live soft skills

soft skills Polly Peck, Maxwell, Barings The 20 th century <Polly Peck, Maxwell, Barings > In 1932, two economists Bearle and Means made some observations about American companies: ● Shareholders were more likely to sell their shares than speak out if they thought directors were not running the company very well. This could result in poor quality management never losing their jobs. ● Some American companies were getting very By the 1950s, companies were growing ever larger – what we now know as " The 1970s – 1990s saw problems starting to become common. By the late 1980s, there were some famous corporate collapses – some due to poor management, but many due to fraud: large , and with so many shareholders there was a growing gap between those who owned the companies, and those who controlled them. globalization " … the existence of large multinational companies with influence around the world was well under way. Polly Peck ● Rapid growth in the 1980s took this East

The South Seas Bubble by soft skils ● In the early Eighteenth Century, the South Seas Company was granted exclusive trading rights in the South Seas (South American colonies) in return for helping to finance Government borrowing. ● To help grow their operations, they looked for investors and issued shares. ● Things seemed to be going well – more and more investors put money in. ● There were expensive London offices – it all looked very successful. ● Management lied about how good it was – with no information available other than what management told them, investors did not know the truth. ● In 1718, Britain and Spain went to war … and the ability to trade in the South Seas was now zero. ● But investors did not know this and kept buying shares ….. ● …..whilst management secretly sold their own shares. ● Once the truth got out, there was a crash – the " South Seas Bubble " had burst. What can we learn from this? ● Investors need to be able to trust managers / directors

soft skills Limitations of internal control systems Even if Control Systems are assessed as very strong, auditors will still do SOME substantive testing. Controls are never completely reliable because: ● staff make mistakes ● staff collude to override systems ● staff believe the cost of the control is greater than the benefit ... so refuse to do it ● controls are designed for normal events ... unique / new types of transaction may bypass the system

soft skills WHAT IS AN INTERNAL CONTROL SYSTEM? According to the Turnbull guidance in the UK Combined Code, control systems need to: ● Safeguard company assets ● Maintain the efficient running of the business ● Protect the accuracy of financial reporting information ● Protect the company from breaking laws and regulations There are several ways in which control can be achieved in an organisation: ● The use of contracts (e.g. with employees) to clarify roles and responsibilities ● A system of reward and discipline ● Feedback and feedforward ● A clear organisational and command structure It is generally accepted that a good Internal Control System is made up of 5 elements: ● A strong Control Environment ● Good Control Procedures ● Good Risk Assessment ● Good Information Systems ● Effective Monitoring (typically the role of internal auditors ) Control environment The control procedures are unlikely to be effective unless there is a strong control environment: ● Management Att

soft skills In family companies, it is often the case that: ● family members have special voting rights ● family members have guaranteed seats on the board. This can lead to both positive and negative governance issues. Positive ● with the family name at stake, there is likely to be a greater feeling of "ownership" on the Board, which may reduce the risk of unethical behaviour ● to continue the family name, a longer term view of management may occur. Negative ● a less independent board ● the board may have a dominant person / group of family members ● with board members often coming from a single family, there may be a lack of variety in ideas, and an unwillingness to change previous decisions ● family problems may become business problems ● there may be unsuitable people on the board, who were elected purely because of their membership of the family. DOMINATED COMPANIES

What is professional behaviour? In its simplest terms, professional behaviour is behaving in a manner that is prescribed, and expected, by your profession. In a wider sense, professional behaviour would involve: o Following the rules and standards mentioned above o Ensuring your work was always of the best quality o Not doing anything to damage the reputation of the profession o Actively trying to improve the reputation of the profession o Acting in the "public interest" at all times. The public interest On many occasions in your studies, you meet the concept of "public interest". For example, auditors are usually expected to keep client information As noted in confidential ; but one exception to this rule is where disclosing the information would be in the public interest. chapter 8 , this is a very difficult concept. For example: o How many of the public should we consider? o How many can we consider? o As a result of such difficulties, the professional account

SARBANES-OXLEY ACT (SARBOX, SOX) After the collapse of Enron, WorldCom, and a series of other American corporate frauds and failures, the US Government was keen to act quickly and firmly. On 30 July 2002, the Sarbanes-Oxley Act was passed (it is named after the 2 US politicians who sponsored it through Congress). It was not long before it became known as Sarbox … or SOX. There are many differences between SOX and the UK Combined Code: ● SOX is law, with strict penalties for non-compliance. The Combined Code is Best Practice, not law ● SOX makes audit partner rotation the law, whereas in the UK such matters are covered by the profession’s Codes of Ethics ● SOX has a ban on auditors providing a range of "other services" to their audit clients. In the UK, very few "other services" are banned, but are instead considered within the objectivity area of Ethics. ● SOX requires the CEO and CFO to personally attest to the accuracy of the Annual Report, Quarterly Reports

