ones that the entity manages to remove, or that part that they
manage to reduce. Risk retention is where risk is either deliberately retained within the
business because it is viewed as adding value or which is impossible to remove.
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KEY KNOWLEDGE
Risk Manager

A risk manager is a full time employee, who is probably not a director. They report to the
risk committee of the board. Their job is full-time identification and management of risks as
well as ensuring that risk awareness is embedded in the corporate culture at all levels.
A risk manager will generally have specialist knowledge of the industry. The risk manager
needs to combine technical skills in credit, market and operational risk with leadership and
persuasive skills to persuade all staff to consider risk in every decision that they make. This
is embedding risk culture.
KEY KNOWLEDGE
Types of Business Risk

Common sources of business risk include:
 Market: Risks affecting every player in the market as a whole. “Systematic risk” as
used in CAPM in paper F9.
 Credit: Risk of payables not paying, or of not being able to replace borrowings as they
fall due for renewal.
 Liquidity: Risk of running out of cash, even if the business is profitable.
 Technological risk: Risk of technology making current methods unprofitable and
redundant.
 Legal: Pervasive risk of changes in law having an adverse effect on the business.
 Health, safety and environmental: Partly a sub-set of legal risk, but also the risk of
the stakeholders’ expectations increasing beyond what is legally required and
economically viable.
 Reputation: Damage done by loss of reputation, fairly or otherwise.
 Business probity: Risk of dishonesty affecting the business.
 Derivatives: Risk from holding highly volatile financial instruments.
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KEY KNOWLEDGE
Types of Controls

 Corporate controls = general policy statements, established core culture and overall
monitoring procedures, corporate governance
 Management controls = planning and performance monitoring
 Business process controls = authorisation limits and reconciliation
 Transaction controls include = accuracy and completeness checks
You may use the mnemonic SOAPSPAM to generate ideas for types of control:
 Segregation of duties
 Organisational controls (eg set authority limits)
 Authorisation
 Physical
 Supervision
 Personnel, eg background checks
 Arithmetical and reconciliations
 Management – the tone from the top, including existence of an internal audit
department.
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Chapter 4
Professional Values and Ethics
START
The Big Picture
Ethics will feature significantly in the exam, often as part of a case study, but possibly as a
stand alone question. It is unlikely that you would be asked your own ethical views on
something. Indeed, it is likely that you may be asked to advocate the case for an argument
that you personally do not believe in. More probably, you will be asked to define these
terms and use them to categorise or explain the views of a person in a case study scenario.
KEY KNOWLEDGE
Absolutism v Relativism

Absolutism (dogmatic ethics) is the view that there is an unchanging set of ethical principles
that will apply in all situations at all times and in all societies.
These include religion, law, natural law and deontological approaches.
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Advantages:
 Set of rules that can be followed and knowing actions are right.
 The absolute rules make application of corporate governance more achievable.
Disadvantages/ limitations:
 Takes no account of evolving norms within society and development of ‘advances’ in

morality.
 Still subject to human interpretation = different views on the same issue.
 There will never be universal agreement.
 Two absolutist positions may be incompatible and therefore irreconcilable = can tell
lie to save an innocent life?
Relativism (pragmatic ethics) is the view that a wide variety of acceptable ethical beliefs and
practices exist.
It recognises the differences that exist between the rules of behaviour prevailing in different
cultures. Significant in the context of international business as ethical opinions may change
over time.
KEY KNOWLEDGE
Deontological Ethics v Teleological Ethics

The deontological approach judges the action, while the teleological approach judges the
outcomes.
Deontology (the word is linked to the word “duty”) looks at all actions as being the result of
a duty or “categorical imperative”. It is irrelevant what the consequences are of the action –
the ethical behaviour is judged by the action itself, not its consequences. This school of
ethical thinking is associated most strongly with the work of Emmanuel Kant.
For a deontological rule to exist, it must be capable of following a number of fundamental

rules or “maxims”, including:
 It must be possible to apply the rule universally and consistently (the “universality”
test)
 The rule should show respect for human dignity
Teleology makes moral judgements about the action by reference to their outcomes or
consequences. The act itself is not relevant in assessing whether it is ethical or not, it is the
consequences or potential consequences of an action that matters. Hence teleological
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ExPress Notes

thinkers may support the idea that victimless crimes may exist, if nobody is hurt by an
action.
It may be sub-divided into two parts:
Utilitarian ethics – an action is morally right if it benefits the greatest number of

people, even if it does harm to a minority.
Egotistical – the rightness or wrongness of an action is assessed only by references

to the person making the ethical judgement, not society as a whole.
Under teleological thinking, right or wrong becomes a question of benefit or harm.
KEY KNOWLEDGE
Development of Ethical Thinking: Kohlberg

