Wednesday, October 23, 2013

Question Verbs

QUESTION VERBS
ACCA examiners have highlighted the lack of understanding of the requirements of question verbs as the most serious weakness in many candidates’ scripts. Given below are some common question verbs used in exams.

Analyse
· Intellectual level 2, 3
· Actual meaning Break into separate parts and discuss, examine, or interpret each part
· Key tips Give reasons for the current situation or what has happened.

Apply
· Intellectual level 2
· Actual meaning To put into action pertinently and/or relevantly
· Key tips Properly apply the scenario/case.

Assess
· Intellectual level 3
· Actual meaning To judge the worth, importance, evaluate or estimate the nature, quality, ability, extent, or significance
· Key tips Determine the strengths/weaknesses/importance/significance/ability to contribute.

Calculate
· Intellectual level 2, 3
· Actual meaning To ascertain by computation, to make an estimate of; evaluate, to perform a mathematical process
· Key tips Provide description along with numerical calculations.

Comment
· Intellectual level 3
· Actual meaning To remark or express an opinion
· Key tips Your answer should include an explanation, illustration or criticism.

Compare
· Intellectual level 2
· Actual meaning Examine two or more things to identify similarities and differences
· Key tips Clearly explain the resemblances or differences.

Conclusion
· Intellectual level 2 ,3
· Actual meaning The result or outcome of an act or process or event, final arrangement or settlement
· Key tips End your answer well, with a clear decision.

Criticise
· Intellectual level 3
· Actual meaning Present the weaknesses/problems; evaluate comparative worth Don’t explain the situation. Instead, analyse it
· Key tips Criticism often involves analysis.

Define
· Intellectual level 1
· Actual meaning Give the meaning; usually a meaning specific to the course or subject
· Key tips Explain the exact meaning because usually definitions are short.

Describe
· Intellectual level 1, 2
· Actual meaning Give a detailed account or key features. List characteristics, qualities and parts
· Key tips Make a picture with words; identification is not sufficient.

Discuss
· Intellectual level 3
· Actual meaning Consider and debate/argue about the pros and cons of an issue. Examine in-detail by using arguments in favour or against
· Key tips Write about any conflict, compare and contrast.

Evaluate
· Intellectual level 3
· Actual meaning Determine the scenario in the light of the arguments for and against
· Key tips Mention evidence/case/point/issue to support evaluation.

Explain
· Intellectual level 1, 2
· Actual meaning Make an idea clear. Show logically how a concept is developed. Give the reason for an event
· Key tips Don’t just provide a list of points, add in some explanation of the points you’re discussing.

Illustrate
· Intellectual level 2
· Actual meaning Give concrete examples. Explain clearly by using comparisons or examples
· Key tips Add in some description.
  
Interpret
· Intellectual level 3
· Actual meaning Comment on, give examples, describe relationships
· Key tips Include explanation and evaluation.

List
· Intellectual level 1
· Actual meaning List several ideas, aspects, events, things, qualities, reasons, etc
  Key tips Don’t discuss, just make a list.

Outline
· Intellectual level 2
· Actual meaning Describe main ideas, characteristics, or events
· Key tips Briefly explain the highlighted points.

Recommend
· Intellectual level 3
· Actual meaning Advise the appropriate actions to pursue in terms the recipient will understand
· Key tips Give advice or counsel.

Relate
· Intellectual level 2, 3
· Actual meaning Show the connections between ideas or events
· Key tips Relate to real time examples.

State
· Intellectual level 2
· Actual meaning Explain precisely
· Key tips Focus on the exact point.

Summarise
· Intellectual level 2
· Actual meaning Give a brief, condensed account Include conclusions. Avoid unnecessary details
· Key tips Remember to conclude your explanation.

Tuesday, October 22, 2013

Mendelow Model

It is important for organisations to understand which groups of stakeholders can influence them the most as these stakeholders probably cannot be ignored. 

The Mendelow framework is used to understand the influence that each stakeholder has over the organisation’s strategy and objectives.

The organisation’s strategy for relating to its stakeholders depends on which part of the map the stakeholder falls into. This enables organisations to prioritise which stakeholders are more important than others.

