Short

name Long name

AASB Australian Accounting standard Board
AUASB Auditing and Assurance Standrad board
APESB Accounting professional and ethical standards boar
FRC Financial reporting council
Duties Reporting Body
Regulatory body which sets accounting standards in Australia Report to FRC
Developing auditing standards Report to FRC
sets the professional standards for accountants Independent body
Regulate AASB and AUASB
 Ethics and Governance
Module 1: Accounting and Summary
Page Key term/ Concept Description
3 Idea of profession To act in the best interest of the society.
Service ideal/ Public interest Can retain the integrity and authority by serving wider public interest
Primary commitment to the public

3 Essential basis of business Trust

Implied social contract

3 Contract between Profession & society: to be maintained professionals must follow core principles of the profession
(Members of Profession will act in the best interest of the public and society in return will provide range of benefits for the
profession in return)

Retain integrity and authority By serving the wider public interest. Therefore accountants need to distinguish public interest in disclosing any information
3 and if there is any self
of the profession interest.

Public interest Altruism: Actions that benefits others even at their own benefits
Altruism, Enlightened self interest
enlightened self interest: Larson suggest monopolistic professionals may not be driven by altruism but self interest.
maintaining monopoly and gaining unwarrent wealth and influence from the position

3 Responsible decision making Systematic framework of principles: Governance, accountability, Ethics

(Systematic framework of principles) Governance
conducting the work based on not only the internal governance framework of the entity that accountant work
on but also in terms of formally approved policies and strategies of the profession governing body.
accountability
adhering to regulatory requirements and disclosure to stakeholders.
ethical conducts
ensuring integrity and honesty in the pursuit of professional purposes and client interests.

ideal position of balanced decision is in the centre where governance, ethics and accountability interconnects.

7 Enlightened self interest Doing well by doing good. Protecting the public interest in a self interested way
Combining self interest and public interest which still serves the public interest at large.

7 Market economy Economic self interest/ Enlightened self-interest

8 Entrepreneurialism and Ideals of accounting profession - (Carnegie and Napier) 4Es
professionalism 1. Education
4 E's 2. Ethics
3. Expertise
4. Entrepreneurship

placing too strong an emphasis on entrepreneurship, especially where it involves a de-emphasis on any of the other ideals,
may result in a
‘deprofessionalisation’ of accounting.
This de-professionalisation may occue because the pursuit of commercial opportunities moves an accountant away from
integrity, objectivity and professional behaviour in order to achieve commercial success.

(increasing their personal wealth and influence than on notions of public service.)
‘ethics versus profits’ dilemma.

9 profession Occupation or area which requires special training and skill and one that requires high level of education.
(learnt through specialised training and maintained by continuing professional development)
Members of professions are expected to behave ethically and in the best interests of society.
Professions focus on intellectual or administrative skills, rather than mechanical or physical actions.
Demonstrate its high-level commitment to integrity and service.

10 Profession VS occupation There is no clear distinction between an occupation and a profession.

Professionals are only distinguished from non-professionals by a higher level of standards.
Often leads to greater status and wealth for its members due to members’ specialised skills and the level of monopoly
control
Monopoly control describes the situation where members of the profession control who is allowed to work in the industry by
establishing licensing rules and regulations. Creates protection against competition.
Professions exist primarily to serve society. (Service Ideal)
Independence/ autonomy

10 Greenwoods 8 attributes of 8 Attributes that confirms the existance of a profession

profession 1. systematic body of theory and knowledge
2. extensive education process for its members
3. ideal of service to the community
4. high degree of autonomy and independence
5. code of ethics for its members
6. distinctive ethos or culture
 7. application of professional judgement
8. existence of a governing body

Professional Judgement Ability to diagnose + ability to solve

Self-Regulation Once accorded the relevant permissions, it is common for a profession to have a substantial degree of independence or
11 autonomy.
(greater level of authority to set their own rules and regulations and have less detailed government regulation.)
self-regulate commonly extends to membership and membership rules of a profession.
Professional bodies set the education requirements, professional ethical standards and disciplinary processes for
members.
Autonomy allows members of a profession to be judged by their informed peers, rather than by regulators.
Professions have an extra-legal role in regulating their members. Extra-legal means regulations in addition to what is
prescribed in statute law or common law.
A member found to have engaged in conduct that brings the profession into disrepute can have a range of penalties
imposed against them.
Outcomes of disciplinary action will often include publication of the member’s name and a summary of the misconduct that
occurred.

11 Co-Regulation Society trusts the profession to act in its best interest and values the service provided.

Potential negative outcome from this autonomy if the profession fails to properly demonstrate selfcontrol and self-
regulation, and does not holdits members to account when they act inappropriately (members acting unethically).
Lack of self-regulation, trust in the profession will be eroded and the value and the status of the profession will be
destroyed.
As a result, some of the authority to self-regulate has been removed from the profession. Regulations from external
sources are also in place.
So, the profession has moved from a situation of self-regulation to co-regulation, with regulation shared between the
profession and external sources.
eg: FRC: Oversight body of accounting and auditing standard setting.

Professional Members of a profession. Has a significant level of training and a high level of competence and skills in a specific area of
12 knowledge. Behaves in an ethical and appropriate manner, and apply their skill and judgement in areas of importance.
Recognised as offering important advantages to society undertaking complex tasks and functions. Accorded a privileged
position in society.

12 Accounting profession: Traditional Vie Traditional View: Acts for the public interest, rather than self-interest.
 Demonstrates a range of attributes that are focused on serving society. Demonstrate skill and judgement in their area of
and Market control View expertise.
Attributes include:
systematic body of knowledge
extensive education process
a code of ethics
an ethos or culture
a governing body

Market control view: Accountants are self interested and act to create a monopoly to ensure only certain members can
perform work in the area.
Less concerned with the broader public interest.
This helps generate greater financial returns as well as building status and prestige in the community.

One common perception is that professionals are self-serving monopolists whose professional bodies exist principally to
maintain membership exclusivity. Denial of entry of non-members into an industry or occupation maintains the monopoly.

1. a systematic body of theory and knowledge - difference between an occupational group that is a profession and
Attributes of profession (in detail) another occupational group not recognised as a profession lies in the element of superior skill. Much more important than
the possession of skills is the fact that the entire range if skills and expertise should relate to, and be supported by, a well-
13 founded body of knowledge.

2. an extensive education process - entrants to the profession should have acquired an understanding of the theory and
practice of the profession. Knowledge and skills acquired are not generally obtained or understood by the general public.

3. an ideal of service to the community - 3 perspectives:

1. the wellbeing of society - preparing and attesting information that ensures the efficient and orderly functioning of
business, not-for-profit and govt enterprises. Provides information that facilitates better decision making for individuals,
business and govt. Thus, advancing the interests of parties at all levels, which ultimately results in the betterment of
society.
2. the pursuit of excellence - focus is the performance of the professional. Accountants accept responsibility for
maintaining and updating their knowledge and skills, and applying their skills and competence with due professional care in
the best interests of society.
3. community service - offering time and skills free of charge.
Pro bono: for the good
1. Membership of finance committees for church groups, charities and schools
2. Providing financial counselling and other advice to people referred by community welfare groups
3. Holding honorary positions on hospital and university boards
 4. a high degree of autonomy and independence - this has now become a co-regulatory process. Use professional
judgement free from direction or influence of others. Free from fear or reprisals. Professional person's judgement should be
autonomous.

Regulatory structure of CPA Australia.Regulatory structures and practices attempt to define the technical and ethical responsibilities that accountants owe to their
16 employers, clients, third parties and the public.
The regulatory structures of CPA Australia include a:
1. system of accreditation for accounting degree programs to ensure that the relevant body of knowledge is acquired by
future members
2. membership qualification process by way of examination and required practical experience
3. requirement for high levels of continuing professional education
4. code of ethics that must be complied with
5. disciplinary process to address member misconduct.

5. a code of ethics for members - code of professional ethics establish expected standards of behaviour and the need for
17 members to act in the public interest.

17 6. a distinctive ethos or culture

Values: ideas that individuals, groups of individuals or entire communities believe are important
Norms: comprise both formal and informal characteristics
Symboles: include its insignia, emblems, certification and titles

17 CPA Members Ethos/ Culture Integrity is the foundation

7. Application of professional judgement - According to Becker (1982) professional judgement is the single most
Application of professional important attribute that differentiates professional from non-professional. Ability to diagnose and solve complex,
Judgement (Professional Judgement) unstructured values-based problems of the kind that arise in professional practice.
17

Professional Judgement vs Technical Professional people must have an ‘awareness of the uncertainty, complexity, instability, uniqueness, and value conflict’ that
18 Judgement surround many of the problems they tackle in practice.
Professionals must choose the outcome that professionally best meets the social ideal of professions, rather than merely
the best outcome for the client at that moment.
Professionals are required to develop competency in professional judgement, artistry and intuition.
These competencies are required not only in applying knowledge and skills to problem solving, but also (and Schön would
argue, more importantly) to finding and defining the right problem to be solved.
 The complexity of understanding the nature of problems may not seem obvious at first, but this understanding is an
essential component in gaining the wisdom required to make values-based professional judgement.