Kohlberg's six stages can be more generally grouped into three levels of two stages each:
pre-conventional, conventional and post-conventional. The theories were developed from
analysis of child psychology and how children’s views of ethics morph into time by
experience. Progression through each level (or “plane” is sequential and no stage can be
skipped, though not all people reach the final level.
Plane/ level 1: Pre-conventional ethical thinking
1. Obedience and punishment orientation (How can I avoid punishment?)
2. Self-interest orientation (What's in it for me?)
Plane/ level 2 (Conventional)
3. Interpersonal accord and conformity (Social norms, desire to fit in with the crowd, the
good boy/good girl attitude)
4. Authority and social-order maintaining orientation (law are obeyed as an expedient in

order for society to function, but its core rightness or wrongness is not challenged. A level 4
thinker would be willing to obey laws that were imposed by a non-democratic government).
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Level 3 (Post-Conventional)
5. Social contract orientation (laws are obeyed only because the individual recognises that
laws must exist, evolve and require a degree of personal compromise in order for society to
function. A stage 5 thinker would be willing to accept laws implemented in a democratic
society only).
6. Universal ethical principles (Principled conscience. Laws and the reasoning of others are
not viewed as necessarily to be obeyed. Indeed, if a government passes a law that violates
a natural justice, such as imprisonment without trial, individuals have a duty to disobey the
law and overthrow the government).
KEY KNOWLEDGE
Resolving Ethical Conflicts

There are two principal models in the exam for attempting to resolve ethical conflict:
1. Tucker’s five questions

2. The American Accounting Association model.
In past exams, the examiner has stipulated which model to use, so you need to know both
in complete form.
Tucker’s five questions
Ethical decisions, such as whether to proceed with an investment, should be evaluated by

asking five core questions and obtaining evidence to reach an appropriate conclusion:
 profitable
 legal
 fair and equitable
 right, which is prone to subjective judgement
 sustainable or environmentally sound.
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American Accounting Association
American accounting association model – ethical decisions as a series of answers to

questions.
 Establish the facts of the case

 Identify the ethical issues at stake, eg stakeholder claim conflict
 Identify the norms, values and principles related (this could be particularly relevant if
assessing the behaviour of a person in a different culture/ country)
 Come up with alternative course of action possible (brainstorm all possibilities)
 Identify the best courses of action in alignment with the norms, values and
principles, ie produce a short list of viable choices
 Assess the consequences of each course of action
 Reach your decision.
Ethics and the accounting profession specifically
There is a substantial overlap in the syllabus for paper P1 and the syllabus for F8 and P7 in
this regard.
IFAC (International Federation of Accountants) fundamental ethical principles
Objectivity
Members should not allow bias, conflicts of interest or undue influence of others to
override professional or business judgements.
Professional behaviour
Members should comply with relevant laws and regulations and should avoid any
action that discredits the profession.
Professional competence and due care
Members have a continuing duty to maintain professional knowledge and skill at a

required level.
Members must be seen as acting diligently and in accordance with applicable
technical and professional standards
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Technical standards
Members should ensure all undertaken work is performed to the highest standard.
Integrity
Members should be honest and straightforward in al business and professional

relationships
Confidentiality
Members should respect the confidentiality of information acquired as a result of

professional and business relationships and should not disclose it to third parties
without authority to do so. Such information should not be used for the personal
advantage or members or third parties
Categories of threat to accountants’ independence:
 Self-interest (eg financial involvement)

 Self-review (eg auditing financial statements that include figures based on the
auditor having advised on implementation of an accounting standard)
 Advocacy (eg having a reason to believe a certain figure is right, when it’s
actually wrong such as attempting to neutrally assess a tax provision after
fighting the client’s case for a reduction in taxes payable).
 Familiarity (excessive personal knowledge of the client, resulting in progressively
hardened views of the client’s ethics and competence, thus destroying
scepticism)
 Intimidation (eg threat of humiliation, blackmail).
KEY KNOWLEDGE
Defining “Profession” and “Professionalism”

A profession is distinguished by having a:
 specialised body of knowledge

 commitment to the social good
 ability to regulate itself
 high social status.
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Accountants should seek to promote or preserve the public interest. If the idea of a
profession is to have any significance, then it must make a bargain with society in which
they promise conscientiously to serve the public interest. In return, society allocates certain
privileges. These might include one or more of the following:
 the right to engage in self-regulation

 the exclusive right to perform particular functions, such as conduct audits or speak in
court on behalf of somebody
 special status.
There is more to being an accountant than is captured by the definition of the professional.
It can be argued that accountants should have the presentation of truth, in a fair and
accurate manner, as a goal. This is because members of society at large are generally
impacted by the actions of a profession, even if they have no direct involvement in that
profession themselves.
Members of any profession therefore have an ongoing wider duty to society at large rather
than solely to their own professional body.
KEY KNOWLEDGE
Corporate Social Responsibility

