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Module 1 Accounting and society

Part A Accountants as members of a profession


Public interest or self interest?
- Responsible decision-making
Enlightened self interest
Ideals of accounting entrepreneurialism and professionalism
What is a profession?
- Self-regulation
- From self-regulation to a co-regulatory process
What is a professional?
Professionals the traditional view and the market control view
Trust and professions
Attributes of the accounting profession
- A systematic body of theory and knowledge
- An extensive education process
- An ideal of service to the community
The well-being of society
The pursuit of excellence
Community service
- A high degree of autonomy and independence
Example 1.1 Co-regulatory approach to setting accounting standards in Australia
Co-regulation and professional discipline
- A code of ethics for members
- A distinctive ethos or culture
- Application of professional judgment
- The existence of a governing body
The professions regulatory process
- Accounting Professional and Ethical Standards Board
- Background
- The quality assurance process
- Professional discipline

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Regulation of member conduct


Penalties and appeals
Part B Interaction with society
Accounting roles, activities and relationships
- Relationships and roles
- Accounting work environments
Table 1.1: Types of accounting work environments
- Public practice accounting
Big Four accounting firms
Second-tier accounting firms
Small practices and sole practitioners
Roles in public practice
Table 1.2: Public practice roles
- Professional accountants in business
Table 1.3: Private practice roles
- Accounting in small and medium enterprises (SMEs)
Table 1.4: PAIB description of activities of a professional accountant
Generating value
The role of accountants as financial advisers
Accounting as external advisors to SMEs
- Public sector
- Not for profits (NFPs)
Social impact of accounting
- Social impact example depreciation and behaviour
- Impacts of higher levels of depreciation
- Impacts of lower levels of depreciation
Credibility of the profession
- Credibility under challenge
- Key issues causing reduced credibility
Creative accounting
Poor audit quality

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Lack of auditor independence


Financial accounting distortions
Case Study 1.1: The collapse of ABC Learning
Auditor failure
- Restoring credibility to accounting
Establishment of the Financial Reporting Council
Accounting standards are backed by law
Auditors must apply the code of ethics
FRC responsible for auditor independence
Enhanced regulation
Adoption of international standards
Capability considerations
- Business leadership capabilities
- Technical skills, knowledge and experience
- Soft skills, knowledge and experience
- TSKE and SSKE career perspectives
- Career guidance system

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Module 2 Ethics
Part A: Professional ethics
Impact of ethical or unethical decisions
Ethics an overview
- Example 2.1: James Hardie Industries NV
Ethics in accounting real life scenarios
- Ethical dilemmas
Table 2.1: Ethical issues experienced by accountants
Example 2.2: Keeping on trucking
Example 2.3: Sustainable distribution
The accounting work environment
Applying ethics
Part B: Ethical theories
Example 2.4: A normative ethical theory utilitarianism
Teleological theories (consequential)
- Egoism
Example 2.5: Egoism and providing a professional opinion
- Restricted egoism
- Utilitarianism
Example 2.6: Cost benefit analysis by Ford
Table 2.2: Differences between ethical egoism and utilitarianism
Deontological theories (duty based)
- Motive
- Rights
- Justice
Example 2.7: Equality
Virtue ethics
- Moral agency
Many possible outcomes
Part C: Compiled APES 110 Code of Ethics of Professional Accountants
The public interest ethics in practice

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An introduction to the APESB Code of Ethics


- Part A of the code general application of the Code
Integrity (s.110)
Example 2.8: Moral courage
Objectivity (s.120)
Professional competence and due care (s.130)
Confidentiality (s.140)
Professional behaviour (s.150)
Case study 2.1: Scott London, former senior partner (audit) at KPMG Los Angeles
- The conceptual framework approach (ss. 100.6-100.11)
Threats (s.100.12)
Table 2.3: Threats to fundamental principles
Example 2.9: Intimidation a threat to the fundamental principles
Table 2.4: Examples of threats accountants in public practice and business
Safeguards (ss.100.13-100.16)
Ethical conflict resolution (ss.100.19-100.24)
- Part B of the code members in public practice
Professional appointment (s.210)
Referrals
Conflicts of interest (s.220)
Conflicts between two or more clients
Conflicts between the member and the client (incompatible activities)
Second opinions (s.230)
Fees and other types of remuneration (s.240)
Professional fees
Contingent fees, referral fees and commissions
Commissions and soft-dollar benefits
Marketing and professional services (s.250)
Gifts and hospitality (s.260)
Custody of client assets (s.270)
Objectivity all services (s.280)
Example 2.10: Reliance A&A

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Australian preface to discussion on independence (ss.290-291)