18 Key judgements auditors make 1. identifying those charged with governance in a reporting entity
2. deciding whether reasonable assurance or limited assurance is possible
3. ensuring that the budget for the audit is sufficient
4. deciding on an audit plan
4. deciding whether the evaluation of the results is appropriate

17 Co Regulation & Accounting professio AASB AND AUASB was initially regulated by CPA Australia,
Chartered Accountants of Aus and NZ (CA ANZ) and Institute of public accountants (IPA)

19 Existence of governing body 8. the existence of a governing body - Roles of governing body
1. Speak for the profession as a whole
2. Ensure those who enter the profession have the requisite standard of education and keeping up to date with continued
education
3. Encourage the setting and monitoring of high standards of professional conduct
4. Apply disciplinary sanctions if standards of professional conduct are not observed
5. Ensure high standards of performance and conformance by the professional body itself

APESB (Accounting Professional and Ethical Standards Board). Independent body that sets the professional standards for
19 accountants.
(Professional accounting body) Result of CPA Aust and CA ANZ

AASB & AAUASB have high degree of autonomy - report to FRC.

AUASB reports to the FRC and not to the professional accounting bodies.
4 Nov 2005, CPA Aust and ICAA announced the establishment of APESB, an independent ethical standards board to
review and set the code of ethics and professional standards.
CPA Aust, CA ANZ and IPA are all members of APESB - required to abide by APESB standards.

• reviewing the professional and ethical standards on a yearly cycle, and monitoring the needs of the accounting profession
APESB fulfils its role by:
20 and the public for areas requiring new or updated professional and ethical standards.

• reviewing the implementation of new and amended professional and ethical standards within six months of issue.
• referring matters to the secretariat for research, direction and amendment.
• seeking comment on exposure drafts for proposed standards from the public, the professional bodies and their members
• monitoring the effectiveness of professional and ethical standards.
 The Quality Assurance Process The integrity of information provided by accountants to their immediate employers, clients and other stakeholders is
20 enhanced through the profession's quality assurance process.

Standard setting - the institutional arrangements for standard setting involve the FRC with oversight responsibility for the
AASB, which deals with accounting standard setting in the private and public sector, and the AUASB, which deals with the
setting of auditing standards.

Conformity with standards - Issued with APESB, APES 205 and APES 210 are mandatory statements of responsibilities for
members involved in the preparation, presentation or audit of financial reports.

Practice Reviews - members must demonstrate compliance with quality control standards by annually providing a signed
assurance that the established quality control requirements are being met and by undergoing a practice review. Members
in public practice will be subject to a practice assessment by an experienced assessor every three, five or seven years
depending on the complexity of the member's practice.

Practice reviews take place under CPA Australia’s Best Practice Program
Designed to ensure members who are subject to review have implemented adequate processes to manage work quality
and practice risks,
follow professional & ethical standards, and meet requirements set out in CPA Australia’s ByLaws for members who hold
Public Practice Certificates.

Accounting Firm Regulation - each public practice entity adopts policies and procedures to ensure that accountants
practising within it adhere to professional standards.

20 Quality Assurance process 1. Standard setting

APESB + APES 320 Quality managem2. Conformity with standards
for firm 3. Practice review
4. Accounting firm regulation
5. Professional Discipline

Provides guidence on establishing quality management systems (QMS). QMS should ensure that a firms outputs are
APES 320 appropriate and provides a reasonable confidence that practice has compiled with professional, regulatory and legal
21 requirements.
 Professional and ethical standards aim to ensure that members of the accounting profession work to the highest level of
Professional Discipline
professionalism, providing a quality of service that achieves credibility among the general public and gains their confidence.
23
CPA Aust has undertaken to act in the public interest and has an obligation to ensure that complaints about members are
investigated thoroughly, in an impartial and timely manner, at all times striving to preserve the rights of members while
acknowledging the public interest concerns of complainants.

23/ 24Disciplinary process 1. The process for dealing with member conduct is started when a complaint is made.
2. The complainant should first attempt to resolve the matter directly with CPA Aust member.
3. If unsuccessful, the complainant must lodge a written complaint with all necessary details supported by documentary
evidence
4. GMPC reviews all complaints and determines whether the complaint is relevant.
5. If relevent, a file will be opened to address the issue.
6. The complaint will be assigned to a Professional Conduct Officer (PCO)
7. The PCO will contact the member against whom the complaint has been made and provide details of the nature of the
issue. The member will be asked to provide an explanation.
8. A report wil be given to the GMPC to enable a recommendation to the CEP of CPA Aust as to whether there is a case to
answer.
9. If there is a case to answer, the CEO must refer the complaint to either the Disciplinary Tribunal or to a One Person
Tribunal (OPT).
10. GMPC will refer the case to an investigating case manager (ICM). The ICM will prepare written particulars of the case
and present the complaint at the hearing.
11. A decision will be made, and the member and complainant will be advised of the outcome.

23 people who can raise complaints Mmebers of the public

Mmebers of CPA
General manager professional conduct (GMPC) of CPA

24/ 25Penalties and Appeals Points a to e on the page 24/ 25

Relationships and Roles The key professional relationships that accountants have are with employers, clients, regulators, employees (if business
28 owners or managers) and their peers

29 Fcators influencing individual behaviouThese factors include culture, standards and ethical evaluations. Other variables that have an impact are:
1. Personal moral development
2. Family influences and personal relationships
3. Organisational Level
4. Laws and regulations
 5. Professional aspects
A threat to, or excessive pressure on, any of these areas has the potential to result in unprofessional conduct.

29 Types of accounting work environments

29 Public practice Public practice refers to professional accountants who offer accounting services to businesses and the public.

Types of public practices

29 Big 4 accounting firms 1. PWC
2. Deloitte
3. EY
4. KPMG
Provide a broader range of services than just audit and assurance, including advising on corporate or entity restructures,
taxation, consulting to various entities on their operations and governance structures, and providing staff for secondments
30 to companies.

Second-tier accounting firms Operate on a smaller scale than the Big Four, but they offer a wide range of services. Eg. Findex, BDO, Grant Thornton
and Pitcher Partners.
 Small practices & sole practice Smaller accounting practices with one professional accountant as practitioner or a team of professional accountants and
support staff.
operations Smaller accounting firms tend to be used by small and medium enterprises (SMEs)
Usually undertake compliance work that is less related to audit and increasingly business and IT advisory work.

30 Roles in public practice Table 1.4

Accountants as External Advisers to In very small SMEs, no accountants will be employed internally and there is total reliance on an external public accounting
31 practice to perform all accounting functions
CPA Australia in 2005 found that accountants from public practice provided a wide range of services as advisers to the
SME sector.
The survey reported that 97 per cent of SMEs purchase accounting services (i.e. taxation advice and financial statement
preparation) from an external accountant.
Opportunities that exist in the greater provision of profit-oriented business advice rather than accepting the current
overwhelming dominance of compliance advice.

‘fortress enterprise’ mentality.

31 Researchers identified that some owner-managers want to ‘go it alone’ rather than expose their problems to outsiders.
Owners displaying this attitude wanted to hide their weaknesses and typically they would justify their approach by saying
that outside advice was irrelevant or poor.
31 Professional Accountants in Business CFO replaced by CVO
32 PAIB roles in table 1.5

IFAC definition of SME's Entities considered to be of a small and medium size by reference to quantitative (for eg. Assets turnover/employees)
and/or qualitative characteristics

Difference in roles A large business may engage a management accountant whose sole responsibility is budgeting, forecasting and reporting
33 results.
An SME may engage a finance manager in their end-to-end accounting and finance function.

33 Public Sector Environment Includes a wide range of govt and regulatory bodies.

Govts provide for-profit services often called govt business entities (GBEs) or state-owned enterprises (SOEs).

Not-for-Profit sector environment Legal or social entities formed for the purpose of producing goods or services, and whose status does not permit them to
34 be a source of income, profit or financial gain for the individuals or organisations that establish, control or finance them.
35 Social Impact of Accounting Accounting is often perceived as neutral - a set of black and white tasks performed in a mechanical manner.
Rather, the activities of accountants and the use of accounting information, including the decisions that are made based on
the outputs provided by accountants, have a decisive impact on the social functioning of individuals, groups and entities.
The impact is far wider than at first might be apparent.