A clash of responsibilities? As a However, accountants also have responsibilities to others, such as family, religious groups etc. Of particular interest are a professional’s responsibilities to As an employee, you have contractual (and ethical) responsibilities: professional , an accountant has responsibilities as described earlier in the chapter. employers . o To abide by your contract o To follow the rules of your workplace o To do as your employer says o To show a duty / loyalty to your employer and act in the organisation’s best interests (e.g. by acting in the best interests of the organisation’s shareholders and other stakeholders) o To carry out work honestly and not allow personal interests or pressures to outweigh employer interests o Clearly, if your employer expects you to behave in one way, but your profession expects you to do something else, then you face a conflict. Possible solutions to this conflict could be: To keep employer information confidential. o Allowing l

What is professional behaviour? In its simplest terms, professional behaviour is behaving in a manner that is prescribed, and expected, by your profession. In a wider sense, professional behaviour would involve: o Following the rules and standards mentioned above o Ensuring your work was always of the best quality o Not doing anything to damage the reputation of the profession o Actively trying to improve the reputation of the profession o Acting in the "public interest" at all times. The public interest On many occasions in your studies, you meet the concept of "public interest". For example, auditors are usually expected to keep client information As noted in confidential ; but one exception to this rule is where disclosing the information would be in the public interest. chapter 8 , this is a very difficult concept. For example: o How many of the public should we consider? o How many can we consider? o As a result of such difficulties, the professional accoun

WHAT IS ETHICAL? Ethics has different meanings to different people. To some, there is a fixed set of rights and wrongs that can never change. An action is either ethical or unethical, whatever the circumstances. Others believe that there is a fixed set of rights and wrongs at any given time – but that over time this can change. Behaviour that was "right" 500 years ago may now be considered unethical. Similarly, some believe that different ethical rules will need to exist in different countries and cultures, because people are different around the world and there cannot be one set of rights and wrongs that apply to everyone. Others believe that right and wrong depends entirely on the circumstances, and that there are no rules as such. In the exam , you may be required to use any of the theories in this chapter to comment on someone’s behaviour. Whether you believe their behaviour to be right or wrong will be affected by your own beliefs, so be careful! The key is to consi

STAKEHOLDER ACCOUNTABILITY If we believe that stakeholders are important, and if we believe that stakeholders may also have some responsibility for company behaviour, we need to ensure that companies are reporting adequate information to these stakeholders. Over recent years, company Annual Reports have grown massively in size, and part of this growth has been in non-financial reporting . Triple Bottom Line But this raises additional issues: reporting refers to the growth in Social and Environmental disclosures alongside financial disclosures. o Are there any "rules" on what should be reported? o Will there therefore be any comparability year on year, or within industries? o Will information reported be balanced ... or will it inevitably be more positive than negative? o There have been developments in these areas in recent years. Environmental accounting and audit frameworks (such as EMAS and ISO14000) have been developed to provide some guidance. Auditing information is

Why deal with stakeholders at all? As we saw earlier in the Chapter, the traditional view is that companies should be run for their owners, the shareholders, and that is all. However, we also saw that an alternative argument is that it might be good for business ("expedient") to keep staff happy, customers and suppliers happy, the local community happy etc. Instrumental Many believe that companies should demonstrate some CSR purely for profit reasons – that CSR looks good to the outside World and leads to higher sales. There is no moral element to this decision – the decision is taken purely for profit. Studies have shown that most consumers in the UK believe that companies are only fighting pollution, being nice to suppliers, and looking after employees because they think it makes them look like good companies and attract customers and profits.