  1. Clearly, those stakeholders with high power and high interest are the most importance. They cannot be ignored and need to be actively managed by an organisation. It may be difficult if there are a several stakeholders in that section of the map as they may have competing claims and it will be difficult for the organisation to please all of them.
  2. Stakeholders with high power and low interest must be kept satisfied as if they are concerned about the organisation’s operations it would be easy for them to take an interest and suddenly be influential.
  3. Stakeholders with low power and high interest are interested in the organisation but have little power. They may be able to increase that power by forming alliances with other stakeholders. The organisation must keep them informed and watch their power base.
  4. Stakeholders with low power and low interest can largely be ignored, although this strategy does not take into account any ethical considerations towards those stakeholders.



Saturday, October 19, 2013

Contents and Objectives of each Reports of CG in UK

The Cadbury report focused on the role and structure of the board of directors, audit and accountability and the relationship with institutional investors. Companies should provide a note in the annual report that they had complied or to explain what provisions had not been complied with.

In subsequent years, the Greenbury report was published (1995) which covered director remuneration after concerns that directors remuneration was becoming uncontrolled.

In 1998 the Hampel report was published, which updated Cadbury and Greenbury and amalgamated them into the Combined Code. This is a single code containing guidance on corporate governance. The Hampel report had reviewed the two reports amid concerns that corporate governance compliance was a box-ticking exercise, so aimed to make the code principles based. This meant that companies had to consider if they met the spirit of the code’s principles.

Further reports on corporate governance have included Turnbull (1999) which reviewed internal control; Higgs (2003) focusing on non-executive directors; Tyson (2003) covering recruitment of non-executive directors; and Smith (2003) which looked at auditors and audit committees.


Corporate Governance Development in UK


  1. The Combined Code developed after corporate failures in the late 1980s and early 1990s that caused government focus on listed companies and corporate governance.
  2. The Combined Code developed from a number of different reports looking into different areas of corporate governance. 
  3. This started with the Cadbury code of best practice in 1992 and was added to in 1995 with the Greenbury report arising from concerns about directors’ remuneration. In 1998 the Hampel report looked at the effectiveness of the Cadbury and Greenbury reports and whether the recommendations were working. 
  4. The three reports became the Combined Code.
  5. Later, in 1999, the Turnbull Guidance was published on internal controls and 
  6. In 2003 in the aftermath of Enron, two separate committees were set up to look at the role of NEDs (Higgs report) and the role of audit and audit committees (Smith report).

Thursday, October 17, 2013

PROBLEMS BETWEEN PRINCIPAL AND AGENT

PROBLEMS BETWEEN PRINCIPAL AND AGENT

As discussed above, due to the existence of large companies with many small shareholders it can be difficult for shareholders to have a voice. However, it is important to understand that directors have a duty to act in the shareholder’s best interests. This is known as their fiduciary duty which means the directors should act in the utmost good faith to the shareholders and should not place themselves in a position where their own interests conflict with this duty. In other words, the directors are accountable to the shareholders.

Problems between principal and agent occur when there is conflict in the relationship. In many cases the objectives of the two parties are in conflict. Shareholders may want capital growth or dividend growth. Directors, who may not be shareholders, may seek to maximise their own wealth in terms of pay and bonuses. Many bonuses are paid based on profits and therefore they wish to maximise profits in the short term. This will not necessarily achieve the shareholders’ objectives.

One way of dealing with this problem is to align the objectives of shareholders and directors, often by including long-term benefits in a director’s bonus structure. For this reason, many directors are given share options that are exercisable at a future date so they will consider the long-term perspective of the company as well as the short term, thus aligning the interests of both parties.

Other problem-solving measures include:
  • Attending the AGM and voting for or against the proposed resolution;
  • Meetings between institutional investors and directors;
  • Proposing resolutions to be heard at the AGM;
  • Divesting shares.


BARINGS BANK

BARINGS BANK
Barings Bank was a very old traditional British bank. In the 1980s and early 1990s the banking industry was going through a period of change as a result of deregulation. British banks had previously been very tightly controlled but gradually the British government allowed British banks to enter into new markets.

In the early 1990s, Barings expanded into “new” products such as options and futures trading. Nick Leeson, a British banker, was given the new Singapore branch to manage.
In trading operations, the bank has a front office where the trades are organised and a back office, where the trades are recorded and accounted for. There should always be segregation of duties between those trading and those accounting for the trades. This should stop fraudulent traders doing one thing and recording another.

However, at Barings, Leeson had total control of both the front office and the back office. He controlled how his trades were being recorded.