Credibility of the profession Credibility of the profession has declined because of several factors including accuracy of financial reporting, corporate
37 failures, auditor independence and a lack of audit quality.

Higher levels of depreciations can have the following impacts:

• In the short term, higher depreciation levels will mean lower profits and lower asset levels.
• In the longer term, there will be a rise in profits with lower asset levels. This may lead to a lower measurement base for a
manager against which
future performance is measured - this will show a greater percentage improvement and is likely to lead to higher long-term
bonuses.
• Lower asset levels will also lead to a higher retun on assets.
• Lenders may be nervous due to lower profit levels and asset values that may be used as security.
• Owners with a short-term focus may be frustrated by lower profits and consider selling their investment. This may lead to
a decline in the share price.

Key issues causing reduced credibilityEarnings Management - use of accounting techniques to manipulate the final profit and earnings figures. Can be
achieved via the manipulation of reserves, accounting policy changes that are not reflective of the organisation's position,
and other changes permitted under the accounting standards, such as the choice of valuation method.
Creative Accounting - choices available to present information in ways that do not clearly represent reality, and which
provide a distorted and often favourable view of the organisation.
Poor Audit Quality - pereceived inability of auditors to identify a company in distress prior to collapse.
Lack of Auditor Independence - where conflicted auditors do not act in the public interest.
Financial Accounting Distortions

40 Restoring credibility Establishment of the FRC

Accounting standards are backed by law.
Auditors must apply the code of ethics.
FRC responsible for auditor independence.
Enhanced regulation.
Adoption of international standards.
The reduction of the profession’s autonomy
41 Capability Considerations Technical skills, knowledge and experience (TSKE)
general accounting activities, including:
• financial reporting
• taxation
• finance and financial analysis
• management accounting
• relevant IT and technical communications knowledge
• an understanding of regulations, laws and company structures.
Technical requirements will depend on the field of work and the level of detailed skills and knowledge required.

42 Soft skills, knowledge and experience (SSKE)

about people and related issues. social skills and capabilities, including the ability to:
• listen
• understand complex and difficult issues and their role in the decisions and information needs of others
• communicate effectively (both verbally and in writing)
• discuss and debate without hostility — a vital aspect of interpersonal skills
• persuade and convince based on logical and reasonable argument
• manage time
• meet deadlines
• build and improve capabilities.

Research shows more value is placed on technical skills at the start of a CPA’s career while more emphasis is placed on
the soft skills in the latter parts, when considering promotions to partnership and director level.
 Ethics and Governance
Module 2: Ethics
PageKey term/ Concept Description
48 Part A: Professional Ethics Ethics essentially deals with what is "right" and "wrong" and how people should act when faced with a particular situation.
The Chambers Dictionary defines ethics as 'a code of behavior considered correct'.
Professional ethics is the application of ethical principles or frameworks by professionals who have an obligation to act in the interests
of those who rely on their services as well as in the best interest of the public.
Ethical principles Integrity, Objectivity, professional competence and due care, confidentiality and professional behavior.

The ethical responsibilities of a professional accountant include:

• the exercise of reasonable skills and diligence
• adherence to a professional code of ethics and standards
• the cautious application of relevant knowledge and experience
• professional scepticism to ensure that any observed discrepancies are properly followed up and investigated.

Impacts of ethical or unethical decisIn many cases, the information provided will be the result of decisions that members make when compiling or preparing the information.
Unethical decisions can have significant impacts on the broader community as it can lead to misled financial statements and incorrect
49 judgements about governance of the entity.

49 ASIC Ethical regulation 1. Conduct financial reporting surveillance and

responsibilities 2. seek amendments for financial statements which failed to properly apply a particular standard
3. Acting against Greenwashing

50 Need for controlled ethics system As ethics is subjective there was a need for systematic ethical process to create a coherent and consistent approach to resolve issues.

51 Kidder 4 types of ethical dilemma(1) Truth versus loyalty

(2) Individual versus group
(3) Short-term versus long-term
(4) Justice versus mercy

52 Types of ethical issues 1. Misleading reporting (40.88%)

based on 238 accounting 2. Fraud and Tax evasion (13.87%)
professionals 3. Misuse of funds and insider trading (11.68%)
4. Breach of confidentiality (8.03%)

52 Key reasons for misconducts 1. Pressure from Clients (21.43%)

2. Conflicts of interest (18.91%)
3. Pressure from corporate management or board of directors (17.65%)

53 Responses to Ethical issues 1. Resisting pressure and saying 'no'

2. Seeking of advice
3. Educating fellow professional
4. Educating clients
5. Informing the management
6. Document everything in writing

53 Contemporary ethical challenges 1. Artificial inteligence (AI)

2. Sustainability
3. Greenwashing - occurs when organisations make misleading or false claims about how environmentally conscious they are in order to
attract investment from individual or institutional ethical investors.
 Greenwashing poses a challenge for accountants in organisations that may make exaggerated claims of their environmental friendliness.

57 Part B: Ethical Theories The Western approach to ethical theory tends to orient itself around the objective of finding the truth in a situation.
Eisenbeiss states that Western theories in the area of ethics and leadership have their historical roots in the work by ancient theorists or
ethicists such as Plato and Aristotle.
Eastern traditions have their historical roots in Confucianism, which has an emphasis on social order, responsibility, reverence for a family.

In Western ethics, ethical theories are attempts to either explain human behaviour as it is, which is called descriptive ethics, or provide a
57 framework for how people should behave, which is called normative ethics.
One way of thinking about these approaches is that any descriptive theory of ethical behaviour explains existing behaviour without
necessarily seeking to change it while normative ethical theories set norms for behaviour.

58 Normative Theories Propose pinciples that distinguish right from wrong by establishing a norm or standard of correct behaviour that should be followed at all times.
Provides two key functions
1. provide a framework for judging the rightness of an act or decision after the event has occurred.
2. Provide a framework for decision making to resolve ethical problems.

58 Normative ethics two categories 1. Ethics of conduct

2. Ethics of character

58 Ethics of charcter Ethics of character, is also called virtue ethics.

This is an area of ethical theory that calls upon people to examine the various traits of individuals in order to determine whether they
have behaved in a manner that is wrong, based on that particular assessment.

58 Ethics of conduct split into two prominent categories: teleological (consequential) and deontological (non-consequential or duty-based).
Teleological theories centre around the need for individuals and groups to consider the consequences of actions. The ends justify the
means: egoism and utilitariansim.
Deontological theories centre round the need for individuals and groups to consider the intent of actions.

59 Teleological Theories Determine right from wrong or good from bad, based solely on the results or consequences of the decisions or action.
Evaluate the impact of decisions or actions on outcomes, they are termed 'consequential'.
If the benefits of a proposed action outweigh the costs, the decision or action is considered ethically correct.
Benefits and costs are both the combination of tangible and psychological outcomes
59 Egoism Evaluates the rightness of an action from the perspective of the decision maker (self).
Ethical Egoist approach describes the idea that it is right for a person to pursue an action in their own self-interest, assuming that
everyone else is entitled to act in their own self-interest as well.
Psychological egoism how people tend to behave without implying an ethical judgement about how they should behave.
One difficulty with egoism is that acts of self-interest are commonly misunderstood as acts of selfishness.
Restricted egoism can be seen as an ethically more acceptable form of egoism. Relates to self-interest being the subject of morals, but
is constrained by laws and regulations.

According to the utilitarian (or utility) principle, determining good from bad, or right from wrong, is an act or decision that produces the
60 Utilitarianism greatest benefit or pleasure for the greatest number of people.
Applying this principle to judgement, decision making and problem solving is a process that relies on five basic steps.
1. Identify and articulate the ethical problem(s).
2. Identify all available courses of action that will resolve the situation.
3. Determine the foreseeable costs and benefits (short and long term) associated with each option.
4. Compare and weigh the ratio of good and bad outcomes associated with each option.
5. Select the option that will produce the greatest benefit for the greatest number of people.

60 Cost benefit analysis A utilitarian analysis should be distinguished from a cost–benefit analysis that is normally applied in business decisions.
A cost–benefit analysis in business is generally weighed up in economic terms and only as it relates to the decision maker
and the employing organisation

61 4 main limitations of Utilitarianism 1. Difficulty in measuring and assigning a numerical value to consequences
2. identifying all stakeholders potentially affected by a decision or action and the ability to reliably predict future outcomes is an uncertain and difficult process.
3. focus on the results of proposed actions and not the motivation, intention or the character of the action it self
4. ignore other factors, such as community interests or the interests of others

Table 2.2 Differences between ethical egoism and utilitarianism

Deontological theories
A deontologist asserts that there are more important considerations than outcomes. In fact, it is the intention behind the act itself that is
62 Deontological theories more important than the results of the act.
Take the example of telling a lie. Some look to the consequences that are likely to flow from telling a lie (a consequential analysis),
whereas a deontologist would argue that it is always wrong to lie, whatever the outcome(s).

