Welcome to

ACCA’s Practice to Pass Session

March 2020 Attempt

(Day 4)

Pakistan & UAE

WhatsApp +971 555 245 672
 Day Wise Plan
DAY 4:
Topics:

o Professional Ethics / Public Interest / Corporate Code of Ethics P1 Dec 2013 Q4C
SBL Sep 2018: Cofold Q3A

o Board of Directors Specimen Paper # 1 (DCS) Q1B

(Split Roles, NEDs, Committees, Remuneration, Diversity, Insider Trading)

o Family Owned Vs Listed Cos -

o Internal Controls / Weaknesses SBL Sep 2018: Cofold Q3B

o Internal Audit (if time permits) -

 Professional Code of Ethics

Principles of Professional Ethics (IESBA / IFAC)- Mandatory on All Qualified Accountants

▪ Integrity:
Honest, straight forward, truthfulness, do not conceal any wrong thing, fair dealing

▪ Objectivity:
Fact based, no bias, no conflict of interest, no undue influence

▪ Professional competence and due care:

Maintain professional knowledge and skills, up-to-date with all laws, diligent in work, act with due care

▪ Confidentiality:
Should not disclose confidential information unless there is legal or professional duty, do not use confidential
information for personal advantage

▪ Professional behavior:
Avoid actions which discredits the profession / members, for e.g. not following company policies or procedures
 Public Interest

A professional accountant is expected to protect the interest of the following,

IN ADDITION to shareholders’ interests

▪ Customers

▪ Suppliers

▪ Employees

▪ Government

▪ Society / community
 Corporate Code of Ethics
(issued by Organizations – applicable to all employees)

CCE Covers the following

Employees Customers / Suppliers Society / Community

▪ Gender equality ▪ Quality ▪ Job opportunities

▪ No discrimination ▪ Product safety ▪ CSR

▪ Diversity ▪ Personal data and privacy ▪ Environment / pollution

▪ Working conditions ▪ Fair business practice

▪ Health and safety

▪ Better pay
Topic: Prof Ethics / Public Interest

P1 Dec 2013: Lobo Co

Q4C
 P1 Dec 2013 Q4C – LOBO Co
A technological failure occurred at Lobo Company last year. A new computer system which was designed to control Lobo’s
complicated operational facility broke down shortly after it was installed. This meant that the company was unable to carry
out production processes normally for several days.

The cause of the failure was later found to have been a system specification error made by Frank Bub, the operations
director and a professional engineer. He had seriously miscalculated the capacity needed for the new system and had
ordered a computer system which was unfit for purpose. Not only had this resulted in the loss of several days of production
and a loss of loyalty and goodwill from customers and others, it also cost a large amount to repair and upgrade the system
to be able to cope with the actual demands placed upon it.

Frank Bub acknowledged that he had over-ridden normal procurement procedures in purchasing the system. But he was
thought by his colleagues to be such a competent engineer, it was not felt necessary for anybody else in the company to
discuss the purchase with the suppliers. His fellow directors believed that Mr Bub would exercise the judgement needed to
purchase and implement the new system. Because the system was needed urgently, there was no time to run it in ‘pilot
mode’ or to test it on site before it was fully installed. When he was asked about the failure, Frank Bub said that he decided
to buy the system in question because an old friend had recommended it and that he saw no need to take further advice
beyond that.

Required:
Discuss the fundamental principles of professional ethics which Frank Bub failed to observe and explain how an
awareness of his duty to the public interest may have prevented his errors. (9 marks)
 Chairman & CEO

Role & Responsibilities of Chairman

Main role: Running the Board

▪ Link between company and shareholders / stakeholders

▪ Communication with shareholders (e.g. Annual Report)
▪ Protect shareholder interests and increase long term shareholder wealth
▪ Ensure smooth running of board, such as:
 Appropriate size, knowledge, skills, experience, and independence of directors
 Balance between executive and non-executive directors
 Effective functioning of Board Committees
 Regular meetings
 Directors’ nomination, performance and remuneration
Role & Responsibilities of CEO
Main role: Running the Company

▪ Propose strategies to the board

▪ Implement decisions of the Board
▪ Monitor day to day running of business and all departments
▪ Manage resources effectively and efficiently
▪ Risk management and internal control systems
▪ Timely and accurate reporting
▪ Legal and regulatory compliance
▪ Interact with external parties, such as Government, key customers, key suppliers, Stock Exchanges
 Splitting of Roles Between Chairman & CEO
The Chairman runs the Board. The CEO runs the company. The running of the Board should be separate from
the running of the Company. Hence the role of Chairman and the role of CEO should not be performed by one
person, as this concentrate excessive power in the hand of one person. The Chairman should be independent
just like a NED.