Independence audit, review and other assurance engagements (ss.290-291)
Figure 2.2: Independence checklist for employees to be used annually in conjunction with
employee review
Table 2.5: Common threats to independence and relevant safeguards audit and review
engagements
Provision of non-assurance services to audit clients (s.290.154)
Case Study 2.2: Arthur Andersen
- Part C of the code - members in business
Conflicts of interest (s. 310)
Preparation and reporting of information (s.320)
Reporting with integrity
Acting with sufficient expertise (s.330)
Financial interests (s.340)
Inducements (s.350)
- APES GN 40 Ethical Conflicts in the Workplace Considerations for Members in Business
Examples of ethical failures by accountants
- Sonya Denise Causer (August 2010) Member in Business (Integrity, Professional behaviour)
- Trevor Neil Thomson (May 2010) Member in public practice (Integrity, Objectivity, Professional
behaviour)
- Warren Sinnott (June 2014) Member in public practice (Objectivity, Professional competence and
due care, Professional behaviour)
Part D: Ethical decision-making
Figure 2.3: Influences on an individuals decision
Example 2.11: Whistleblowing
Factors influencing decision-making
- Individual factors
- Organisational factors
Example 2.12: Poor ethical cultures cause significant trouble
Example 2.13: Omega Finance
- Professional factors
- Societal factors

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Law and regulation


Culture
Ethical decision-making models
- Philosophical model of ethical decision-making
- Example 2.14: DIGFX
- American Accounting Association model
- Example 2.15: An asset by any other name
- Example 2.16: Chain of command

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Module 3: Governance concepts


Part A: Overview of corporate governance
Governance
- Table 3.1: Examples of agents and principals
- Accountants and effective governance
- Importance of governance
- Governance and performance
The need for governance
- Stewardship theory
- Agency theory
- Agency issues and costs
Monitoring costs
Bonding costs
Residual loss
Excessive non-financial benefits
Empire building
Risk avoidance
Differing time horizons
Example 3.1: Agency costs
Components of corporate governance
- Figure 3.1: Corporate governance framework
- Corporations
Table 3.2: Types of corporations
Figure 3.2: Level of company regulation
- Shareholders
Individual shareholders
Institutional shareholders
- The board
Figure 3.3: The primary functions of the board
Board of directors
Alternative board structures and relationships
- Directors

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Board chair
Role of the CEO
Independence of directors
Figure 3.4: Directors independence characteristics
The role of the board
Conflict of interest
Act in the corporations best interests
Exercise powers for proper purpose
Duty to retain discretion
Duty of care, skill and diligence
Continuous disclosure regimes
Examples of the exercise of directors duties
Example 3.3: Centro case
Example 3.4: James Hardie case
Duty to prevent insolvent trading
Summary of board duties and functions
Committees of the board
Risk management committee
Nomination committee
Remuneration committee
Audit committee
Benefits of audit committees
Limitations of audit committees
Example 3.5: The Enron audit committee
Internal and external auditors
Regulators
Objective of regulation
Principles-based versus rules-based regulation
Stakeholders
Stakeholder concept
Stakeholder map
Figure 3.5: Corporate stakeholders

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Table 3.3: Nature of the corporation and some stakeholder relationships


Employees
Suppliers and lenders
Table 3.4: Considering suppliers and lenders as stakeholders
Consumers (customers)
- Management
Operational management
Part B: International perspectives on corporate governance
Global push for improved governance
Thirty years of corporate governance
- International development timetable
- United Kingdom
- United States
Committee of Sponsoring Organisations of the Treadway Commission
Sarbans Oxley Act
Audit reform
Corporate accountability
Other international approaches
- Australia
Ramsay Report
ASX corporate governance principles and recommendations
Corporate Law Economic Reform Program Act 2004 (Cwlth)
Audit reform
Financial reporting
Part C: Codes and guidance
OECD Principles of Corporate Governance
- Principle 1: Ensuring the basis for an effective corporate governance framework
- Principle 2: The rights and equitable treatment of shareholders and key ownership functions
- Principle 3: Institutional investors, stock markets, and other intermediaries
- Principle 4: The role of stakeholders in corporate governance
- Principle 5: Disclosure and transparency
- Principle 6: The responsibilities of the board

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UK Financial Reporting Council Corporate Governance Code


