P1 Acca

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For Examinations to June 2015
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Revision Essentials
ACCA
Paper P1 | GOVERNANCE, RISK AND ETHICS
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ACCA
PAPER P1
GOVERNANCE, RISK & ETHICS
REVISION ESSENTIALS
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publication can be accepted by the author, editor or publisher.
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These are condensed notes focusing on key issues for those of you who lead busy, mobile
lives or for those of you who want to revise in a more focused fashion.
CONTENT
CONTENT
0101
0201
0301
0401
0501
0601
0701
0801
0901
1001
1101
1201
1301
1401
1501
1601
1701
1801
1901
2001
2101
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Syllabus
Scope of corporate governance
Agency relationships and stakeholder theory
The board of directors
Board committees
Directors remuneration
Approaches to corporate governance
Corporate social responsibility
Management control systems
Internal audit and compliance
Reporting on internal control
Identifying, assessing and controlling risk
Ethical theories
Ethics and social responsibility
Professions and the public interest
Professional practice and codes of ethics
Conflicts of interest and unethical behaviour
Integrated Reporting and Sustainability
Reading and examination technique
Analysis of past exams
Examiners feedback
Be Warned: These notes only offer guidance on key issues. On their own they are not enough to pass the examination.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
(i)
SYLLABUS
compliance with relevant professional codes, laws and

regulations.
Aim
To apply relevant knowledge, skills and exercise
professional judgement relating to governance,
internal control, compliance and the management of
risk within an organisation, in the context of an overall
ethical framework.
Relational diagram of main capabilities
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Governance and responsibility (A)
Main capabilities
Internal control and

review (B)
On successful completion of this paper, candidates should be

able to:
define governance and explain its function in the

effective management and control of organisations and
of the resources for which they are accountable;
evaluate the Governance, Risk and Ethics role in

internal control, review and compliance;
explain the role of the accountant in identifying and

assessing risk;
Professional values, ethics and social responsibility (E)
Position within the syllabus
GRE
(P1)
explain and evaluate the role of the accountant in

controlling and mitigating risk; and
Professional
Module
demonstrate the application of professional values and

judgement through an ethical framework that is in the
best interests of society and the profession, in
Identifying, assessing, and

controlling (C and D)
AB
(F1)
0101
Professional
Papers
AA (F8)
Governance and responsibility
1
2
3
4
5
6
7
The scope of governance

Agency relationships and theories
The board of directors
Board committees
Directors remuneration
Different approaches to corporate governance
Corporate governance and corporate social
responsibility
Governance: reporting and disclosure
1
2
3
8
B
1
2
3
4
C
1
2
3
Controlling risk
Targeting and monitoring of risk

Methods of controlling and reducing risk
Risk avoidance, retention and modelling
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Detailed syllabus
SYLLABUS
Internal control and review
Management control systems in corporate governance

Internal control, audit and compliance in corporate
governance
Internal control and reporting
Management information in audit and internal control
Professional values and ethics
1
2
3
4
5
Ethical theories
Different approaches to ethics and social responsibility
Professions and the public interest
Professional practice and codes of ethics
Conflicts of interest and the consequences of unethical
behaviour
Ethical characteristics of professionalism
Social and environmental issues in the conduct of
business and of ethical behaviour
6
7
Identifying and assessing risk
Risk and the risk management process

Categories of risk
Identification, assessment and measurement of risk
0102
SYLLABUS
Approach to examining the syllabus
Section B
Time allowed: 3 hours
Section B comprises three questions of 25 marks each, of

which the candidate must answer two. These questions will
be more likely to assess a range of discrete subject areas from
the main syllabus section headings, but may require
application, evaluation and the synthesis of information
contained within short scenarios in which some requirements
may need to be contextualised (put into context).
One compulsory question
50%
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Section A:
Section B:
Choice of two out of three