Advantages of Splitting the Role:

o Segregation of duty leading to improved governance
o Chairman able to challenge CEO
o Other directors / employees can communicate with Chairman if they have concerns relating to CEO
o Higher shareholder confidence as Chairman is normally a NED

Disadvantages of Splitting the Role:

o Chances of disagreement or clash between Chairman and CEO
o Chairman may not have in-depth knowledge of business
 NEDs
Definition
▪ NEDs are part-time outside directors who are ‘independent’ i.e. they are not employee of the company.
▪ They get a fixed fee for being NEDs and are not entitled to any bonus or share options as it will create conflict
of interest and threaten their independence.

Role of NEDs
▪ Strategy: discuss strategies, bring external experience and leadership
▪ Performance: scrutinize the performance of Executive directors
▪ Risk: ensuring effective internal control and risk management systems are in place and financial reporting is
accurate and reliable
▪ People: nomination, remuneration and succession planning of executive directors and senior executives,
providing added comfort to shareholders

Advantages of NEDs
▪ Brings independence / adds confidence to shareholders
▪ Have external experience and wider perspective
▪ Scrutinize / challenge performance of CEO and executive directors
▪ Employees can discuss confidential or sensitive matter with NED directly (whistle-blowing)
▪ Company can comply with Regulatory / Listing requirements
Disadvantages of NEDs
▪ May lack independence
▪ Smaller remuneration as compared to executive directors (no incentive)
▪ May not give sufficient time to business

Independence of NEDs
▪ Not an employee of the company for last 5 years
▪ No business or financial relationship with the company for last 3 years
▪ Not an NED in same company for more than 9 years
▪ Not have close family ties or friendship with executive directors
▪ No family members working in the company in senior position
▪ No share in profit or having share options of the company

Number of NEDs?
 Board Committees
1- Nomination Committee (Majority NEDs):
a. Decide the size of the board
b. Ensures sufficient knowledge, skills and experience is available
c. Balance between EDs and NEDs
d. Appointment of new directors
e. Training and succession planning

2- Remuneration Committee (100% NEDs):

a. Decide remuneration policy / package
b. Link portion of remuneration with
i. Individual’s performance
ii. Medium to long term targets
3- Audit Committee (100% NEDs):
a. Review financial statements & internal controls
b. Liaise with external auditors
c. Supervise internal audit
d. Whistle blowing arrangement
Note:
All members have to be NED with
atleast one member having recent
expertise in finance and audit

4- Risk Committee (Majority NEDs):

a. Implement risk management process / ERM framework
b. Embed risk management in Organization’s culture
c. Identify key risks and recommend controls
d. Ensure internal controls are working effectively

Advantages (Importance) of Having Board Committees

▪ More focused and specialized
▪ More time can be spent by committees as full board has limited time
▪ Higher involvement by NEDs (e.g. in audit or remuneration committees)
▪ Board can focus more on strategic and business matters
▪ Increases shareholder confidence
 Remuneration & Rewards of Directors
General Principles

▪ Remuneration should be sufficient to attract, retain and motivate competent directors

▪ Remuneration should have following components:

 Fixed pay
 Variable / Performance based incentives:
▪ Short term incentives (e.g. bonus)
▪ Long term incentives (e.g. share options)

▪ Director cannot approve his own remuneration – to be done by Remuneration Committee (NEDs)

▪ Full transparency to shareholders (e.g. disclosures in annual accounts)

▪ Retention options:
▪ Attractive package
▪ Loyalty bonus (e.g. if you stay with Company for 5 years, you will get Rs XXX bonus)
▪ Long term bonus (performance based)
▪ Share options
 Diversity in the Board
Diversity means having variety of people in the board, normally based on demographics prevailing in that
society. Diversity is based on age, gender, educational / professional background, experience, ethnicity, etc.

Advantages of Diversity

▪ Wider pool of talent

▪ Broader range of ideas and knowledge

▪ More representative of the community / society

▪ Enhanced reputation and outlook of organization

▪ Compliance with listing regulations

Issues of Diversity

▪ May lead to sub-groupings within the board

▪ Board may ignore the views of diversified members

 Insider Trading / Dealing
Insider trading / dealing means buying or selling of company shares by its own directors or senior
executives based on information which is not publicly available as yet.