Rights
An ethical theory of rights asserts that a good decision respects others' rights, while a wrong decision violates them.
Rights are entitlements defined by a person's characteristics, roles, or conditions
1. Legal and contractual rights
2. Human rights

63 Justice: Concerns with fairness and equality

Different types of justice 1. Equality principle

2. Merit principle
3. Needs principle

64 Virtue ethics Its focus is to understand and develop virtues that make us better people.
Virtues may be defined as attitudes, dispositions or traits of character that enable us to do what is ethically desirable, and which through
consistent practice, become habitual acts.
65 Limitation A limitation of virtue ethics is that it does not always provide guidance when a person is faced with a genuine ethical dilemma.
Virtue ethics emphasises the personal attributes that an ethical person should possess. However, it does not necessarily make clear
what one should do in a specific conflict situation.

65 Moral agency A moral agent is a decision maker who has the ability to make moral judgements based on some notion of right and wrong and is held accountable for these actions.
Accountants are moral agents.

67 Part C: APESB - APES 110

The sum of the benefits that citizens receive from the services provided by the accountancy profession, incorporating the effects of all
68 Public interest regulatory measures designed to ensure the quality and provision of such effects.

IFAC defines 'interest' as the responsibilities that professional accountants have to society.

The accountants's primary duty is not to the client or the employer, but to the public. Therefore, emphasis on the public interest extends
69 to interests beyond the needs of an individual client or employer.

Part 1 sets out the requirement for all members to comply with the code, list the fundamental principles that members must comply with
69 4 Parts of code of ethics and provides a conceptual framework that members can use to ensure that they comply with the principles.
APES 110 Part 2 sets out how the conceptual framework applies to members in business.
Part 3 sets out how the conceptual framework applies to members in public practice when providing professional services.
Part 4 which is split into two sections (4A and 4B), sets out the independence standards that apply to members when providing assurance services.

70 Fundamental principles ss110 - 115: There are 5 fundamental principles

s111: Integrity
s112: Objectivity
s113: professional competence and due care
s114: confidentiality
s115: professional behavior

70 s 111: Integrity Integrity is an element of character and is essential to the maintenance of public trust.
Integrity in accounting is centred on concepts such as trust, honesty and honourable and reliable behavior.
APESB Code of Ethics imposes an obligation on accountants to be straightforward and honest in professional and business relationships (para. R111.1)

shall not knowingly be associated with reports, returns, communications or other information where the Member believes
that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information provided recklessly; or
(c) Omits or obscures required information required where such omission or obscurity would be misleading (para. R111.2).

71 s 112: Objectivity Refers to the state or quality of being true, outside of any individual feelings or interpretations.
Accountants should be impartial, honest and free from conflicts of interest.
exercise professional or business judgement without being compromised by: [b]ias; [c]onflict
of interest; or [u]ndue influence of, or undue reliance on, individuals, organisations, technology or other
factors’ (para. R112.1).

Examples of situations which compromise the objectivity

1. aquring financial interest in a client
2. formal or informal relationships with the exceutive management
3. receiving excessive fee from a single client
 Arm's length transaction One in which both parties act in their own interests (e.g. to maximise returns), without pressure or duress from the other party or a third party.
Not engage in relationships that interfere with each party’s independent interests.

71 s 113: Professopnal Two obligations under this

1. Attain and maintain professional knowledge and skill at the level required to ensure that client or employing organisation receives
competence and due care competent Professional Activities, based on current technical and professional standards and relevant legislation.
2. Acting diligently in accordance with applicable technical and professional standards.
Acquiring and maintaining professional competence is typically achieved through an accredited university accounting degree and
professional development program
Diligence encompasses the responsibility to 'act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis'
Accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should
not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty
72 S 114 confidentiality
to disclose.
Must refrain from using confidential information to their personal advantage or the advantage of a thrid party.
Maintain confidentiality in all circumstances.
The duty continues even after such relationships have been terminated (paras R114.1(f), R114.2)
Duty of confidentiality is relieved only when disclosure is required by law, or there is a professional duty or right to disclose.

Circumstances when disclosure of

confidential information is required Page 72

Must comply with relevant laws and regulations; behave in a manner consistent with the profession's responsibility to act in the public
interest in all Professional Activities and business relationships; and avoid any conduct that the Memebr knows or should know might
72 S 115 Professional Behaviour discredit the profession.
Act in a way that promotes the good reputation of the profession and their colleagues.

74 S 120: The conceptual framework Relies on the application of key principles for decision making.
Comprises of 3 steps:
• Identify the threats to compliance with the fundamental principles
• Evaluate the threats identified
• Address the threats by eliminating or reducing them to an Acceptable Level

76 Identifying Threats The first step in the conceptual framework is to identify such threats.

5 threats to the fundamental principlAPES 110 defines 5 categories of threat:

1. Self interest
2. Self review
3. Advocacy
4. Familiarity
5. Intimidation

79 Evaluating threats
Once a threat has been identified, members need to evaluate the threat to determine whether a threat is at an acceptable level.
APES 110 states that 'An Acceptable Level is the level at which a member using the reasonable and informed third party test would likely
conclude that the member complies with the fundamental principles'
The forms of guidance relevant to evaluating the threat level (para. 120.8 A2) include
• Corporate governance requirements.
• Educational, training and experience requirements for the profession.
• Effective complaint systems which enable the Member and the general public to draw attention to unethical behaviour.
 • An explicitly stated duty to report breaches of ethics requirements.
• Professional or regulatory monitoring and disciplinary procedures.

80 Addressing threats Members must evaluate how to eliminate or reduce threats to an acceptable level, as per the Code's process (para. R120.10).
Threats should be addressed by either:
(a) Eliminating the circumstances, including interests or relationships, that are creating the threats.
(b) Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable Level; or
(c) Declining or ending the specific Professional Activity (para. R120.10)

If members are unable to eliminate the circumstances that gives rise to threat or find safeguards, the only option left is to decline to
engage in or to end a particular professional activity.

Defined as ‘actions, individually or in combination, that the Member takes that effectively reduce threats to compliance with the
80 Safeguard fundamental principles to an Acceptable Level’ (para. 120.10 A2).

81 Applying code to members Table 2.8

in practice

81 Conflict of interest The Code requires individuals to not allow a conflict of interest to compromise their judgement when involved in professional activities or engagements.
(ss. 210, 310) table 2.9
table 2.10

83 Remuneration, Incentives, Fees table 2.11

and other Forms of Payment there is the possibility of a self-interest threat that can arise if situations are not properly managed. Self-interest threats can arise in several ways
(ss. 240, 330) if financial affairs are compromised in some form.

84 TABLE 2.12 Safeguards to prevent self-interest threats

85 Commissions and Soft-Dollar Those who provide financial advice must follow the provisions of APES 230 Financial Planning Services.
Benefits Receiving remuneration in the form of commissions and other financial benefits might threaten a member’s objectivity.
Commissions create potential self-interest threats to objectivity.
Therefore, accountants should adopt a fee-for-service approach
At a minimum, member who accepts commissions or other incentives, the member must fully and clearly disclose to the client the nature and extent of such fees.
soft-dollar benefits received from third parties create conflicts that can potentially undermine independent advice.
Soft-dollar benefits include all monetary and non-monetary benefits received from a third party
CPA Australia, through APES 230, has accordingly banned a wide range of benefits, gifts or other incentives including commissions
based on sales volumes, preferential commissions linked to in-house financial products, free or subsidised office equipment,
computers or software, and gifts over $300 in value.