ASX Principles and recommendations
- (1) Lay solid foundations for management and oversight
- (2) Structure the board to add value
- (3) Act ethically and responsibly
- (4) Safeguard integrity in corporate reporting
- (5) Make timely and balanced disclosure
- (6) Respect the rights of security holders
- (7) Recognise and manage risk
- (8) Remunerate fairly and responsibly
- Understand the ASX Principles
- The ASX Principles and Recommendations
- Principle 1 Lay solid foundations for management and oversight
- Principle 2 Structure the board to add value
- Principle 3 Act ethically and responsibly
- Principle 4 Safeguard integrity in corporate reporting
- Principle 5 Make timely and balanced disclosure
- Principle 6 Respect the rights of security holders
- Principle 7 Recognise and manage risk
- Principle 8 Remunerate fairly and responsibly
Alternative international approaches to governance
- Table 3.5: Governance systems
- Market-based systems
- Relationship-based systems European approaches
Different political, legal and regulatory structures
Company law
Employee representation
Stakeholder issues
Shareholder rights and participation mechanics
Board structure, roles and responsibilities
Supervisory body independence and leadership
Disclosure

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Germany
France
- Relationship-based systems Asian approaches
Differing corporate governance models
Japan
China
Family-controlled companies and business networks
India
Part D: Non-corporates and governance
Governance in other sectors
Family-owned business and small and medium-sized enterprises
Not-for-profit organisations
- The diversity of the not-for-profit sector
- Example 3.6: Governance of a childcare centre
Public sector enterprises
- The uniqueness of the public sector
- Example 3.7: Governance in the public sector
The significance of the non-corporate sector to the economy
Part E: Governance failures and improvements
Common failure factors
- Remuneration
- Wilful blindness
- Complex financial instruments
Improving corporate governance
- Risk management
Internal control and risk management
Internal control and risk systems including accounting, risk control and internal audit
- Independence of the chair of the board
- Continued evolution of corporate governance

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Module 4: Governance in practice


Corporate governance success factors
- Board appointment and cessation
Appointment
De-staggering
Departures
Removal
Two-strikes rule shareholder spill the whole world
Example 4.1: Reaction to shareholder spills
Disqualification
Ethics or disqualification
- Diversity fairness and performance
Board diversity
Adopting diversity
- Remuneration and performance
Understanding the debate
Example 4.2: Remuneration headline illustration
- International debate about remuneration levels and fairness
Table 4.1: Wage gap between CEOs and entry level graduates (multiples)
Payments for past and future performance and motivation
Non-executive directors
Executive directors and other senior executives
Performance-based remuneration
Disclosure, transparency and remuneration
Tightening rules regarding remuneration Australian illustrations
Remuneration, risk and the GFC
Public examples
Example 4.3: Americas most overpaid CEOs
Example 4.4: BHP Billiton
Operational issues
- Employees generally
- Occupational health and safety

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Example 4.5: Workplace injuries


- Fair pay and working conditions
- Family and leave entitlements
- Ethical obligations employee governance
Satisfying the objectives of the OECD Principals
Example 4.6: OECD Principles can create improved employment standards
Case examples of failure
Example 4.7: Apple Inc.
Example 4.8: Pike River Coal Mine
- Trade and labour unions
- Audit and related regulation
Example 4.9: Centro and PwC auditor liability
Impact of the legal system on the corporation
- The legal system
- The economy and the legal system
Proof, penalties and redress criminal and civil
- Laws leading to criminal penalties
- Laws with civil outcomes and civil penalties
- Redness compared with penalties
Competition and protecting markets for goods and services
- Competition policy
Workable competition
- Competition and stakeholders
Table 4.2: international competition legislation and regulators
- Regulating anti-competitive conduct
- Abuse of market power
Misuse of market power
Example 4.10: Cabcharge - $14 million penalty for breach
Example 4.11: Intel fined EUR 1.06 biliion
- Mergers and acquisitions
Example 4.12: ACCC v. Metcash Trading Ltd [2011] FCAFC 151
- Agreements between competitors cartel conduct

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Output restrictions
Allocation customer, suppliers or territories
Bid-rigging
Price-fixing
Example 4.13: Midland brick case
Example 4.14: International airline pricing cartel
- Unilateral restrictions on supply (exclusive dealing)
Example 4.15: Hypothetical Tummy Fill
- Resale price maintenance
- Approvals procedures
Example 4.16: Competition law and potential penalties
Legal compliance and governance
Why have a compliance program? As identified by Professor Fels
- Whistle-blower protection
Australian Corporations Act whistle blowers protection
Example 4.17: National Australia Bank dealing room failure
Example 4.18: Sherron Watkins (Enron)
Consumers and customers
- Caveat emptor to consumer protection
Regulation and consumer protection
Table 4.3: Some important common approaches to consumer protection and, in particular,
the issue of misleading conduct
- Misleading conduct and representations
Example 4.19: Apple and 4G iPads
Puffery
- Unconscionable conduct
Example 4.20: Amadio case
Governance issues in the non-corporate sector
- Government bodies
- Charities and not-for-profits sector
Figure 4.1: Top concerns about charities
Case Study 1: Fraud

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Case Study 2: Governance and fraud