When members of Leeson’s team made a few mistakes, Leeson did not want his staff to be blamed so he hid their mistakes in an account (88888). He could do this because of the lack of segregation of duties which allowed him to trade and then to record those trades. Additionally, there was a lack of understanding of the trades being entered into both by the UK directors and the auditors.

Leeson used the bank’s money to gamble on the markets, making speculative trades. The 88888 account was used to hide any losses. By the end of 1994, losses in that account amounted to more than £200 million.

The bank allowed him more money to continue trading, although it was unlikely they knew what he was doing.

The fraud reached a climax in January 1995 when he gambled that the Japanese stock exchange, the Nikkei, would not move significantly overnight. Unfortunately the Kobe earthquake hit Japan and the stock exchange fell significantly. Leeson aimed to recoup losses by betting that the stock exchange would recover quickly. It didn’t and Leeson knew that millions were going to be lost and he fled. By the time the bank understood the position he had created it was too late and he had created a massive loss exceeding £800m. This was big enough to wipe out Barings bank. The bank was eventually sold for £1.

The bank was wiped out by one trader because the directors didn’t understand the business they were in or what Leeson was doing. There was a serious lack of internal control over the operations. Again, there was too much control in one person’s hands and to some extent the auditors failed to properly understand the situation at the bank.


ENRON CASE

ENRON
The collapse of Enron is probably the most famous example of a company failure due to fraudulent accounting.

Enron was one of the top 10 American companies in 2001. It filed for bankruptcy in December 2001 as a result of accounting scandals that rendered the financial statements worthless.


THE ACCOUNTING SCANDAL
Enron was an energy company based in Houston, Texas, formed by bringing together two other operations and was run by the chairman, Kenneth Lay. He was highly regarded as a businessman as Enron had performed so well.

Enron provided energy and also started to look at new ways of making money by developing energy derivatives such as options and futures. The problem was that Enron needed to borrow a lot of money to continue to finance its operations. It was aware that high levels of debt made the company’s financial position look weaker so instead of borrowing the money in the Enron companies it set up special purpose entities (SPEs), who borrowed the money on Enron’s behalf and then channelled the funds in to Enron.

At the time, American accounting standards were set up in such a way that if these SPEs were set up carefully enough, the liabilities would not appear in the Enron accounts. This is called ‘off-balance sheet’ financing as the debts belong to Enron but are not shown in that company’s balance sheet/statement of financial position.

Many of the hidden debts were backed by the Enron share price. If the share price continued to rise, the debts did not need to be repaid. However, if the share price fell, the debts had to be settled. This had an adverse impact on cash flow, which then had a negative effect on the share price thus requiring more debts to be settled and so on.

Enron had massively under reported just how debt they had. The financial statements showed profits when in reality the company was hiding huge debts and losses in the SPEs. When the Enron share price reached its highest level in August 2001, Enron senior executives started to sell their own shares, whilst still encouraging investors to buy shares in Enron. As large numbers of shares were offloaded by Enron executives who knew the true financial position of the company, the share price started to fall. By the end of November 2001, the news of the financial losses and mounting debts was made public and the company filed for bankruptcy in December 2001. The share price had dropped from a high of US$90 to being worthless.


WHAT WENT WRONG?
There were a number of problems at Enron. Whilst some of the accounting was strictly within the American rules, some of it contravened accounting standards. Far too much information and control was in the hands of a very small number of dominant individuals who were too involved in the day to day running of the business.
There was a lack of internal control and poor risk management. Whilst Enron did have non-executive directors they did not appear to understand what was happening and clearly did not question the executive directors sufficiently.

There was a serious failure in the audit function as the auditors, Arthur Andersen, were aware of what Enron was doing. The role of the auditor is to report to the shareholders on the accuracy of the financial statements and yet Andersen was so close to the directors that they were not fulfilling their obligations. There are allegations that they assisted Enron in committing some of the illegal accounting. Arthur Andersen collapsed as a result of this scandal.

Andersen earned a large audit fee as well as a huge amount of fees for non-audit work. There has always been an opinion in the accountancy profession that if the auditors perform many other services in addition to the external audit it could compromise their opinion about the accuracy of the financial statements, as they do not want to upset the directors and risk losing the (usually) more lucrative non-audit work.


As a result of Enron’s bankruptcy, the American government responded by issuing the Sarbanes-Oxley Act in July 2002. This was American corporate governance backed by law. It is a very tough piece of legislation with strict rules about the director’s responsibility for the financial statements, auditor independence and internal control. It aims to ensure that such public accounting scandals cannot happen again.