85 Inducements, Including Inducements are defined as being objects, situations or actions that are used as a means to influence another individual’s behaviour
The Code describes inducements as ranging from acts of hospitality to acts that end in noncompliance with the legal and regulatory
Gifts and Hospitality (ss. 250, 340) pronouncements that are in force in a jurisdiction.
Various forms of inducements exist, and they may take the form of gifts, hospitality, entertainment, political or charitable donations etc.
The Code points to rules and laws that operate in jurisdictions that prohibit the offer or acceptance of inducements.
These laws are typically related to bribery and corruption

86 table 2.13 Factors to consider when evaluating inducements with intent to improperly influence behaviour
86 table 2.14 Safeguards related to inducements
 Members in business and in public practice may encounter or be made aware of actual or suspected non-compliance with laws and
87 Responding to Non-Compliance regulations when carrying out professional activities.
with Laws and Regulations
NOCLAR deals with how members must respond when they encounter or are made aware of noncompliance or suspected non-
compliance with laws and regulations in the course of carrying out
(ss. 260, 360) professional activities, to ensure that they act in the public interest.
NOCLAR NOCLAR provides a framework for accountants in so that they can fulfil their responsibility to act in the public interest when responding to non-compliance
(a) To comply with the fundamental principles of integrity and professional behaviour;
(b) By alerting management or, where appropriate, Those Charged with Governance of the employing organisation/client
(i) Enable them to rectify, remediate or mitigate the consequences of the identified or suspected NOCLAR; or
(ii) Deter the commission of the NOCLAR where it has not yet occurred; and
(c) To take such further action as appropriate in the public interest (paras 260.4, 360.4)

91 Preparation and Presentation of Accountants in business who are involved in preparing and reporting information must ensure that they: page 91
Accountants in business can be pressured to prepare or report information in a misleading way or to become associated with misleading
Information (s. 220) information through the actions of others.
Safeguards to address such threats or reduce them to an acceptable level include consultation with others within the firm or employing
organisation, those charged with governance, a professional body, a regulatory body or legal counsel.
A member may decide to refuse to be associated with information that is misleading if attempts to deal with various individuals within the corporate hierarchy fail.

Reporting with Integrity Those who work in the field of accounting must not only be well qualified but also possess a high degree of integrity.
A person with integrity will then demonstrate desirbale behavioural attributes that are associated with integrity, such as being honest and
compliant with the relevant laws and regulations.

92 Acting with Sufficient Expertise (s. Linked closely to the fundamental principle of professional competence and due care.
A member shall 'only undertake significant tasks for which the Member has, or can obtain, sufficient training or experience'
A member shall not intentionally mislead an employing organisation as to the level of expertise or experience possessed.
Threats include having insufficient time to properly perform or complete relevant duties, and having insufficient experience, training and/or education.
 Safeguards include obtaining additional training, ensuring that there is adequate time available for performing the relevant duties, and
obtaining assistance from someone with the necessary expertise.

The standard requires members not to allow pressures from others to result in breaches of the fundamental principles, and not to
92 Pressure to Breach Fundamental Pripressure others in a way that could result in a person breaching one or more of the fundamental principles.
(s. 270)
3 key sources of potential pressure:
• within an employing organisation, for eg. From a colleague or superior
• an external individual or institution such as a vendor, customer or lender
• internal or external targets and expectations

When a member in public practice is approached by a potential client, acceptance of the client should not be granted automatcially. The
93 Professional Appointments (s. 320) member must consider a number of issues before accepting a new client.
They must consider whether acceptance would create any threats to compliance with the fundamental principles.

Communication A matter of etiquette for a proposed successor to communicate with their predecessor before accepting a professional appointment.
One problem inhibiting effective communication is that existing accountants are bound by the principle of confidentiality.

94 Referrals Occurs when a client requires specialist advice in an area that is beyond the competence of their existing accountant.
The member or the client should engage another accountant with the required expertise.
The underlying issue with referrals is one of professional competence.

94 Second Opinions (s. 321) Problems may arise when a client is dissatisfied with the orginial opinion on a transaction seeks alternative opinions from other accountants.
Opinion shopping occurs when the client seeks alternative opinions until they succeed in obtaining an opinion favorable to their position.
When this occurs, the client may use this opinion to place pressure on the existing accountant to adopt the alternative opinion favorable to the client or risk losing the client.

Reviewing engagements within a pra

Careful thought needs to go into the appointment of an engagement quality reveiwer so that threats to objectivity are not created.
(s. 325)

95 Custody of Client Assets (s. 350) Accountants should not assume custody of client monies or other assets.

Independence The code defines independence as being linked to both objectivity and integrity.
a. Independence of mind - the state of mind that permits the expression of a conclusion without being affected by influences that
compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional
scepticism.
b. Independence in appearance - the avoidance of facts and circumstances that are so significant that a reasonable and informed third
party would be likely to coclude that a Firm's or an Audit or Assurance Team member's integrity, objectivity or professional scepticism
has been compromised.

97 Special Purpose Financial StatemenPrepared in accordance with a financial reporting framework designed to meet the financial information needs of specified users.
(ss. 800, 900)

Ethical decision making is defined as reaching a responsible decision after taking into consideration the general ethical beliefs of the
106 Part D: Ethical Decision Making individual, the ethical implications of a course of action, and the norms and rules pertaining to the circumstances of the situation.

107 Factors influencing decision making• Individual Factors - people at different levels of moral development have varying capacities to judge what is ethically right and so may react differently to a similar situation.
The higher a person's moral development, the less dependent that person is on outside influences and, hence, the more that person is
likely to behave autonomously and ethically.
 Ethical courage Is the level of courage a person demonstrates in order to make difficult decisions and act upon these decisions.

108 • Organisational Factors - corporate culture is defined as patterns and rules that govern the behavior of an organisation and its employees.
A culture that lacks written policies and coeds of ethics and accepts dishonestly and unethical condust may have a strong influence on a person's ethical decision making.
Speaking up on ethical issues Page 110-111

111 • Professional Factors - the extent of the influence on a decision making is dependent on the effectiveness of the Code.

• Societal Factors - generally relate to the world we live in. These include the laws that govern our behaviour and culture, which reflect
the attitudes and values of the community.

Holds that ethical behavior is relative to the norms of one's culture. That is, whether an action is right or wrong depends on the ethical
112 Ethical Relativism norms of the society in which it is practised.

Presents a combination of the normative ethical principles derived from the theories of egoism, utilitarianism, and rights and justice in the
114 Philosophical Model of Ethical Deci form of specific questions rather than abstract principles.
Making 1. Do the benefits outweigh the harms to oneself?
2. Do the benefits outweigh the harms to others?
3. Are the rights of individual stakeholders considered and respected?
4. Are the benefits and burdens justly distributed?

115 American Accounting Association MThe purpose of the 7 step model is to develop a systematic approach to making decisions that can be used in any situation with ethical implications.
The advantage of AAA model is the ethical awareness it creates by giving particular attention to stakeholders and ethical issues.
1. What are the facts of the case?
2. What are the ethical issues in the case?
3. What are the norms, principles and values related to the case?
4. What are the alternative courses of action?
5. What is the best course of action that is consistent with the norms, principles and values identified in Step 3?
6. What are the consequences of each possible course of action?
7. What is the decision?
 Ethics and Governance
Module 3: Governance Concepts

Page Key term/ Concept Description

Part A
A corporation is separate from its owners; it is a distinct legal entity with most of the same legal rights as an
123 Corporation individual.
Advantages of corporation over other forms of business organisations
1. Separate legal entity distinct from its owners. Corporation is seperated from its owners (Most of legal rights
similar to an individual)
2. Limited liability (Limited to the original capital invested by the owners)
3. Perpetual Succession (ownership by, and operations of corporation can last forever)

123 corporate winding up A corporation ceases to exist only through formal legal procedures that result in the corporation 'winding up'.

123 Primary responsibilities Maximise the wealth of its shareholders.

of a corporation Consider the interests of a wider group of stakeholders (Employees, customers, suppliers and the community)

123 types of corporations 1. For profit or not for profit

2. Private
3. Public

124 Proprietary companies Hold shares privately and limited to 50 non employee members

can issue shares to existing share holders, employees or subsidiary companies. But not for investors
Cannot do anything which require disclosure to investors including, offering securities for issue or sale to
public

124 Public companies It will have more than 50 members and may issue securities to the public. May apply to list on the ASX.
125 Compliance requirement Table 3.2

126 3 components to 1. Financial statements

annual financial reports 2. Notes to financial statements
3. Directors declaration

126 Directors/ Other officers Corporate act sets out the eligibility criteria for this section.

126 Director identification number ASIC introduced Director Identification Numbers in November 2021, managed by ABRS,
Designed to prevent the use of false or fraudulent director identities.

126 As corporations grow in size, there is also a separation of ownership and management.
Directors ensure they apply professional skepticism as they deal with issues arising during their term
as a director.

Directors and their duties

Duty to avoid conflicts of
127 interest Agency relationship: exists when one person acts on behalf of another person

Potential conflicts may be at the expense of the corporation, or may even be beneficial to the corporation.
Law requires that directors of larger corporations (including all public and listed corporations) must not be
involved in decisions where any actual or potential conflicts of interest are identified.
Can bypass this rule - clearly advise the board of the conflict and also gain approval from the remaining
directors or from the shareholders or from corporate regulators.
Failure to disclose can result in civil liabilities, full obligations to compensate persons (natural and corporate)
who are harmed and even criminal prosecutions, including possible jail and fines.

