Governance, risk, ethics and theory

Accounting Ahead | Original study resource | accountingahead.com.au

Governance, risk, ethics and theory

MODULE 5 | PART A.3 | STUDENT COMPANION

Corporate governance: the set of rules, relationships, systems and processes by which authority is exercised

and controlled, and by which those in control are held accountable. In Australia: the Corporations Act; ASIC; the

Financial Reporting Council; ASX Corporate Governance Council principles and recommendations (disclose

compliance, or explain why not).

Two dimensions of governance

Conformance

Assurance, including audit

Understanding and managing risks

Compliance with laws and rules

Performance

Taking risks to achieve objectives

Strategy, resource use and value creation

Risk appetite and expected returns

Good governance balances conformance with performance

The board, risk and performance

Topic Remember

Board role Set objectives, monitor performance, report to shareholders; finance, audit and risk

committees

Risk appetite Risk averse, neutral or seeking; make expected returns explicit (hurdle rates, payback,

IRR)

COSO ERM (2017) Integrates enterprise risk management with strategy and performance

ISO 31000:2018 Risk = the effect of uncertainty on objectives

Accountants' role Report integrity; management control and performance monitoring; risk management

framework

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART A.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Governance, risk and performance

Governance

Sets objectives in line with stakeholders

and competition

Strategies and plans

Turned into organisational actions

Outcomes

Results of those actions

Measures and targets

Track performance against objectives

Management controls

Financial and non-financial feedback

Enterprise risk management

Within the board's risk appetite

Ethics: principles and threats

Fundamental principles Threats

Integrity - straightforward and honest Self-interest - an interest sways judgement

Objectivity - no bias, conflict or undue influence Self-review - judging your own earlier work

Professional competence and due care Advocacy - promoting the employer's position too far

Confidentiality Familiarity - too close for too long

Professional behaviour - lawful, no discredit Intimidation - real or perceived pressure

APES 110: identify, evaluate and address threats to the principles

Resolving an ethical conflict: weigh the principles and the consequences; raise it internally (if needed

with the board); consider legal advice and any reporting duty; if misleading information remains, refuse to

be associated with it - which may mean resigning.

Case note - Volkswagen, 2015: the company admitted that about 11 million diesel vehicles carried software

that cheated emissions tests; the chief executive resigned within days and billions were paid in fines and

settlements.

Sources: Al Jazeera, NBC News and CBS News reporting, September 2015.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART A.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Two theories

Agency theory

Principals delegate to agents, who may act in self-interest

Sharing rule: bonuses, options, incentive plans

Information asymmetry: agents know more

Contingency theory

No universal best performance management system

Fit to size, environment, technology and strategy

National pharmacy chain vs one owner-run pharmacy

Practice questions

MODULE 5 | PART A.3 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Name the threat

Situation Threat

(a) The CFO is asked to review controls she designed last year

(b) A manager's bonus depends on figures he is preparing

(c) The CEO hints that 'team players' don't question the forecast

(d) An accountant has worked with the same supplier for 15 years

(e) A finance manager argues the company's case to the tax office beyond

what the facts support

Question 2 - Risk appetite

A board says it is 'risk seeking' in new markets but 'risk averse' on safety. How should this shape the

performance measures and targets used by management?

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART A.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 3 - Agency

A franchisor pays franchisees a bonus on sales revenue. Explain the agency problem this may create and

suggest a better sharing rule.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART A.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 5 | PART A.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Name the threat

Situation Answer

(a) Self-review

(b) Self-interest

(c) Intimidation

(d) Familiarity

(e) Advocacy

Question 2 - Risk appetite

New markets: allow stretch growth targets, accept lower early returns, set explicit hurdle rates and payback

limits, and track leading measures (customer acquisition, market share). Safety: zero-harm style targets with

leading indicators (near-miss reports, training completion, audits), no rewards that trade safety for output, and

escalation of any breach to the board.

Question 3 - Agency

Franchisees may chase revenue through heavy discounting or costly promotions that hurt the network's brand

and profit - their goals differ from the franchisor's. Better: reward a balance of profit contribution, customer

satisfaction and brand-standard audits, with part of the reward deferred and tied to sustained performance.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART A.3 | WORKED ANSWERS

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