ACC 325 - Governance, Business Ethics, Risk Management and Internal Control Flashcards

Flashcards for reviewing key concepts from the lecture notes.

Governance

Administering the processes and systems placed for satisfying stakeholder expectation; it means to steer.

Corporate Governance

A set of systems, procedures, policies, practices, standards put in place by a corporate to ensure that relationship with various stakeholders is maintained in transparent and honest manner.

Good corporate governance promotes

Investor confidence, which is crucial to the ability of entities listed to compete for capital.

IIA says governance is

A system by which a company is controlled and directed; includes the rules and procedures for making decisions on corporate affairs to ensure success while maintaining the right balance with stakeholders' interest.

HAIRDRIFT (Governance and other underpinning concepts)

Honesty/probity, Accountability, Independence, Responsibility, Decision making / judgment, Reputation, Integrity , Fairness, Transparency / openness

Accountability

The emphasis is the managers accountability to the shareholders, but also accountable to other possible stakeholders.

Independence

The emphasis is making sure that there are truly nonexecutive directors on the board who are free to critique the job performance of management. Independence is not having a 'conflict of interest' issue.

Integrity

B behaving in accordance with high standards of behavior and a strict moral or ethical code of conduct. This means 'doing the right thing.' 'Being a straight shooter.'

Transparency / openness

Not hiding 'anything'. Transparency means clarity. This involves full disclosure of material matters which could influence the decisions of stakeholders.

Rights and responsibilities of shareholders

Shareholders have the right to receive all material information that may affect the value of their investment and to vote on measures affecting the organization's governance.

Company Secretaries

They are an officer of the company and as such they have an operational role in the company. They also have role to play in corporate governance by making sure that the directors are complying with corporate governance

Regulators role

Making sure that public companies' financial information is transparent, reliable and accurate.

Institutional investors

Manage funds of individual investors. They are organizations which pool large sums of money and invest those sums in security, real property and other investment assets.

Agency Theory

A theory of the relationship between the principal and an agent. In limited companies, the directors and senior managers act as agents of the shareholders, who own the company

Agents

The directors and senior management of the company. They are selected and hired to run the company in the best interest of the shareholders.

Principals

The shareholders. They elect the board and the boards hire the CEO who is in charge of putting the management team together.

Agency Relationship

Arises when one or more persons (the principals) engage another person (the agent) to perform some service on their behalf that involves delegating some decision making authority to the agent

Agency costs

The costs of having an agent make decisions are behalf of a principal. Applying this to corporate governance, agency costs are the costs that the shareholders incur by having managers run the company instead of running the company themselves.

In the context of agency, accountability means

The agent is answerable under his contract to his principal and must account for the resources of his principal and the money he has gained working on his principal's behalf.

Transaction costs theory

economic theory. Is based on the idea that companies have to decide which activities are needed to be performed 'in house' and which activities it can buy from external sources.

Social contract position

Take the expedient viewpoint and takes it a step further, in saying that companies are given a license to operate can they can operate as long as they deserve the license.

Social Ecologist

Companies should do everything they can to minimize the harm they do to the environment. Companies adopt environmentally friendly positions, not because they have to, but because it is their responsibility to do so.

Board of Directors

An elected group of individuals that represent shareholders. The board is a governing body that typically meets at regular intervals to set policies for corporate management and oversight.

2-tier company board structure

Membership of the two boards is entirely separate. The effectiveness of this type of structure will depend on the relationship between the chair and CEO.

Executive directors

Directors who also have executive management responsibilities in the company. They are normally full-time employees.

Non-executive directors (NEDS)

Directors who do not have any executive management responsibilities and are not employees of the company.

Duties of directors

Directors have a fiduciary duty to act in the best interest of the company. They need to use their powers for proper purpose, avoid conflicts of interest and exercise a duty of care.

Role of the Chairman

Chairman must act as the spokesperson of the board and is the conduit of communication between the CEO and the shareholders.

Role of the CEO

Responsible for the executive management of the company operations and is the leader of the management team.

Ethics

A 'system of moral principles, rules and conduct.'

Business Ethics

The application of ethical principles and methods of analysis to business.

Consequentialist Approach

Is to take the view that the 'correctness' or 'rightness' of an action depends on its outcome (the consequences of the outcome).

Deontological Approach

Associated with the ideas of the 18h century philosopher Kant. This approach takes the view that certain actions are ethically right and others are wrong

Unethical Practice

An action that falls outside of what is considered morally right or proper for a person, a profession or an industry.

Ethical Dilemma

A situation in which a difficult choice has to be made between two courses of action, either of which entails transgressing a moral principle.

A threat to independence of accountants in practice

Includes self-interest, self review, advocacy, familiarity, and intimidation.

Rules-based

A code would contain specific rules about how they should act in a specific situation

Principles-based code

A code that specifies general principles of ethical behavior and requires the accountant to act in accordance with the principles.

Risk

The probability that some future event could adversely impact the organization. Risk is measured in terms of probability and impact.

Systemic Risk

Not fully uncontrollable by an organization and not entirely predictable.

Unsystemic Risk

Usually controllable by an organization and is reasonably predictable.

Financial Risk

The risk which has some direct financial impact on the entity.

Non-Financial Risk

Types of direct financial impact on the business.

Interest Rate Risk

That are connected with interest factors such as bonds/ debentures, faces the interest rate risk.

Currency Risk

The volatility in the currency rates.

Equity Risk

Depreciation in one's investment due to the change in market index.