The duty to avoid conflicts of interests is matched with the corresponding demand to act in the best interests
127 Duty to act in good faith in the of the corporation.
Corporation's best interest Actions should be made in good faith, honestly and without fraud or collusion.

127 Duty to exercise power for Essential for directors to act within their designated powers.
 proper use The two main areas that must be satisfied are,
· act within their power,
· do not abuse their powers

Powerful interest groups appoint nominee directors to a board, representing third-party interests like major
128 Nominee Director shareholders or holding corporations.
The nominee director must always act in the best interests of the corporation and use their powers only for
proper purposes when making a decision as a director of a board.

If a director delegates a power that they should have exercised themselves, they may be liable if the
128 Duty to retain discretionary delegate's actions cause the corporation to suffer loss
powers Director must not let some one who is not a director carry out his duties
Delegates must be properly appointed by board using professionaly accepted procedures
Some director duties and tasks are simply 'non-delegable'. This means that any attempt to delegate these
'non-delegable' functions will compromise inappropraite action by a director and will not deem the director
immune from liability.

Duty to act with care and

128/ diligence A director is expected to exercise risk in a sensible and prudent manner.
129 Standard of care may differ even between directors of the same corporation:
• A director who also has professional qualifications and uses them in an executive capacity may be subject to
a higher level of responsibility.
• Non-executive directors who are not involved in the business on a day-to-day basis are still required to
demonstrate a duty of care.
The Corporations Act protects directors through the business judgment rule, ensuring they act with care and
129 Business Judgement Rule diligence in decisions they make if they:
S 180(2) (a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be
appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.

Duty to remain informed about Directors need to know what is happening within the company and in the environment within which the
129 company operations company operates.
 Reading board papers, applying professional scepticism, asking appropriate questions of company officers
and auditors enable directors to get the information they require.

Duty to prevent insolvent

130 trading A basic duty of directors under the Corporations Act is to ensure that a company can pay its debts.
Directors must, at the time a debt is incurred, have reasonable grounds to believe that the company will be
able to pay its debts when they are due for payment.
An insolvent company is one that is unable to pay all its debts when they fall due.
If a company becomes insolvent, the directors must not allow it to incur further debts.

In an effort to protect directors in their attempt to trade out of insolvency, the Corporations Act includes a safe
130 Safe habour provision harbour provision
(a) at a particular time after the person starts to suspect the company may become or be insolvent, the person
starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the
company; and
(b) the debt is incurred directly or indirectly in connection with any such course of action during the period
starting at that time, and ending at the earliest of any of the following times:
(i) if the person fails to take any such course of action within a reasonable period after that time — the end of
that reasonable period;
(ii) when the person ceases to take any such course of action
(iii) when any such course of action ceases to be reasonably likely to lead to a better outcome for the
company;
(iv) the appointment of an administrator, or liquidator, of the company

Unless the company can obtain sufficient finance or trade its way out of financial difficulty, the
options available to directors are to appoint a voluntary administrator or a liquidator
The purpose of liquidation of an insolvent company is to have an independent and suitably qualified person
(the liquidator) take control of the company so that its affairs can be wound up in an orderly and fair way for
the benefit of its creditors.

All independent directors must be non-executive directors, but not all non-executive directors are independent.
 To describe a director as ‘independent’ carries with it a particular connotation that the director is not
aligned with the interests of management or a substantial holder and can and will bring an
134 Directors independence independent judgement to bear on issues before the board.
Three types of directors
1. Executive directors
Non executive directors
2. Non independent non executive directors
3. Independent non executive directors
questions on page 135

Even if a director is not independent, it is important to appreciate the concept and to ensure decisions are
135 Determining the independence made as impartially (i.e. as independently) as possible.

135 Company secretaries Company secretaries are individuals who fulfil a crucial compliance role.

Responsibility for ensuring a company maintains all its compliance obligations with the corporate regulator.
They must be at least 18 years old and reside in Australia.

Shareholder power Powers include the power to appoint, remunerate and remove directors, call meetings, call for and vote on
136 resolutions, and seek redress from the courts.

136 Appointment of directors The Corporations Act states that directors can be appointed in two ways (ss. 201G, 201H):
1. by resolution passed in a general meeting;
2. by the directors of a company which is subject to confirmation by:
– a proprietary company via resolution within two months of the appointment; and
– a public company via resolution at the company’s next annual general meeting (AGM)

136 Remuneration Shareholders typically approve director remuneration in public companies. For listed companies,

annual general meetings allow members to adopt a company's remuneration report, but this is advisory
and does not bind the directors or the company. If a resolution passes, all directors must reelect
at a spill meeting.
 The Corporations Act (s. 198A) states that ‘the business of a company is to be managed by or under the
137 Board powers direction of the directors’
(Board of dirctors) Oversee the activities of an organization.
It is preferable that the roles and responsibilities of the board be explicitly set out in a written charter or
constitution.

Rogers CJ concluded that the role of the board in modern companies is to set policy and organisational
objectives (performance) and then ensure adequate controls and review procedures are in place
(conformance) to ensure effective implementation by management (performance).
On going oversight
138 responsibility Board is not in place to run the business it self. This should be done by CEO. However when CEO fails,
of the board board should take timely actions.
Board must ensure appropriate procedures are in place for risk management and internal control.

Board must be informed about any key business information that could be untoward or inappropriate.

Support mechanism 1. induction for new directors

2. Relevant education and training for the directors
3. Board evaluations
4. provided with expert advice (Legal & finance)

The board is elected by shareholders and functions as their agent

Boards are expected to act for, on behalf of or in the best interests of shareholders.

The primary duty of boards is to shareholders, with the duty to all other stakeholders deriving from
the directors’ duty to ‘act in good faith in the best interests of the company’

138 Alternative board structures top tier: supervisory board

second tier: management board

CEO Power CEO is responsible for the ongoing operations of the organisation.
The CEO is usually a director of the board as well, and because of this, may also be called the managing
director or MD.
 The CEO effectively has two roles, board member and CEO.

Potentially two identifiable agency relationships arise — one with shareholders and another with the board.
The CEO, with the management team, is responsible for constructing the strategies and the significant
policies of the company.

The task of implementing corporate strategies and policies rests with the CEO and the management team.

The CEO must keep the board informed on key issues relating to the management of the company.
Reports should include information on performance and key risks, and also exceptional/significant events
(such as the loss of a key customer).

Provides an understanding of how different people or groups are likely to behave in the corporate
138 Corporate governance theories environment.
140 Stewardship theory People in power (the agents or stewards) will act for the benefit of those who have engaged them.

(Relationship between Sees appointed directors as ‘stewards’ who carefully look after the resources they have been trusted with.
shareholders and directors) Stewards are expected to naturally act favourably on behalf of the owners.

A strength of stewardship theory is that it perceives directors as professionals able to demonstrate their
commitment to the company and its shareholders in a virtuous and capable way without constant oversight.
One criticism of this theory is the assumption that good stewards do exist and that these stewards will
maintain their virtues over extended periods of time.

140 Agency Theory Agency theory takes the alternative view and assumes people have a self-interested egoist approach.

(relationship between agents Agency theory views corporate governance through the relationship between agents and principals.
and principals.) Agency consists of giving power to individuals or groups to act on behalf of others.
Agent may not naturally act in the best interests of the principal.
Assumption of agency theory is that all parties are rational utility maximisers, which means agents may
pursue different goals from those of the principals.
 1. All individuals will act in their own self-interest. Where a potential conflict of interest exists between
140 Agency theory two key principals and agents,
assumptions agents will tend to act first in ways that will maximise their own personal circumstances.

2. Agents are in a position of power as they have better access to, and control of, information (information

asymmetry) and the ability to make decisions.

140 Goal congruence Interest alignment, also called ‘goal congruence’, is a critically important aspect of good governance.
The costs of not achieving interest alignment can sometimes be catastrophic.

140 3 types of agency cost 1. Monitoring cost

2. bonding cost
3. residual cost

Resons for agency cost • information asymmetry (where the agent has more information than the principal)
• poor communication
• poor understanding
• innocent and unintended self-interested behaviour by agents
• deliberate legal self-interested behaviour
• illegal self-interested behaviour by agents (e.g. fraud)

140 Monitoring cost Incurred by principals because an agency relationship exists.

Some monitoring costs are compulsory, such as costs relating to annual reporting and external auditing.
Other monitoring costs are discretionary, such as the work required to construct and analyse activities
according to a strategic or balanced scorecard.

140 Bonding cost Costs incurred by the agent to demonstrate to the principal that they are goal congruent.
This may include voluntary restrictions on the agent’s behaviour or benefits to demonstrate goal congruence,
and are part of the explanation for the development of executive stock options and other benefits that have
significantly increased executive rewards in recent decades.
140 Residual cost Residual loss is a cost incurred by the principal.
Residual loss arises because, no matter how good the monitoring and bonding efforts, the agent will inevitably
make decisions that are not consistent with the principal’s interests.
Any loss, cost or underperformance arising from these decisions by the agent represents a residual loss of
value to the principals.