The CSR Network (a not-for-profit NGO) defines corporate social responsibility (CSR) as
being “about how businesses align their values and behaviour with the expectations and
needs of stakeholders - not just customers and investors, but also employees, suppliers,
communities, regulators, special interest groups and society as a whole”.
In other words, it is the degree to which companies voluntarily engage with perceived duties
beyond their minimum legal duties, if any legal duties even exist.
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KEY KNOWLEDGE
Gray, Owen & Adams Viewpoints on Corporate Social

Responsibility

Gray, Owen & Adams identified seven possible viewpoints that stakeholders might take,
ranging from the most limited view of social corporate responsibility (pristine capitalists) to
the most extreme (deep ecologists). In the exam, you may be required to define each of
these, or suggest which of these viewpoints a particular stakeholder appears to fit into and
why. The ones that we feel are the most important for the exam are in red.
Pristine capitalists: Business has no moral responsibilities beyond their

obligations to shareholders and creditors.
Expedients: Social responsibility may be appropriate if it is in the

business’s economic interest.
Proponents of the social contract (“social contractarians”): There is

effectively a contract or agreement between the organisation and those
who are affected by their decisions.
Social ecologists: Believe that business activities result in resource

exhaustion; waste and pollution must be modified. Organisations must be
socially responsible.
Socialists: Seek to promote egalitarian equality.
Radical feminists: Aim to promote feminine values such as co-operation.

Note that this is not associated with the women’s rights movement.
Deep ecologists: Suggest that man has no greater rights to resources or life
than other species.
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KEY KNOWLEDGE
Sustainability

Sustainability is the ability to continue to generate the same return without causing
permanent damage to the environment.
 Weak sustainability:
This believes that the focus should be on sustaining the human species and the natural
environment can be regarded as a resource. The weak sustainability viewpoint tends to
dominate discussion within the Western economic viewpoint.
 Strong sustainability:
This stresses the need for harmony with the natural world; it is important to sustain all
species, not just the human race. They see a requirement for fundamental change,
including a change in how man perceives economic growth (and whether it is pursued at
all).
(end of ExPress Notes)
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1. Some Key Things to DO at Paper P1 7

2. Corporate Governance and Responsibility 10

3. Risk Management and Internal Control 22

4. Professional Values and Ethics 27

Components of an effective study system

 The ExPress notes for that paper

Your stage in These ExPress ExP ExP ACCA online

Our ExPress notes fit into our portfolio of materials as follows:

Notes Notes Notes

To maximise your chances of success in the exam we recommend you visit

Some Key Points to DO at Paper P1

 Prioritise the three areas of the syllabus within your study:

 Illustrate the relevance of your knowledge by reference to recent real business

 Book on an ExP course if you can possibly afford it.

Corporate Governance and

Independence Responsibility Accountability

Possible exam relevance:

Low Minimal effort required Keep informed

High Keep satisfied Key players (core stakeholders)

Possible exam relevance:

 A useful checklist for assessing the performance of a board of directors.

 Fiduciary duties of directors (legal duty arising from trust law)

 Provide leadership to the board,  Execute the business plans

 have no executive (ie day-to-day management) responsibilities. Executive directors

The role includes four principal areas of responsibility:

Advantages of a unitary board structure (disadvantages of a multi-tier structure) include:

Drawbacks of a unitary board structure (advantages of a unitary structure) include:

 A NED or independent director cannot be expected to both manage and monitor.

These may include:

Basic Profit Options Pensions Discretionary

Possible exam relevance:

Key features “Comply or explain” approach. Quasi-legal approach, with a series

Examples UK Combined Code 2006/ 2008 Sarbanes-Oxley Act (USA)

Relative Allows common sense judgment. Clear and unambiguous. In an

Risk Management and Internal

Internal environment: The internal environment encompasses the tone of an

Event identification: Internal and external events affecting achievement of an entity’s

Risk response: Management selects risk responses – avoiding, accepting, reducing, or

Monitoring: The entirety of enterprise risk management is monitored and modifications

Expected impact Low Reduce Accept

Professional Values and Ethics

These include religion, law, natural law and deontological approaches.

 Takes no account of evolving norms within society and development of ‘advances’ in

For a deontological rule to exist, it must be capable of following a number of fundamental

It may be sub-divided into two parts:

Utilitarian ethics – an action is morally right if it benefits the greatest number of

Egotistical – the rightness or wrongness of an action is assessed only by references

Under teleological thinking, right or wrong becomes a question of benefit or harm.

Plane/ level 1: Pre-conventional ethical thinking

1. Obedience and punishment orientation (How can I avoid punishment?)

2. Self-interest orientation (What's in it for me?)

Plane/ level 2 (Conventional)

4. Authority and social-order maintaining orientation (law are obeyed as an expedient in

1. Tucker’s five questions

Tucker’s five questions

Ethical decisions, such as whether to proceed with an investment, should be evaluated by

American accounting association model – ethical decisions as a series of answers to

 Establish the facts of the case

Ethics and the accounting profession specifically

IFAC (International Federation of Accountants) fundamental ethical principles

Professional competence and due care

Members have a continuing duty to maintain professional knowledge and skill at a