Commodity Risk

With the absolute changes in the price of the commodity.

Credit Risk

When a counter party is unable or unwilling to fulfill their contractual obligation.

Liquidity Risk

Arises due to mis-matches in the cash flow i.e. absence of adequate funds.

Trading Risk

Absence of the liquidity or enough products or securities etc to actually undertake buy and sell activities.

Funding Risk

Refers to the inability to meet the obligations.

Operational Risk/Management Risk

Arises due to inadequate systems, system capacities, system failure, and obsolescence risk, management failure on account co-ordination, faulty control or human error.

Legal Risk

A counter party does not have the legal or regulatory authority to engage in the transactions.

Political Country Risk

Arises where the firm have its business operations abroad.

Business/Industry & Service Risk

Uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes business to fail.

Strategic Risk

Business plans which have not been developed properly and comprehensively since inception.

Compliance Risk

The compliance or breaches of laws/ regulations which the entity is supposed to adhere.

Fraud Risk

Through the abuse of systems, controls, procedures and working practices and be perpetrated by an outsider or insider.

Reputation Risk

The negative public opinion.

Transaction Risk

Due to failure or inadequacy of internal system, information channels, employees integrity or operating processes.

Disaster Risk

On account of natural calamities and man- made risks disasters.

Regulatory Risk

Is on account of change in Government policies and perceptions.

Technology Risk

Failure of system caused due to tampering of data access to critical information, non availability of data and lack of controls.

Risk Management Process

Used to describe the processes which aim to assist organizations identify, understand, evaluate and take action on their risks with a view to increasing the probability of their success and reducing the impact and likelihood of failure.

Effective risk management plan focuses on

Identifying and assessing possible risks.

The Process of Risk Management

Logical and sequential steps of Risk Identification, Risk Analysis, Risk Assessment and Handling of Risk

Risk Identification

The first stage of the risk management strategy.

Risk Analysis

Helps to identify and manage potential problems that could undermine key business initiatives or projects.

Risk assessment

The way in which enterprises get a handle on how significant each risk is to the achievement of their overall goals.

Risk Avoidance

To avoid taking or choosing of less risky business/project.

Risk Retention/absorption

The handling the unavoidable risk internally and the firm bears/ absorbs it.

Risk Reduction

It is better chance of dealing with any risk situation.

Risk Transfer

Refers to legal assignment of cost of certain potential losses to another.

Risk Mitigation

To reduce adverse effects. It is the process by which an organization introduces specific measures to minimize unforeseen operational or procedural obstacles encountered during an activity.

Transfer Risk

To the risk the risk where transfers risk to another agency when risk is better equipped to take care of a risk for a consideration.

Tolerate Risk or Risk Retention

Retention of the risk by accepting the loss when it occurs or bearing/absorbing internal losses.

Reduce Risk

Outsourcing is an example of this when the outsourcer can demonstrate higher capability at managing or reducing risks.

Avoid Risk

Results in complete elimination of exposure to loss due to a specific risk and avoids high risk to mitigate during a handling process.

Combine Risk

When the business faces two or three risks the overall risk is reduced by combination and is suitable within the areas of financial risk.

Sharing Risk

Insurance does this a method of a consideration whether can be a paying of insurance premium with the company will share the risk during re-insurance.

Hedging Risk

Exposure of funds to fluctuations in foreign exchange rates, prices etc., bring about financial risks resulting in losses or gain.

Internal Control

A process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

Internal control objectives

Relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations.

Internal control

Process designed, implemented and maintained by those charged with governance, management and other personnel.

Internal Control Nature

Establishes preventing measures in the organization and follows the principle that key activities in the organizations should be processed by one person and be checked by the independent person.

Accounting Controls

Comprise the plan of organization and all methods and procedures that are concerned mainly with and relate to, the safeguarding of assets and the reliability of the financial information.

Administrative Controls

Very wide in their scope, include all other managerial controls concerned with decision-making process and have an indirect relationship with financial records.

Segregation of duties

The division of an operation into a series of sub-operations undertaken by different people that allows for internal checks to take place.

Organizational Structure

The structure or pattern of an organisation meaning system of arrangements and relations as between various levels of personnel for carrying out of plans and policies towards achievement of objectives.

Objectives

The aims, goals, purposes or accomplishments which the top management lay down and expect the staff members to achieve.

Authorization and Approval

All transactions should require authorization or approval by an appropriate responsible person with specified limits for these authorizations.

Personnel

Should possess be proper capabilities commensurate with their responsibilities.

Management

Is responsible for establishing, monitoring and reviewing the systems of internal control.

Records and Reports

Should be maintained accurately and adequately so as to assist the management in formulating present and future events in decision making and planning.

Accounting Controls

Those controls that encompasses primarily check that the transactions to be recorded and processed have been authorised, and that they are all included and that they are correctly recorded and accurately processed.

Protections of Assets

Custody of assets involves measures designed to ensure that access to assets are only provided to authorized personnel.

Supervision

Day-to-day transactions and the recording thereof and is the supervisory role undertaken by staff allocated those with proper training and suitability to such a function.

Control Environment

Communication and enforcement of integrity and ethical value, Commitment to competence, Participation by those charged to governance , Management's philosophy and operating style, Organizational structure , Assignment of authority and responsibility and Human Resource policies and practices.

Monitoring of Controls

Whether bank reconciliations are being prepared on a timely basis, sales personnel's compliance with the entity's policies on terms of sales contracts and a legal department's oversight of compliance of ethical and business policies practices.