141 Examples of residual cost 1. Excessive non financial benefits

The over-consumption of perquisites (perks) relates to obtaining an excessive level of incidental benefits in
addition to income.
2. Empire building
Acts by management to increase their power and influence within a company for reasons associated with
personal satisfaction.
3. Risk avoidence

The incentive for managers to engage in risky investments depends on their remuneration. Higher returns

may be sought by shareholders who diversify their risk portfolio. If managers are remunerated with fixed
salaries and do not participate in higher returns, they minimize downside risk, underachieving the
organization and causing a loss of value to shareholders.
4. Differing time Horizons

Managers often only have an interest in the firm for the duration of their employment. If managers are to
be rewarded on current year profits alone, then those managers may only consider the current year as being
the relevant time frame
The time frame is an important consideration when designing remuneration schemes.

142 How to address residual cost 1. Get permission from the board of chair for the expense

(these are also examples of 2. If the expense is urgent provid a written report to the board after such expense
voluntary restrictions) 3. If the report was not accept immediately personally held liable for such expenses
 4. undertake a review of the efficiency for all major expenses to with a view to eleminate such which are not
profitable (Ex: foregin travel for potential branches which are not performing well)

Stakeholder theory focuses on how managers in an entity, irrespective of its type, seek to manage their
142 Stakeholder Theory relationships with all of their internal and external stakeholders.
Internal stakeholder group: employees, owners, management
External stakeholders: customers, suppliers, crditors, regulatoirs, government, community

Corporate Social
142 Responsibility Deals with the concept that an entity and those employed by it should engage in activities and promote
Theory (CSR Theory) causes and initiatives that are seen as providing a social benefit to the community.

Part B
145 Corporate governance is the system by which business corporations are directed and controlled.
Governance = conformance + performance

Aims to ensure that organisations are properly run in the best interests of their stakeholders, including the
146 Good governance optimal performance of national and international economies.
Good corporate governance promotes investor confidence.
The principles of corporate governance are intended to help policy makers evaluate and improve the legal,
OECD regulatory, and institutional framework for corporate governance, with a view to supporting economic
efficiency, sustainable growth and financial stability.
Play an important role in contributing to the achievement of broader economic objectives and three
major public policy benefits
1. help companies to access financing
2. well-designed corporate governance policies provide a framework to protect investors
3. well-designed corporate governance policies also support the sustainability and resilience of corporations
and in turn may contribute to the sustainability and resilience of the broader economy

Governance allocates clear roles to the board and to management, and a well-constituted and high-
performance-oriented board can motivate and encourage management to achieve greater corporate
147 performance.
148 Shareholders Are the persons or entities who own a company and have an important part to play in corporate governance.
Shareholders have delegated much authority to the directors - principal/agent relationship.
Shareholders who hold a significant stake in a company are often able to use their voting power to gain places
for themselves or their nominees on the board.

Want companies to be run efficiently and profitably, and for the companies to be adequately supervised by the
149 Individual Shareholders board.

Include insurance companies, superannuation funds, investment trusts and professional investment fund
150 Institutional Shareholders managers.

Insitutional investors can be seen to have a greater responsibility and ability to hold management to account.

In a perfect world, everyone would have equal access to all information. However, there is often significant
150 Information Asymmetry information asymmetry within the company structure.
Investor knowledge comes from individual research, shareholder activists and proxy advisers.
Access to knowledge may be limited to information that the company publishes or information that
shareholders or their representatives can encourage companies to share.

151 The Board Boards and directors are the most significant components of corporate governance. Consist of
1. Chair
2. Executive director (Including CEO)
3. Non executive directors

151 Chair/ Board chair The role of the chair is to lead the board of directors, including
Roles 1. determining the board’s agenda,
2. obtaining contributions from other board members as part of the board’s deliberations, and
3. monitoring and assessing the performance of the directors.

In some countries, it is important that the chair be independent while other countries this is not critical.

Where the roles are combined, it is the usual practice to have a senior independent director who can express
 an independent view.

152 Primary functions of the board 1. providing accountability

(Approve and work with CEO) 2. Strategy formulation

3. Monitoring and supervising
4. Policy making
(Further explanation on page 152)

153 Committees of the Board Effectiveness of the board is enhanced by the establishment of the appropriate board subcommittees.
These committees enable the distribution of workload to allow a more detailed consideration to be given to
important matters, such as executive remuneration and external financial reporting.
Subcommittees are important for creating environments where independent directors’ views can take priority
in order to achieve independent decisions.
These committees do not reduce the responsibility of the board as a whole, and care needs to be taken to
ensure that all those concerned understand their functions.
Board of directors is still responsible for decisions made by the committees.

154 Nomination Committee Primarily responsible for recommending the succession procedures within an organisation.

Succession is the concept of identifying and selecting people who will replace senior staff when they leave.

Assessing the overall performance of the board and, sometimes, the performance of key executives.
Given that boards comprise a balance of directors, including executives, it is appropriate for the
nomination committee to include executive directors.

154 Remuneration Committee Deals with remuneration, especially for senior executives.
Include what and how directors and executives are paid.
The sensitivity of setting a remuneration policy can be reduced if executives are not involved in the
committees that decide their remuneration.
 To ensure independence, it is necessary that executives do not set the remuneration of independent directors.

154 Audit Committee Important in relation to the conformance aspects of corporate governance.
Appropriate conduit between the company and the external auditor, ensuring that the work of the external
auditor maintains the utmost integrity and independence.
To ensure the independence of the audit committee, it is recommended that the audit committee comprise
only nonexecutive members, with a majority being independent.
An audit committee with no executives means that communications with the external auditor at a formal level
will take place without the CFO.

154 Sarbanes–Oxley Act The Sarbanes–Oxley Act provides that the audit committee has the responsibility to ‘hire and fire’ auditors.

Role should include reviewing the adequacy of operational and internal controls (including the internal audit
function) and reviewing half year and fullyear financial statement prior to board approval.

155 Benefits and limitations Page 155

156 Risk Committee Ensure that risk is assessed, understood and appropriately managed.

It is essential that strategic planning and management decisions are made appropriately in the context of the
risk appetite of the corporation and its various stakeholders, especially its shareholders.
A good understanding of risk is assisted by a clear understanding of strategy.
If a company does not have a good understanding of risk, the likelihood of conformance and performance
failure is high.
IFAC recommends that companies should establish a strategy committee that reviews strategy in all its
dimensions including risk.

Assists the board by providing advice and guidance in relation to environmental, social and governance (ESG)
157 Sustainability Committee and sustainability issues.
 Internal auditor plays an important role in ensuring that internal financial controls, compliance controls,
157 Auditors operational controls and risk management systems are operating effectively.
External auditors conduct a thorough and independent review of the financial statements.

‘Audit failure’ When an audit is deficient due to negligence, incompetence or lack of independence by the auditor.

The external auditor, as an independent party with a detailed knowledge of the entity’s financial affairs, is able
to provide substantial advice to the audit committee.

External auditor should attend the full board meeting when the financial statements are approved, to enable
all directors to ask any questions they may have regarding the financial statements or the audit process.

Effective regulation and enforcement are essential to ensure that companies can compete against each other
157 Regulators in a fair and reasonable manner.
The purpose of regulation is to support free and open markets.

• Principles-based approach is where the broad principles or recommendations on corporate governance

158 Alternative Approaches to are specified.
Regulation Corporations will normally be expected to follow the principles or recommendations
Provides more flexibility in implementing specific corporate governance practices in view of the potential
diversity of corporations.

• Rules-based approach is more detailed and prescriptive.

Specific and detailed regulations are provided and must be complied with.
There is no flexibility in deciding whether to comply or not.

Risk-based regulation involves focusing resources on the highest non-compliance risks.

Risk-based approach helps achieve public outcomes while minimising unintended side-effects of regulation
and rules.

159 Stakeholders Used in a very broad sense, meaning anyone who is affected by the operations of an entity.
 The Anglo-American corporation law approach is that directors must act in the best interests of the
Stakeholder Concept corporation as a whole.
Corporations are run according to corporate law duties in relation to shareholders.

This approach does not mean that a corporation should be run for the exclusive benefit of its shareholders.

Stakeholder Map Fig 3.5 provides a diagram of potential stakeholders.

Table 3.5 page 160 - 161.

162 Employees Are important stakeholders in any corporate environment.

It is the knowledge and skill of the employees that will be critical to the success of the company.

