ACCA P1 Governance, Risk and Ethics Format of the Paper Section A: 50 marks • A number of questions relating to a single scenario Section B: 50 marks • Two out of three 25 mark questions 2 Core Areas of Syllabus 3 • Governance and responsibility 35% • Internal control and review 20% • Identifying, assessing & controlling risk 25% • Professional values and ethics 20% Syllabus Summary Governance & responsibility Internal control & review Risk management Professional values & ethics 4 Chapter 5 1 Theory of governance Session Content 6 Company ownership and control 7 Definition of corporate governance “ The system by which companies are directed and controlled in the interests of shareholders and other stakeholders” 8 Key concepts • Fairness • Openness / transparency • Independence • Probity / honesty • Responsibility • Accountability • Reputation • Judgement • Integrity 9 Operational areas affected by corporate governance 10 Agency theory 11 Agency theory and corporate governance 12 Key concepts of agency theory • • • • • • • 13 Agent employed by principal Agency = relationship Agency costs Accountability Fiduciary responsibility Stakeholders Objectives Cost of agency relationships Examples include: • Incentive schemes for directors • Providing and reviewing data • Meetings • Accepting higher risks • Monitoring behaviour • Residual loss 14 Agency problem resolution measures • • • • • 15 Meeting – Principal/key investors Voting at AGM Resolutions at AGM Accepting takeovers Divestment of shares Agency accountability • Act in shareholders’ interests • Provide good information • Operate within legal structure 16 Transaction cost theory – external transactions 17 Transaction costs can be further impacted 18 Stakeholder theory 19 Chapter 20 2 Development of corporate governance Session Content 21 UK Corporate Governance Code (2010) • • • • • 22 Section A: Leadership Section B: Effectiveness Section C: Accountability Section D: Remuneration Section E: Relations with Shareholders Reasons for developing a governance code • • • • • 23 Reduce fraud / corruption Poor governance = poor performance Investors will pay a premium Decision factor for institutional investors Reduces risk Practical problems with a governance code • • • • • • 24 Reactionary process Impact varies Restricts individual decision-making power Bureaucracy Harms competitiveness Cannot stop fraud
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