25-mark questions
50%
Section A
Section A will be based on a case study style question, with

requirements based on several parts with all parts relating to
the same case information. The case study will usually
assess a range of subject areas across the syllabus and will
require the candidate to demonstrate high level capabilities to
evaluate, relate and apply the information in the case study to
several of the requirements.
Additional information
The examiner has stated that some simple arithmetical

calculations may be required when dealing with risk. This
will enable some aspects of risk to be examined that cannot
be examined in a solely narrative based examination.
The study guide offers more detailed guidance on the depth
and level at which the examinable documents will be
examined.
0103
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SCOPE OF CORPORATE GOVERNANCE
0201
Questioning mind, alert for errors, critical

assessment of facts and evidence
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Scepticism
Innovation
The process through which economic and social value is extracted from knowledge through the generation, development and
implementation of ideas to produce new or improved strategies, capabilities, products, services or processes.
0202
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0203
Public sector organisations

Not for profit. Usually based on value for money.
National (e.g. national government), sub-national (e.g. regional authorities, local government) and supranational (e.g. EU,
UN, WTO, IMF).
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Governance structure can be similar to the private sector, but stakeholders will be taxpayers, the general public and users
of the services provided.
0204
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Considerations
Understanding of the stakeholders involved and their claims.
Public sector entities are not controlled by shareholders.
Agency relationships can be complex and will involve those in government.
Culture and risks will be significantly different between public and private sector entities.
0205
AGENCY RELATIONSHIPS AND STAKEHOLDER THEORY
AGENCY THEORY
1.1 Key concepts
Agency the relationship between a principal and their

agent where the agent is hired/employed by the
principal to carry out a task on their behalf.
To act within the powers conferred by the

companys deed (memorandum and articles of
association in the UK) and to exercise powers for
proper purposes.
Not to restrain discretion (e.g. must use independent

judgement on the companys behalf).
To avoid conflicts of interest and conflicting

duties.
Not to make a secret profit (includes accepting

benefit or bribes from third parties).
To exercise due skill and care in the performance

of their duties.
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Agency costs the costs incurred in establishing and

monitoring the agent by the principal.
Residual loss the reduction in shareholder value

through the directors awarding themselves benefits
beyond basic salaries and incentive schemes (e.g.
company cars, houses, planes, club memberships, etc).
Agent is accountable to the principal for the outcome of

the work they carry out and the resources they use.
Directors are answerable to, and held responsible by,
the shareholders for their actions.
Fiduciary duty the duty imposed upon individuals

because of the position of trust and confidence in which
they stand in relation to another.
Fiduciary duties of directors include:
To act in good faith in the best interests of the

company.
0301
Agency problem concerns how principals control

agents to ensure they act in the principals best interests
and not in their own interests. Methods include:
Remuneration and incentive schemes.

Voting at AGM.
Determining composition of the board.
Shareholder resolutions.
Selling shareholding
One-to-one meetings
STAKEHOLDER THEORY
Any group or individual who can affect, or be affected by, the achievement of an organisations objectives
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0302
2.1 Mendelow
Stakeholder risk is the risk that the business will not

maximise its wealth because of the lack of
understanding of the impact of stakeholders on the
business by the directors.
By using Mendelow companies can:
understand if their current strategy is still in line

with stakeholders interests and power;
identify who will provide support to a strategic

project and who has the ability and aim to stop it;
try to reposition stakeholders to increase support

or reduce threats to a strategic objective;
encourage stakeholders to stay in their appropriate

category or prevent them moving to another
category;
identify change within stakeholders that may

imply that the current strategy needs to be rethought with the possibility of a new strategy
being developed.
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Maps stakeholder power (ability to impact strategy)

against interest.
POWER
High
Low
Keep satisfied
(L,H)
Key players
(H,H)
Minimal effort
(L,L)
Keep informed
(H,L)
High
INTEREST
0303
THE BOARD
1.1 Role, responsibilities and duties
Every company should be headed by an effective board,

which is collectively responsible for the success of the
company.
(UK Corporate Governance Code)
Reviewing performance of the company