Managing risk There are many techniques available to manage risk. Some look to manage overall risk, whilst others target specific risks. Avoiding risk Some risks can be totally avoided. If a business has identified that opening a subsidiary in Austria appears high risk, then not opening the subsidiary solves the problem! However, to totally avoid a business opportunity is often a rather extreme reaction – and if no risks are taken, the chance of returns being earned is small! Reducing risk Overall Risk Reduction Risk is the uncertainty caused by variable returns. One way to deal with uncertainty is to By operating in many different sectors, it is likely that when one sector is performing badly, another will be doing well, leading to a diversify . smoothing of profits. Advantages of Diversification ● Smoothing of profits, making forward planning easier ● May be economies of scale between some sectors, however diverse those sectors are. Disadvantages of Diversification ● Spreading r

 Risk types Financial Risk The risk that a company will not be able to survive as a going concern. This risk has a number of elements: Credit Risk The risk that customers fail to pay their bills on time (or at all!) Market Risk The risk of changes in the value of a company’s financial assets (e.g. shares, bonds) Liquidity Risk The risk of running out of cash because inflows are not arriving in time to pay outflows! Currency Risk The risk of changing foreign exchange rates in the future. This could lead to: ● ● ● Transaction Risk – change in the value of a future receivable or payable Translation Risk – change in the value of the company’s Balance Sheet if year-end exchange rates have changed Economic Risk – change in the competitiveness of the company due to longer term changes in exchange rates Interest Rate Risk The change in the value of investments and loans as a result of changing interest rates. This is the risk of breaching laws and regulations and being fined (or even cl

FAMILY DOMINATED COMPANIES In family companies, it is often the case that: ● family members have special voting rights ● family members have guaranteed seats on the board. This can lead to both positive and negative governance issues. Positive ● with the family name at stake, there is likely to be a greater feeling of "ownership" on the Board, which may reduce the risk of unethical behaviour ● to continue the family name, a longer term view of management may occur. Negative ● a less independent board ● the board may have a dominant person / group of family members ● with board members often coming from a single family, there may be a lack of variety in ideas, and an unwillingness to change previous decisions ● family problems may become business problems ● there may be unsuitable people on the board, who were elected purely because of their membership of the family.

STAKEHOLDER ACCOUNTABILITY If we believe that stakeholders are important, and if we believe that stakeholders may also have some responsibility for company behaviour, we need to ensure that companies are reporting adequate information to these stakeholders. Over recent years, company Annual Reports have grown massively in size, and part of this growth has been in non-financial reporting . Triple Bottom Line But this raises additional issues: reporting refers to the growth in Social and Environmental disclosures alongside financial disclosures. o Are there any "rules" on what should be reported? o Will there therefore be any comparability year on year, or within industries? o Will information reported be balanced ... or will it inevitably be more positive than negative? o There have been developments in these areas in recent years. Environmental accounting and audit frameworks (such as EMAS and ISO14000) have been developed to provide some guidance. Auditing information i

CORPORATE SOCIAL RESPONSIBILITY Much of the above analysis helps to split stakeholders into different types, but does not spend long looking at the moral aspect. As companies have grown into multinational organisations, their ability to affect the world and how society operates has grown as well: ● Companies can change the way society works Should companies consider stakeholders at all, and if so, which ones? o Mobile phones o Email o ● Companies pollute the environment, and big companies can have a noticeable effect on their local community ● A big company in a community will be a major employer – decisions it takes could be the main influence on the prosperity of the community ● Companies who use low cost countries for supplies and services could be seen to be keeping those countries low cost … which could mean they are keeping wages down to what might be viewed as unacceptably low levels Facebook So how much responsibility do these companies have for their actions? Should we

Agency theory and stakeholder theory Shareholders ( There is a risk that the directors do not run the company in the best interests of the shareholders … and this is the potential The question is, is this necessarily a problem at all… Earlier in the course, we defined corporate governance as "running the company in the best interests of shareholders ● Who are these other stakeholders? ● To what extent should / could / must the Board take them into consideration? ● What if what is good for one stakeholder is bad for another stakeholder? ● What if what is good for shareholders might be viewed as principals ) employ directors ( agents ) to run the company for them. agency problem . and other stakeholders ". This raises a number of questions: unethical behaviour ? Types of stakeholder Later in the chapter, we will look at the extent to which organisations might want to deal with different stakeholders. But before we do this, we need to consider It may be the case that di

The overall authority of ISAs and how ISAs are applied in individual countries ISAs are designed to be applied in the audit of financial statements and may be applied to the audit of other historical financial information. Each ISA contains the basic principles and procedures to apply to that ISA (identified by bold type in the ISA itself). Other text in the ISA provides guidance on the implementation of the principles. In other words, to apply the ISA, the whole of the text, not simply the parts in bold type, must be read and understood. ISAs are not designed to override the requirements for the audit of entities in individual countries. So if our country did not require an audit of specific entities, then the ISAs would not overrule that requirement. Regarding the detailed requirements of an audit, such as the nature of testing or the issuing of an engagement letter, where our country requirements meet those of the ISA, then the ISA will be used. It is therefore unlikely that our co