Why Insider Trading is Not Allowed

▪ Directors have to act in the primary interest of shareholders and not to make personal gains

▪ Directors have to maximize ‘long’ term value of the organization. If insider trading is allowed, then it is likely that
directors would be tempted to take short term decisions to make personal gains

▪ Insider trading can damage the reputation and integrity of the capital markets of the country
 Family Owned Co Vs Listed Co

Difference Between Family Owned and Public / Listed Companies

Family Owned Business Public / Listed Companies

▪ Owned by family members ▪ Owned by individuals or institutional investors

▪ Mostly private limited ▪ Listed company

▪ Lessor regulations and CG requirements ▪ Stringent regulations and CG requirements

▪ Freedom of taking decisions ▪ Decisions based on majority shareholder or voting

▪ None or few NEDs with weak position ▪ Significant NEDs having strong position

▪ No Board Committees ▪ Formal Board Committees

▪ Less focus on internal audit and risk management ▪ High focus on internal audits & risk management
 Extra Internal Controls in a Listed Company
(not found in family owned / private ltd companies)

▪ Chairman and CEO roles are split

▪ Sufficient NEDs

▪ Board Committees

▪ Internal Audit

▪ Whistle blowing arrangement

Topic: Governance Structure Weaknesses

Specimen Paper # 1 (DCS)

Q1B
 Internal Control Systems
An internal control system comprises the whole network of systems established in an organisation
to provide reasonable assurance that organisational objectives will be achieved and the assets will
be safeguarded.

Purpose / Importance / Advantages of Internal Control System

▪ Achievement of organization’s objective
▪ Orderly and effective conduct of business
▪ Assurance to board in discharge of their corporate governance responsibilities
▪ Mitigates risks faced by the organization
▪ Safeguarding of assets
▪ Completeness and accuracy of accounting records
▪ Accurate and timely financial reporting, both external and internal
▪ Prevention of fraud and error
▪ Compliance with regulatory laws and standards
▪ Provides reliable information to board to enable key decision making
 Internal Control Weakness & Recoms
Use Tabular Format in your answer

Weakness Recommendation Assume 3 marks

for 1 point

OR
Depending on the question

Weakness Impact Recommendation

Assume 4 marks
for 1 point
 Topics:
Ethical & Reputational Concerns + Internal
Control Weakness

SBL Sep 2018: Cofold Construction

Q3 A&B
 [[
Internal Audit
Internal audit is an independent, objective assurance function established within the organization,
with the aim of ensuring that governance process, risk management and internal controls are
working effectively.

Roles / Importance of Internal Audit Factors To Decide Whether Org Needs An Internal Audit
• Evaluating internal control system • Legal / Corp Governance requirement

• Reviewing accounting and financial information • Size, complexity and growth of organization

• Reviewing operational effectiveness and efficiency • Number of employees

• Geographical dispersion (i.e. multiple / overseas locations)
• Reviewing compliance with laws and regulations
• Centralized or decentralized set-up?
• Reviewing risk management procedures
• Cost benefit considerations
• Special investigations (e.g. fraud investigation)
• Key risks facing the organizations / risk level
• Quality of current systems and internal controls
• Increased frequency of breaches or unacceptable events

Independence
• Report to Audit Committee • Remuneration and bonus decided by Audit Committee

• Not involved in operational matters • Strictly follow principles of professional ethics

 Professional Skills
Analysis
Thoroughly review given information and investigate reasons of the current status

Hint: Explain and comment in detail on a particular set of info / data and question appropriateness of any
assumptions used

Evaluation
Assess proposals or arguments in a balanced way (i.e. giving both pros and cons) so that it could be used for
decision making. Demonstrate professional judgement

Hint: Mention both pros and cons

Communication
Express clearly and convincingly keeping in mind the target audience, for e.g. are you writing to Chairman, NED,
Finance Director, HR Director, Shareholders, General Public, etc.

HINT: Use appropriate format for Report, Briefing Notes, Presentation Slides, Letter or Press Release wherever
required
 Commercial Acumen
Understanding of overall business and external factors. To be able to able to give commercially sound comments
and recommendations.

HINT: Use words like opportunities, threats, customers, competitors, market-share, risks, etc.

Scepticism
Ask questions or challenge someone’s views or opinions with facts and figures in order to present the complete
issue picture or issue

Hint: Adopt a questioning tone in your answer, using words like ‘I disagree’, or ‘its seems incorrect’, or ‘its not
clear’ or ‘should be further investigated’