(including that of the CEO and managers) and its
own performance as a board.
Setting the companys values/standards and

ensuring obligations to shareholders and others are
understood and met.
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THE BOARD OF DIRECTORS
Boards role is to provide entrepreneurial leadership of

the company within a framework of prudent and
effective controls which enables risk to be assed and
managed.
(UK Corporate Governance Code)
To define the purpose of the company and the values by

which the company will perform its daily existence and
to identify the stakeholders relevant to the business of
the company. Board must then develop a strategy
combining all three factors and ensure management
implement that strategy. (King Report, South Africa)
Responsibilities and duties include:
Setting the companys strategic aims/objectives.
Ensuring the necessary financial/human resources

are in place to achieve objectives.
Making decisions in the interest of the company.
0401
Ensuring that a satisfactory dialogue with

shareholders takes place and that contact with
shareholder opinion is maintained.
Establishing various committees (e.g. audit

committee, remunerations committee,
appointment committee) ensuring that they have
sufficient resources to undertake their roles.
Appointing a CEO with appropriate leadership

qualities.
Maintaining a sound system of internal control

(including risk management) to safeguard
shareholders investment and the companys
assets.
Presenting a balanced and understandable

assessment of the companys position and
prospects.
Undertaking a formal and rigorous annual

evaluation of its own performance, board
committees and individual directors.
Ensuring that directors have access to independent

professional advice.
Meeting frequently and insisting on receiving

relevant financial and non-financial information to
assess the qualitative measures that are important
to broader stakeholder interests.
NEDS within the board directly provide executive

directors with different expertise, experience and
perspectives.
NEDs bring independent scrutiny to the board,

challenging the CEO and executive directors
before strategies are devised and implemented.
Board accountability is enhanced by providing a

greater protection against fraud and malpractice
and by holding all directors equally accountable
under a cabinet government arrangement.
Reduces the likelihood of abuse of (self-serving)

power by a small number of senior directors.
Closer relationship and better information flow as

all directors are on the same single board.
Promotes easier co-operation between the board
members.
BOARD STRUCTURES
2.1 Unitary
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Includes both executive directors and NEDs who take

decisions as a unified group and are held legally
responsible (as a group and as individuals) for their
individual actions and the success of the company.
Advantages:
Board acts as one with equal status. All directors

have the same legal responsibility. NEDs are
empowered within the board, being given equal
status to executive directors, rather than just acting
in a supervisory capacity.
0402
Disadvantages:
No specific provision is made for employees,

external shareholders or union representatives to
be on the board.
Role of the NEDs demands high expertise and

extensive time commitment.
NEDs are dependent on the information provided

to them by the CEO.
Managers may be less inclined to share

information with a board as its monitoring
intensity over their actions increases.
NEDs may be considered as directly interfering

with the executive directors role.
2.2 Tiered
Stakeholders (e.g. investors and employees) can

sit on the supervisory board, therefore ensuring
their interests will be heard. No major strategic
decisions can be made without the cooperation of
the supervisory board.
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Management board comprises executive directors,

headed by CEO, focusing on operational issues and the
running of the business.
Supervisory board, comprising NEDs headed by the

company chairman drawn from employees,
shareholders and banks. Responsible for safeguarding
stakeholders interests and overseeing the management
board (including approval and evaluation of strategies,
appointment and dismissal of management board,
monitoring management board performance).
Direct power over management through the right

to appoint and dismiss.
Encourages transparency between management

and shop floor.
Disadvantages:
Potential for confusion over authority and

therefore lack of accountability.
Nomination of members of supervisory committee

may not be as independent as intended.
Because the management board generates most of

the information required and used by the
supervisory board, there is a risk that information
may be withheld or not fully disclosed (agency
problem).
By manipulating information to the supervisory

board, executive management will be able to
influence the agenda of the supervisory board.
Advantages:
Clear and formal separation between management

(those being monitored) and the monitors (NEDs).
0403
CEO/CHAIRMAN
3.1 CEO responsibilities
Taking remedial action where necessary and informing

the board of significant changes.
Maintaining the operational performance of the

company.
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Employee representatives may delay or block

decisions being made that are in the best interest
of the company but not for the employees (e.g.
restructuring, rationalisation, redundancies).
Formulating and successfully implementing company

policy.
Directing strategy towards the profitable growth and

operation of the company.
Developing strategic operating plans that reflect the

longer-term objectives and priorities established by the
board.
Monitoring the actions of the functional board directors.
Assuming full accountability to the board for all

company operations.
Representing the company to major customers and

professional associations.
Building and maintaining an effective executive team.
3.2 Chairman responsibilities
Run the board and set its agenda.
Maintaining an ongoing dialogue with chairman.
Putting in place adequate operational planning and