Analytical Procedures as substantive evidence ISA 520 states that analytical procedures must be used at the planning stage to identify risks, and at the completion stage of the audit as a final review of the FS. They may also be used at the substantive stage when the auditor is auditing the draft financial statements. Analytical procedures are not just the comparison of one year with another. AP’s can be used in the following ways: • Ratio analysis • Trend analysis • In order to use analytical procedures the following process should be followed: • Create your own expectation of what you think the figure should be • Compare your expectation to the actual figure • – Example 1 create an expectation of payroll costs for the year by taking last year’s cost and inflating for payrise and change in staff numbers – proof in total. – Example 2 – calculate the receivables day ratio and compare it with prior year and credit terms given to customers. If the figure is higher than expected it may i

‘Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements’ ISA 320 para 3 So what really is materiality? (material by nature). • A big amount of money (material by size). • – triggers a threshold – indicates future developments or other significant events – whose disclosure is compulsory Why is materiality important? • show a true and fair view. If financial statements contain a material misstatement they cannot • of material misstatement to an acceptable level. Auditors therefore must design their audit procedures to reduce the risk • before they design their procedures – hence its place in this chapter. This means that auditors must decide on what they mean by ‘material’ What are the implications for the work the auditors do? Auditors will: BUT • Need to examine all items in the financial statements which are material • amounts have not been they will also need to design tests to give assu

Bank and cash controls Control objectives ● That money is not stolen ● That money received is paid into company bank accounts quickly ● That payments are for genuine business purposes. Control procedures ● Money on company premises kept in a safe ● Where there are tills, these are: o Kept locked when no staff are present o Have prices of products pre-programmed o Only accessible to someone with a key, or a personalised swipe card o ● Money taken to bank using security vans, which do not always take the same route on the same day of the week ● List of approved signatures for each bank account ● Regular bank reconciliations ● Cash receipts recorded immediately, and compared with date cash arrives in bank account ● Payments above a minimum figure require 2 signatures. Reconciled daily (till record v actual cash in till)

Audit procedures Observation Observation consists of looking at a process or procedure being performed by others. It could be used here to observe employees scanning their cards when they start and finish a particular shift. However, its use is limited because it only provides evidence that the process happened at the time of observation. It should be used in conjunction with other audit procedures. Inquiry Inquiry consists of seeking information of knowledgeable individuals, both financial and non-financial, throughout the entity or outside the entity. This can be used to find out how the time recording system works by interviewing relevant staff so would be a good procedure to use. Recalculation Recalculation consists of checking the mathematical accuracy of documents or records. It could be used to calculate the hours worked according to the information on the time recording system. Reperformance Reperformance is the auditor's independent execution of procedures or controls tha

The Oxford Brookes University Research and Analysis Project (RAP) is the final component of the Oxford Brookes University BSc (Hons) in Applied Accounting degree. To reach this stage of the BSc degree you have already successfully completed at least nine demanding ACCA professional exams. You have already demonstrated your undergraduate level abilities by passing the ACCA exams; the RAP provides you with the opportunity to demonstrate the remaining graduate level attributes necessary for the award of the BSc degree. Please read the RAP learning outcomes and assessment criteria carefully before you start your RAP work. This will help you understand what is expected of an ACCA student who wishes to submit a RAP to Oxford Brookes University. You should understand that your research work and preparation of the RAP is covered by the Oxford Brookes University academic regulations. This includes the University’s regulations on cheating which can be found on this website. If an ACCA student o

In countries where there is greater inclusivity in decision-making, or where there is a strong family dominance, it is possible that a A The 2-tier system may also operate with family dominated companies, with family members having their own top-level private Board which has controlling voting rights (and therefore where the true decision-making power rests). To an extent, schools in the UK may be seen to have a 2-tier system, with the Head / Principal and a small number of senior teachers on a management board, with the School Governors in a more supervisory role. Of course, schools naturally have a lot of stakeholders (parents, teachers etc.) so would seem well-suited to this structure. 2-tier board will exist. Management Board will run the day to day operations of the company, but will be monitored by a higher level Supervisory Board . In UK terms, this is similar to having the NEDs on a top board, with the Executive Directors on a separate lower Board. Advantages of 2-tier boa