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THE

BUSINESS
AND
ACCOUNTIN
G
ENVIRONME
NT
Definition of organization.
An organization as a social arrangement which pursues
collective goals, which control its own performance and
which has a boundary separating it from its environment.

Key Points Description


Social Individuals gathered together for a purpose.
arrangement
Collective goals The organization has goals over and above the goals of
the people within it.
Controls Performance is monitored against the goals and adjusted
performance if necessary to ensure the goals are accomplished.

Boundary The organization is distinct from its environment.

Reasons why organization exist.


Pooling of physical
Individual or company pooling limited resources (4Ms)
together to attain some objectives.

Pooling of expertise
Individuals complementing their skills, expertise,
experience, etc in their attempt to attain some results.

Power Centre
Individual rarely has the power to influence events on a
large scale whereas a group of people can certainly
influence decisions.

No individual is all-rounder
No individual is capable of satisfying his/her needs.
Therefore organizations are formed to offer a variety of
products and services.

Synergy advantage
A team’s output is better than an individual.

Difference between organizations.


Ownership
E.g. : Private sector, owned by private owners/ shareholders as for
public sector, government is the owner.

Control
Individuals as owners themselves, by people working on their behalf
or indirectly by government.

Activity
What does the organization do or what is their core business?
Manufacturing? Service?

Legal status / Size


What is the status of the company as defined by the Companies
Act?
• Unlimited companies either sole proprietorship or
partnership.
• Limited companies either private or public: A limited
company is format to limit the liabilities of its owner would
only be held liable up to and only limited to the amount of
shareholdings that they hold in the company.

Source of finance
Where does the company find money to finance their organization?
Borrowing, government funding, share issues.

Technology
High use of technology such as I.T. industry or low use of
technology such as sundry/ sundry shop.

Profit / Non-profit orientated


• Profit = Company

• Non-profit = Charity, for example WWF World Wild Life

System
A system is a collection of interrelated parts which had
taken together forms a whole such that:
• The collection has some purpose
• A change in only of the parts leads to a change
in some other parts.
An organization is a system made up of

Departments Sub-systems

These sub-systems / parts are interrelated & interdependent.


The well being of the organization depends primarily on the
coordination of these sub-system / parts.

Distinctio Description
n
A closed • Isolated from its environment and independent of it
system
• thus no environmental influences affect the behavior

• Eg: medical research, NASA, the court & the jury


An open • Connected and interacts with its environment
system
• Takes in influences and influences from its environment

• Stable system which is nevertheless continually changing /


evolving
Semi- • Their relationship with the environment is in some degree
closed restricted
system • Eg: government in general, ministries in the government

Environment influences on organizations


Environment is everything outside the boundary of an
organization.
Macro Environment
Politico-legal environment (bank)
Legal framework that affect every companies:
1. Law of contract – terms and conditions
2. Criminal law - theft, bribery
3. Company law - reporting requirements
4. Employment law - equal opportunity
5. Health & safety - safety procedures
6. Data protection - personal data
7. Tax law - corporation tax payment, VAT

Legal and regulatory factors affect particular industries, if the public


interest is served. This is either of the two reasons:
• The industries are effectively, monopolies

• Large sum of public money are involved


Government is another key influence on the P environment.
E.g.: ruling government, diplomatic relationship with other countries

Economic environment
Government policy affects the whole economy.
Government is responsible for creating a stable framework in which
business can be done.
It is an important influence at local and national economic activities and
here are some of the factors and impacts:

Factor Description
Overall growth or
fall in Gross • Or demands for goods & services
Domestic Product

Local economic • Type of industries, labours rates, house rates


trends
Interest rate • How much does it cost to borrow money
(affects cash flow)
• Some companies carry a high level of debt

• Rising of it affect customers’ mortgage


payments
Inflation rate • Concern the purchasing power of money.

• High rate weaken the purchasing power of


money
• One needs more money to purchase / buy
Government • Eg: suppliers to government will be directly
spending affected.

The business • A natural order of things, a mixed of good &


cycle bad times, therefore affecting trading
activity.

Socio-cultural environment
All the stakeholders of a company form the society where the business operates.
Thus, need to carry out a demography study – study of human population and
human population trends.

Development Description
Growth Size of population.

Age distribution The young


The youth
The aged
Geography Concentration of population into certain
geographical areas.

Household and family Basic social unit


structure Size determine by number of children, whether
elderly parents live at home, etc.

Social structure Population broken down into a number of sub-


groups with different attitudes and access to
economic resources.

Nature of employment Employees are looking for quality working life and
employers are looking for the ways to reduce cost.

Technological environment
Technology can contribute to overall economic growth.
Our study focus on information technology and telecommunications.

Technological Description
impact
Type of product / Music DVD / MP3
services that are made Movie(cartridge) DVD
and sold
Magazine E-mag

Way the products are From labour intensive capital/machine


made intensive
Way services are From labour intensive capital/machine
provided intensive

Ways the firms are Advancement of IT has provided employer more


managed confident to delegate & decentralize

Means of From manual to electronic


communication

Micro Environment
The five competitive forces model
Prof. Porter
Industries & marketplace
The 5CFs Description
Barriers to new How easy or difficult for a potential company to
entrants enter the market / industry.
The easier it is, the more threat it is.
Threats of substitutes Alternatives that serve the same purpose.
More substitutes more competition for an
organization.