financial control systems.
Ensure that the members of the board receive accurate,

timely and clear information.
Ensuring that the operating objectives and standards of

performance are not only understood but owned by the
management and other employees.
Ensure effective communication with shareholders and

to ensure that the members of the board develop an
understanding of the views of the major investors.
Manage the board to ensure that sufficient time is

allowed for discussion of complex or contentious
issues.
Closely monitoring the operating and financial results

against plans and budgets.
0404
Take the lead in providing a properly constructed

induction programme for new directors that is
comprehensive, formal and tailored and facilitated by
the company secretary.
Take the lead in identifying and meeting the

development needs of individual directors, with (in the
UK) the company secretary having a key role in
facilitating provision.
Ensure that the performance of individuals and of the

board as a whole and its committees is evaluated at least
once a year.
Encourage active engagement by all the members of the

board.
3.3 Effective Chairman
Builds an effective and complementary board, initiating

change and planning succession in board appointments,
subject to board and shareholders approval.
Promotes the highest standards of corporate governance

and seeks compliance with the provisions of the
appropriate governance code (e.g. the UK Corporate
Governance Code) wherever possible.
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Ensures clear structure for and the effective running of

board committees.
Ensures effective implementation of board decisions.
Establishes a close relationship of trust with CEO,

providing support and advice while respecting
executive responsibility.
Provides coherent leadership of the company, including

representing the company and understanding the views
of shareholders.
Upholds the highest standards of integrity and probity.
Sets the agenda, style and tone of board discussions to

promote effective decision-making and constructive
debate.
Promotes effective relationships and open

communication, both inside and outside the boardroom,
between NEDs and the executive team.
0405
3.4 Split role
Avoids the situation where one individual has

unfettered (unrestricted) power.
4.1 Roles
Balance of power between board members such that no

individual will gain unlimited power.
Strategy challenge and offer advice on strategy.
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NEDs
CEO is able to concentrate fully on the management of

the company.
Important check and balance for investors (as well as

other members of the board).
Separate roles reduce the risk of a conflict of interest in

a single person being responsible for company
performance whilst also reporting on that performance
to markets.
Chairman can be an important sounding board for the

concerns of NEDs who, in turn, provide independent
representation of external concerns on boards of
directors.
Performance hold exec directors to account.
Risk ensure adequate system of internal control and

risk management.
People appoint and decide remuneration of

executives. Deal with contractual, disciplinary and
succession issues.
4.2 Skills and being effective
Integrity and high ethical standards, sound judgement,

ability, willingness to challenge and probe and strong
interpersonal skills.
Upholds highest ethical standards of integrity and

probity.
Supporting leadership role of executives, whilst

monitoring conduct.
Questions intelligently, debates constructively,

challenges rigorously and decides dispassionately.
0406
Listens sensitively to the views of others, inside and

outside of the board.
Gains the trust and respect of other board members.
4.4 Advantages
Promotes the highest standards of corporate governance

and compliance with the UK Corporate Governance
Code.
Independent monitoring.
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4.3 Independence threats
Holding too many NED positions and not being able to

devote enough time to the tasks in hand.
External expertise and knowledge, yet with insider

knowledge of the business.
Wider perspective.
Former employee of company (e.g. within past 5

years);
Perception and comfort factor for third parties (e.g.

investors, regulators).
Material business relationships with the company (e.g.

within the past three years);
Wider gene pool (e.g. gender, culture, ethnicity, age)

representative of major stakeholders.
Remuneration paid (apart from the directors fee) by the

company;
4.5 Disadvantages
Lack of appropriate numbers of suitably qualified

individuals.
Very close ties with the companys advisors, directors

or senior employees;
Relatively low rewards, but high liability (e.g. basic

salary, but equal share of blame).
Having been a member of the board for a long period of

time (e.g. more than nine years);
Conflict with executives when trying to get views

heard.
Being, or representing, a major shareholder;
Resentment from executive directors leading to board

disunity.
Participation in share option, performance-related or

pension scheme;
0407
Recruited for governance political correctness (e.g.

