P1 PROFESSIONAL ACCOUNTANT BY SIR FAWAD MUJAHID 2010 www.fawadmujahid.com Page 1 P1 “PROFESSIONAL ACCOUNTANT” By: FAWAD MUJAHID, ACCA Reference Note
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P1 PROFESSIONAL ACCOUNTANT BY SIR FAWAD MUJAHID 2010
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P1“PROFESSIONAL
ACCOUNTANT”
By:
FAWAD MUJAHID, ACCA
Reference Note
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CORPORATE GOVERNANCE
Definitions of Corporate Governance
“Corporate Governance is the system by which companies are
directed and controlled…” Cadbury Report (UK), 1992
“Corporate governance involves a set of relationships between a
company’s management, its board, its shareholders and other
stakeholders also the structure through which objectives of the
company are set, and the means of attaining those objectives
and monitoring performance are determined.” Preamble to the
OECD Principles of Corporate Governance, 2004
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Issues - Corporate Governance
Irregularity of power Irregularity of information Interests of shareholders as outstanding owners Role of owner management Assumption of separation of powers Division among stakeholders
Why Good Corporate Governance is
required?
Good governance leads to good
performance
It creates an open and
transparent system
It improves communication and
breaks down systematic barriers to
flow of information
Good governance allows
decision making based on data. It
reduces risk
Good governance helps in
creating a brand and creates comfort for all stakeholders and
society
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Key Components of Corporate Governance
Fairness Holds into account all Stakeholders
Transparency Open to all public via disclosures, press release
Independence Non-Executive Directors monitoring
Probity Truth – Don’t mislead
Responsibility M’gmt responsible for Organization
Accountability Directors are accountable for their actions
Reputation If poor Corporate Governance is Practiced
Judgment Judging Decisions that contributes to Firm
Integrity Fair dealing with others & architect of FS
Agency Relationship: Owners and Managers
Accountability Responsibilities
Agent is accountable & answerable for his actions to his
principal.
Issues
How to implement the accountability system?
What if the Agent is accountable to other parties than his
principal?
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Fiduciary Responsibilities:
Directors owe a Fiduciary Duty to the company to exercise their
powers bona fide where they are bound to first respect theInterest of the company & then secondary to the General
Shareholders
Performance – Contractual Obligation to perform
Confidence – Information must be kept in confidence
Skill – Maintain the standard of Skill
Conflict of Interest – Avoid conflict of Interest
Other Benefits – Retain with permission
Joint Stock Company
These are companies limited by
shares.
Issues:
Principals (owners): Do not run
the Business’ they are the Investors.
Agents (directors): They run
the Business on the behalf of the
Principals.
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Agency Theory Problem & Solution
The agency problem occurs when:
the desires or goals of the principal and agent
conflict and it is difficult or expensive for the
principal to verify that the agent has behaved
inappropriately
Solution:
principals engage “in incentive-based performance
contracts” monitoring mechanisms “ such as the board of
directors”
Other Important Agency Relationships
Shareholders – Auditors Relationship
Shareholder = Principal , Auditors = Agent
Audit Report = Key Communication
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Stockholder & Corporate Governance
Stockholder Theory
It focuses on the interests of Shareholders where it claims that
Shareholders have a legal right to influence the company.
Shareholders purchase the Shares of the Company and in return
expect their interest to be protected.
Stakeholder Theory
It focuses on the corporate accountability to a broad range of
Stakeholders.
Stakeholder wants will vary and this will depend on your point
of view whether certain group should be considered as a
Stakeholder.
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Two Motivations theory for Organizations responding stakeholder
concerns:
Instrumental View of Stakeholders The organization is using its Stakeholders as an Instrument to
achieve its Economic & Legal objectives.
A business cannot survive alone it needs different Stakeholders
& therefore it is desirable to respond to stakeholders concerns.
Normative View of Stakeholders
This View gives importance to the Ethical & generous
responsibilities towards the different Stakeholders.
It is the moral duty of the Organization to take account of the
opinions & concerns of others.
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STAKEHOLDERS:
Internal Stakeholders: M’gmt, Employees.
Connected Stakeholders : Shareholders, suppliers, customers,lenders, competitors.
External Stakeholders : The Government, Public, NGO’s,
Legitimate Stakeholders: Those who have legal right upon the
Organization.
Illegitimate Stakeholders : Those who don’t have a legal claim
upon the Organization.
Direct Stakeholders: Those who can be affected or affect the
Organization.
Indirect Stakeholders : Those who cannot directly affect the
Organization.
Recognized Stakeholders : Those whose views are considered b/f
deciding strategies
Unrecognized Stakeholders : Those whose views are not
considered
Narrow Stakeholders : Those who are Most affected by the
Organizations Strategies
Wide Stakeholders : Those who are least affected by the
Organizations Strategies
Primary Stakeholders : Those who are the most important
Stakeholders
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Secondary Stakeholders : Those who are not very important to
the Organization
Active Stakeholders : Those who take an interest in participatingin activities
Passive Stakeholders : Those who do not seek to participate in
policy making
Voluntary Stakeholders : Those who engage with activities
Voluntarily
Involuntary Stakeholders : Those who engage with activities
Involuntarily
Known Stakeholders : Those whose existence is known to the
Organization
Unknown Stakeholders : Those whose existence is not known
Stakeholders in Corporate Governance
Directors
Powers are defined in the Articles
Executive Director
Who are involved in Full – Time managing the Company
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Non – Executive Director
Who are involved with the Monitoring of the Company
Company Secretary
Assembling meetings of the Board of Directors
Maintenance of Documents & Registers
Administrative Duties
ICSA, UK Institute of Chartered
Secretaries& Administrators
Best Practice
Is responsible to the Board
If other Administrative or
Executive Duties exists then
should be reported to Chief
Executive
Salary Package should be
settled by the Board or
Remuneration Committee on
the recommendation of
Chairman or Chief Executive