Bargaining power of More supplier more bargaining power


suppliers

Bargaining power of Customers can go to substitutes instead the


buyers organization only

Rivalry amongst the The more players/ competitors, the greater the
existing competitors level of competition.

Stakeholders
Stakeholders are groups, corporations or individual who
have an interest or a stake as well as ability to influence
the well being and future course of action of the
organization.

Stakeholders Description
Internal stakeholders • They are stakeholders who are employed by /
involved in the running of the organization.
• Eg: management, employee, CEO
Connected • They are stakeholders who have a financial link
stakeholders with the organization.
• Eg: shareholders, customers, suppliers,
bankers

External stakeholders • No direct link with an organization financially or


in the running of the company.
• Eg: competitors, government, public at large,
pressure group

Company law (Companies Act 1985)


• Companies are required to publish accounts annually for distribution to
their shareholders.
• A copy of accounts must be lodged with the Registrar of Companies (RoC)
and is available for inspection by any member for public.
• Accounts showed must be true and fair view.

• Companies Act also set formats for company account and states what
information must be disclosed.
• Appoint external independent auditors to audit the accounts.

Non-statutory regulation
N-S R Description
The Financial • Its chairman appointed by the government.
Reporting Council
• Guides the standard setting process.
(FRC)
The Accounting • Responsible for the issue of Financial Reporting
Standard Boards (ASB) Standards (FRSs)
• Lay down prescribed accounting treatments
where a variety approaches might be taken.
• Aim: ensure that users can compare the
accounts of different companies.
The Urgent Issues • Offshoot of ASB. (assistant)
Task Force (UITF)
• Role: assist ASB but unsatisfactory / conflicting
interpretations have developed.

International accounting standards


1. International Accounting Standards Committee (IASC) attempts to
coordinate the development of international accounting standards.
2. It includes representatives from many countries including UK and
USA.
3. ASB will support international standards by incorporating them
within the UK standards

The Stock Exchange regulations


1. Stock Exchange is a market for stocks and shares.
2. A company whose securities are traded in this market is ‘quoted’
or ‘listed’ company.
3. It is more extensive that the disclosure requirements of the
Companies Acts.

Auditing regulations
An audit defined as an independent examination of &
expression of opinion on the financial statement of an
enterprise.

1. Accounts of a limited company are required to be audited by the


Companies Act.
2. A limited company must engage a chartered certified accountant to
examine the financial statements to whether the accounts present a
‘true and fair view’ and comply with the Companies Act.
3. At the conclusion of their audit work, auditors issue a report
addressed to the owner, members and shareholders of the company
and published as part of the accounts.
4. Audit work is governed by Auditing Standards which issued by the
Auditing Practices Board.

Taxation
1. It will affect the work of the accounts of organizations that runs a
PAYE system or is registered for VAT.
2. Keeping records and submitting returns of payroll work to the
Inland Revenue and the Department of Social Securities (DSS).
3. Timing of accounting work in important, since returns are
required every month for payroll and every three months for
VAT. Info must be ready in time with these requirements.

Corporate governance
Defined as the way the management of a firm is
influenced by many stakeholders (including owners,
shareholders and creditors).
Different economies have systems or corporate
governance that differs in the relative strength of
influence exercised by the stakeholders & how they
influence the management.

1. Also refers to the systems, processes and responsibilities


involved in running an organization & the way it’s organized
and directed at BOD.
2. The guiding principle in the development of system of
governance is accountability.

Sphere Actions & Responsibilities


Directors • Responsible for:
i. formulating and setting strategic aims
ii. providing the leadership to implement them
iii. overseeing management processes and
reporting to shareholders
iv. ensuring that all the above are done within
the law

Shareholders • They appoint the directors to be the BOD.

• Appoint auditors to oversee the directors to


satisfy themselves that an appropriate
governance structure is in place.

Auditors • Acts independently of directors and


shareholders
• Objective: checking system on the processes
and reporting system relate to company’s
financial statement.

1. Corporate governance key problem :


How can the providers of capital ensure that the
directors act in the capital providers’ interest?
2. High profile scandals and frauds exposed because
shareholders in listed companies have insufficient influence
and insufficient knowledge of how the company is being run.
3. The Cadbury Committee on corporate governance using Code
of Best Practice (The Cadbury Code).
4. Main provisions of the Code:
1. Separation of the post of chairman and chief executive
2. Should consist of non-executive directors
3. BOD should have separate remuneration committee
made up entirely of non-independent non-executive
directors
4. Audit committees meet external auditors at least
annually without executive directors
5. Directors’ emoluments disclosed in accounts / annual
reports
6. Executive directors’ contracts should not exceed 3
years without shareholders’ approval for re-
appointment
7. Funds available to non-executive directors who wants
independent professional advice
5. Provisions are mainly concerned with limiting the powers of
executive directors and making them more accountable to
the shareholders.