female or ethnicity).
INDUCTION, CPD AND PERFORMANCE
5.3 Performance appraisal
An understanding of the nature of the company, its

business and its markets.
A link with the companys people.
An understanding of the companys main relationships,

including meeting with the auditors.
Individual evaluation should aim to show whether each

director continues to contribute effectively and to
demonstrate commitment to the role.
Led by chairman with NEDs reviewing the chairman.
Role, responsibilities and duties of directors.
Need to communicate vision and culture, communicate

procedural duties, reduce time for new director to
become productive, make new director feel welcomed
and ensure retention.
5.2 CPD
Board should undertake a formal and rigorous annual

evaluation of its own performance and that of its
committees and individual directors.
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5.1 Induction
Chairman to take pro-active role in identifying

development needs.
All directors should reach and maintain an effective and

efficient level of operation.
Resources should be made available for developing and

refreshing the knowledge and skills of directors.
0408
AUDIT COMMITTEE
1.1 UK Corporate Governance Code requirements
Comprise 3 independent NEDs. At least one should

have recent and relevant financial experience.
Develop and implement policy on the engagement of

the external auditor to supply non-audit services, in line
with relevant ethical guidance.
Report to the board, identifying any matters in respect

of which it considers that action or improvement is
needed, making recommendations as to the steps to be
taken.
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BOARD COMMITTEES
Monitor the integrity of the financial statements of the

company including reviewing significant financial
reporting judgements used within them.
Review arrangements by which staff of the company

may, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other
matters (whistle blowing).
REMUNERATION COMMITTEE
Review internal financial controls, general internal

control and risk management systems (if not dealt with
by a separate risk committee or the Board).
Monitor and review the effectiveness of the companys

internal audit function. If there is no internal audit,
consider if there is a need and recommend to the board
accordingly.
Make recommendations to the board on the

appointment, re-appointment and removal of the
external auditor including remuneration and terms of
engagement.
Review and monitor the external auditors

independence and objectivity (in line with appropriate
standards, e.g. IFAC) and the effectiveness of the audit
process.
Formal and transparent procedures for developing

policy on executive remuneration and for fixing the
remuneration packages of individual directors.
Remuneration committee of at least three, or in the case

of smaller companies two, independent NEDs.
Committee should have delegated responsibility for

setting remuneration for all executives and chairman,
including pension rights and compensation payments.
0501
No executive director should be involved in deciding

his/her own remuneration.
Terms of reference, explaining its role and the authority

delegated to it by the board, should be made available.
2.2 Principal duties
Establishing an organisations remuneration policy for

executive directors.
Makes sure that directors are rewarded fairly and

according to market standards.
NOMINATION COMMITTEE
Making recommendations of executive remuneration

and its cost to the board.
Formal, rigorous and transparent procedure for the

appointment of new directors to the board.
Deciding upon the different types of reward.
Deciding on the time-period within which performance

related packages become payable.
Appointments to the board should be on merit and

against objective criteria.
Plans should be in place for orderly succession for

appointments to the board and to senior management
An appropriate balance of skills and experience within

the company and on the board should be maintained.
Prevents executive directors from setting their own

remuneration levels.
A majority of members of the nomination committee

should be independent NEDs.
Establishes a transparent system for setting executive

remuneration levels.
Chairman or an independent NED should be chair.
Committee should make available its terms of

reference, explaining its role and the authority delegated
to it by the board.
Guaranteeing transparency of directors compensation.
2.3 Perceived advantages
Helps to link objectives and performance-related pay

and looks into a balance between short-term and longterm performance elements.
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BOARD COMMITTEES
0502
3.2 Principal duties
Evaluating the existing balance of skills, knowledge and

expertise on the board.
Considering the ratio and number of executive and
NEDs.
Guaranteeing transparent procedures.
Forward thinking on succession matters.