Case Study 3: Governance, private benefit, conflict of interest
The corporation and financial markets
- Role of markets
- Information and the media
Example 4.21: David Jones a market manipulation event?
Ratings agencies
- Protecting financial markets
- Insider trading
Example 4.22: Calvin Zhu insider trading or more?
- Market manipulation
Principles relating to market manipulation
Working definition
Churning
Pools
Runs
Fundraising documents
Example 4.23: John Hartman manipulation insider trades and greed
- Bribery
- International experience of bribery and corruption
Example 4.24: Royal Dutch Shell bribery allegations
- Rogue trading
- Ponzi schemes
Example 4.25: Ponzi scheme
- Phoenix companies
- Representation
Table 4.4: Shareholder representations
- The representational role of institutional investors
Example 4.26: News backs Murdoch despite shareholder threat
- Expanding ethics
Example 4.27: Olympics Corporation

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Module 5 Corporate Accountability


Overview and introduction to key elements
- The evolution of corporate accountability
- History of CSR Reporting
- Environmental sustainability
Example 5.1: Environmental disasters
- Social sustainability
Example 5.2: WACOSS model of social sustainability
- Economic sustainability
- Linking environmental, economic and social sustainability
Figure 5.1: The three pillars of sustainable development
- The boards responsibility for sustainability of the organisation and organisational initiatives
The evolution of different organisational forms: social enterprises and B-Corporations
- Introduction to the key elements
Accountability
CSR
Sustainability
Sustainability reporting
Natural capital
Natural capital accounting
Integrated reporting
Integrated thinking
Drivers of increased business accountability
- The importance of climate change and its relevance to CSR reporting
- The Global Financial Crisis (GFC) and the recognition of market and ethical failures: a case for
accountability and transparency
- Other incentives tied to maximising the value of the organisation and shareholder wealth
Preferential capital flow
Brand and reputation
Risk management incentives
External benefits to companies from communicating through corporate social responsibility
(CSR) reporting: the relationship between CSR and the corporate cost of capital

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Cost of capital benefits


Improved analysts forecasts
Improved general perception of the company
- Corporate identity and accountability
- The shareholder primacy perspective
Table 5.1: Shareholder primacy versus social contract
- Externalities and potential government intervention
Linking to ethical theories
- Enlightened self-interest
- Stakeholder theory
Who are stakeholders?
Normative stakeholder theory
Managerial stakeholder theory
- Organisational legitimacy
The social contract
Legitimacy theory
- Institutional theory
- Summary
What can be measured and reported?
- What is measurable?
Social reporting
Example 5.3: Social return on investment (ROI)
Environmental reporting
Example 5.4: Puma
Economic reporting
Limitations of traditional financial reporting
- Scope of reporting
- Elements of financial reporting
- The practice of discounting future cash flows
Example 5.5: Discounting away the liabilities
- Reliable measurement and probability
- Focus on short-term results

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- The entity assumption


Reporting and guidelines
- What is required? (Mandatory reporting)
Requirements embodied within the Corporations Act and accounting standards
Figure 5.2: Sections of an annual report where mandatory social and environmental
reporting requirements are normally reflected
CSR-related corporate governance disclosures
National Greenhouse and Energy Reporting Act
Table 5.3: National Greenhouse and Energy Reporting Act reporting individuals
Emissions Reduction Fund
National Pollutant Inventory
Issues of disclosure for Australian mandatory reporting requirements
European Union emissions trading scheme
- Guidelines and non-mandatory reporting
Figure 5.3: The relationship between non-mandatory corporate social responsibility
reporting guidelines and the three pillars of sustainability
The Global Reporting Initiative
External factors
Internal factors
Integrated reporting
OECD Guidelines for Multinational Enterprises
Carbon Disclosure Project
United Nations Global Impact
AccountAbility AA1000 series
Equator Principles
The Greenhouse Gas Protocol
Trucost
Sustainability Accounting Standards Board
Dow Jones Sl
- Other initiatives
Social audits
Figure 5.4: The social statement of the Body Shop regarding employees

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Corporate governance mechanisms aimed at improving social and environmental


performance
Corporate governance mechanisms to specifically address climate change
Table 5.4: Best practice corporate governance practices for addressing climate change
Environmental management accounting
Current reporting practice
- Surveys of current reporting practice
- Examples of best practice and innovative reporting
International initiatives on climate change
- Climate change accounting techniques
- Accounting for the levels of emissions
Scope 1
Scope 2
Scope 3
Table 5.5: Major emissions trading/reporting schemes
Current developments
- Socially responsible investments
Figure 5.5: A spectrum of capital options
Responsible investment
Sustainable investment
Thematic investment
Impact investment
- Natural capital accounting
Natural capital and business
The role of accounting

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