RISK COMMITTEE
Ensuring the board and individual board members are

evaluated on a regular basis.
Searching for suitable candidates in a wide range of

areas to ensure that it chooses the most suitable
candidates for the business.
Developing appropriate selection criteria.
Ensuring the new board members receive proper

orientation and other necessary training.
Preparing for succession planning.
3.3 Perceived advantages
Selection process not captured by an individual

director (e.g. CEO).
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BOARD COMMITTEES
4.2 Role
Agree and approve the risk management strategy and

policies.
Assist the board to define the risk appetite of the

organisation.
Provide general and explicit guidance to the main board

on emerging risks and to report on existing risks.
Identify actual risks and the control deficiencies in the

organisation.
Independent selection procedure.
Allows senior executives to concentrate on running the

business.
Not a formal requirement. If no separate committee

exists, then role should be taken by the Audit
Committee if not by the board itself.
0503
Exercise oversight of managements responsibilities,

and review organisations risk profile to ensure that risk
is not higher than risk appetite determined by the board.
PUBLIC SECTOR
Arrangements can be many and varied.
Emphasis is on value for money and service
Receive and review risk reports from functions,

divisions, subsidiaries and other business components.
delivery.
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BOARD COMMITTEES
Ensure that infrastructure, resources and systems are in

place for risk management and are adequate to maintain
a satisfactory level of risk management discipline.
board with sub-committees.
Not uncommon for an oversight body to be

established by national government to ensure a well
run entity that meets its performance targets.
Monitor overall exposure and specific risks.
Monitor the effectiveness of independence risk

management functions throughout the organisation.
Review the strategies, policies, frameworks, models and

procedures that lead to the identification, measurement,
reporting and mitigation of material risks.
Review issues raised by internal audit that impact the
risk management framework.
Ensure that the risk awareness culture is pervasive
throughout the organisation.
Work with the audit committee on designing and
monitoring internal controls for management and
mitigation of risks.
May follow the private sector convention of a
0504
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EXAMINERS FEEDBACK
2104
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Revision Essentials includes:
ACCA syllabus aim and main capabilities

Core topics checklist
Summary of essential facts and theory
Further reading
Relevant articles
Comprehensive analysis of past examinations
Examiners' feedback for the last exam session
Exam technique
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Revision Essentials are not quality assured by ACCA but their content is substantially derived from materials which have been quality assured by ACCA.

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For Examinations to June 2015

Paper P1 | GOVERNANCE, RISK AND ETHICS

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Becker Professional Education's ACCA Study Materials

GOVERNANCE, RISK & ETHICS

For Examinations to June 2015

Copyright 2014 DeVry/Becker Educational Development Corp. All rights reserved.

compliance with relevant professional codes, laws and

Relational diagram of main capabilities

Governance and responsibility (A)

Internal control and

On successful completion of this paper, candidates should be

define governance and explain its function in the

evaluate the Governance, Risk and Ethics role in

explain the role of the accountant in identifying and

Professional values, ethics and social responsibility (E)

Position within the syllabus

explain and evaluate the role of the accountant in

demonstrate the application of professional values and

Identifying, assessing, and

Governance and responsibility

The scope of governance

Targeting and monitoring of risk

Internal control and review

Management control systems in corporate governance

Professional values and ethics

Identifying and assessing risk

Risk and the risk management process

Approach to examining the syllabus

Time allowed: 3 hours

Section B comprises three questions of 25 marks each, of

One compulsory question

Choice of two out of three

Section A will be based on a case study style question, with

The examiner has stated that some simple arithmetical

SCOPE OF CORPORATE GOVERNANCE

SCOPE OF CORPORATE GOVERNANCE

Questioning mind, alert for errors, critical

SCOPE OF CORPORATE GOVERNANCE

SCOPE OF CORPORATE GOVERNANCE

Public sector organisations

SCOPE OF CORPORATE GOVERNANCE

Understanding of the stakeholders involved and their claims.

Public sector entities are not controlled by shareholders.

Agency relationships can be complex and will involve those in government.

AGENCY RELATIONSHIPS AND STAKEHOLDER THEORY

1.1 Key concepts

Agency the relationship between a principal and their

To act within the powers conferred by the

Not to restrain discretion (e.g. must use independent

To avoid conflicts of interest and conflicting

Not to make a secret profit (includes accepting

To exercise due skill and care in the performance

Agency costs the costs incurred in establishing and

Residual loss the reduction in shareholder value

Agent is accountable to the principal for the outcome of

Fiduciary duty the duty imposed upon individuals

Fiduciary duties of directors include:

To act in good faith in the best interests of the

Agency problem concerns how principals control

Remuneration and incentive schemes.

AGENCY RELATIONSHIPS AND STAKEHOLDER THEORY