Suppliers and Lenders Developing and maintaining good relationships with suppliers and lenders will improve performance.
Good relationships add value by avoiding disruptions, and reducing transaction costs and the cost of
borrowing.

Managers are the agents of the board, responsible for pursuing the vision of the company as developed by
163 Management the board, and fulfiling, the strategic direction determined by the board.

Part C

166 Key factors driving the need for better corporate governance internationally include the following - Page 166.

Alternative International
170 Approaches • Market-based Systems

to Governance Terms used to describe this are: outsider system, the Anglo-Saxon system and Shareholder system.
Has been characterised as disclosure based, as the numerous investors depend on access to a reliable and
adequate flow of information to make informed investment decisions.
The role of the banks is less central in a market-based system of corporate governance.
 Shareholders have the right to use their voting power to select the board and decide on certain issues facing
the company.

172 • Relationship-based Systems - European Approaches

Terms used to describe this are: insider system and the stakeholder system.
Relies on the representation of interests on the board of directors.
Long-term large shareholders give a company a degree of protection from both the stock market and the
threat of takeover.

174 • Relationship-based Systems - Asian Approaches

The relationship-based form of conducting business contrasts with the rules-based systems that predominate
in Western industrial countries, where a combination of internal and external controls is exerted on
companies.

A common problem is that Asian economies have a considerable concentration of ownership of companies.

Part D

178 Codes and Guidance The OECD Principles are general or principles based.
The OECD Principles are 'good practice guidelines' and are not written for companies or directors.
Valuable for ensuring that corporate governance guidelines developed by various agencies are consistent
with the OECD Principles.

The OECD Principles specify 6 principles relating to:

1. ensuring the basis for an effective corporate governance framework
2. the rights and equitable treatment of shareholders and key ownership functions
3. institutional investors, stock markets, and other intermediaries
4. disclosure and transparency
5. the responsibilities of the board
6. sustainability and resiliance

Page 178 - 185 detail the principles.

 The UK Corporate Governance
185 Code Demonstrates the way that governance has developed in most jurisdictions using the Anglo-American model.
Using this model, company law developed in conjunction with common law principles.

187 8 ASX Principles and Recommendations - pages 188 - 195.

Part E
Non-Corporates and
Governance

Family-owned businesses, and

196 Small- The agency problem essentially arises from the separation of management and the owners of an organisation.
In small companies with an owner/manager or with family or minor shareholding, this separation does not
and Medium-Sized Enterprises exist.
SMEs are often family-owned.

Conflict between family members poses significant risk, as does the problem of successful growth..

When the business grows successfully, beyond the ability of family members to manage it effectively - often
leads to the need for external professional support and this transition can be very difficult.
To combat these issues - a family council be used to structure family engagement and that a board of
directors should be established.

197 Not-for-Profit Organisations 2 categories: charities, other NFP organisations that are not charities.
Depending on the type of NFP organisation, different tax concessions are available.
NFPs often focus on social issues and aim to achieve a great deal with very few resources, and, therefore,
these resources must be utilised even more carefully than in a commercial organisation.
NFPs are accountable principally to stakeholders rather than shareholders.

ACNC Guidance is specifically for charities and includes two sets of standards: one for charities operating in
ACNC Guidance Australian and one for charities operating overseas.
ACNC Governance Standards - pages 197 - 199
 Diversity in the Not-for-profit The critical difference between these enterprises and commercial enterprises is that the surpluses are
199 sector reinvested for the purpose of the organisations and not for the benefit of the employees or owners.
NFPs are usually autonomous organisations with independent governance and ownership structures, run by
and for the stakeholders of the organisation.
The loss or misallocation of the funds of NFPs is a serious issue that can damage the work and reputation of
the organisation.

The public sector's role is to implement programs cost-effectively in accordance with govt legislation and
200 Public Sector Enterprises policies.

Significance of the Non- The SME sector is of great significance in every economy and community, providing substantial economic
204 Corporate acitivity and employment.
There is the public sector, which continues to have a substantial impact even after the episodes of
Sector privatisation in recent decades.
A further dimension of economic activity is the work of NFP organisations.
These are orgnisations that cannot distribute their earning to those who exercise control in the organisation,
but are dedicated to a wider purpose.
 Ethics and Governance
Module 4: Governance in practice
PageKey term/ Concept Description
Part A
Corporate Governance Success Factors

218 Outcome of poor Corporate Financial failure of the corporation.

Governance

businesses that fail often ignore the fundamentals, and research conducted by various academics and institutions has
Crawford supported
that conclusion.
Altman and Hotchkiss (2006) management inadequacies are often at the core.

218 Common causes of Hamilton and Micklethwait (2006) believe that the main causes of failure can be grouped into six categories
corporate failure (1) Poor strategic decisions
(2) Greed and the desire for power
(3) Overexpansion and ill-judged acquisitions
(4) Dominant CEOs
(5) Failure of internal controls
(6) Ineffective boards.

Lamers (2009) also highlights the importance of cash flow in ensuring the ongoing viability of a
business.
219 Importance of agency theory Corporate culture has also been identified as a significant factor in corporate failure.
The OECD identified that corporate governance weaknesses in remuneration, risk management, board practices and the
exercise

of shareholder rights had played an important role in the development of the financial crisis and that such weaknesses
extended to companies more generally.

219 A KPMG (2016) guide to 1. Greed or sense of making magic happen

corporate collapses 2. Over-ambitious corporate expansions leading to complex structures
3. Excessive debt to fund expansions or personal expense
4. Incentives to management increase the motivation to commit fraud
5. Pressure to achieve market expectations
6. Corporate governance failures as a result of incompetent or ineffective boards and board committees
7. Sense of entitlement by senior management
8. Failure and override of internal controls
 9. Manipulation of financial records and/or fraudulent financial reporting to disguise the true nature of underlying problems

220 Remuneration Two major issues arise in relation to the remuneration that senior executives receive.
1. Concerns about the extent to which high executive earnings are linked to performance
Remuneration methods may fail to achieve alignment or congruency between the agent and principal.
May actually encourage the agent to behave in ways that the principal does not desire at all.
Linking too much remuneration to excessive risk-taking, or to focusing remuneration too closely on short-term performance
while
ignoring long-term sustainable and reliable growth and profits.
2. Frequently shareholder concern regarding the total amount that executives receive which is often regarded as
excessive and involves a residual loss agency cost.

This cost is borne by the shareholders whose returns are reduced by the payments received by senior executives.

A further problem that was emphasised throughout debates on misconduct in the financial services sector were the incentives
paid to the
financial services professional for selling products.

220 Wilful Blindness Term that is sometimes used to refer to types of cases involving serious corporate governance failure.

Wilful blindness refers to situations where individuals seek to avoid their legal liability for a wrongful act by deliberately putting
themselves in a position where they are unaware of facts that will make them liable.

A major implication in relation to the GFC is a lack of expertise of some boards of directors in understanding and effectively
220 Poor Risk Management managing
the risks involved with trading in complex financial instruments.

How to improve CG related to Board

221 Appointment of directors Capable directors, properly appointed, are vital to the effective oversight of modern corporations.

Australia, in common with most countries, only a natural person (i.e. a human being, in contrast to merely a legal person) of
at least 18 years of age can be formally appointed as a director.

A person currently disqualified ‘from managing a corporation’ cannot be appointed a director (and also cannot be appointed
as a senior executive).
Majority of executives who are also directors will be required to have qualifications relevant to their appointed executive
position.
 The appointment of directors is traditionally strongly influenced by the board, even though the shareholders legally appoint
directors.

221 Election of Directors There have been two approaches that have emerged for the election of directors.
1. ‘staggered’ approach to election of directors.
The staggered approach places a greater emphasis on ensuring there is some preservation of corporate memory and
consistency
of decision making over time
The standard period of director appointment has tended to be around the three years in most countries
A three-year staggered vote cycle for directors means that every year, one-third of the directors are required to resign and
then typically
all, or most, of these individuals will stand for re-election.
222 2. ‘destaggering’.
This approach refers to placing all directors up for election each year rather than using a staggered approach
Is set to enhance director accountability and shareholder power.

The managing director is usually the CEO of the organisation. Many managing directors will employ this exemption and may
222 ASX Listing Rule 14.4 never
Election exemption face a shareholder election.
In Australia, an election exemption exists for the managing director

An annual cycle still leaves the possibility of ‘continuing appointment’ of directors who have been on the board for some time
Boards need renewal, as weary or tired directors are unlikely to bring new ideas to the boardroom and may often be resistant
to change.
the relationships that arise within boards mean that independent directors will gradually lose their independence
UK and Australia have specified maximum periods for directors to be considered independent.

222 Evaluation of the board board reviews its own performance at least annually to ensure that it is performing at the optimal level
A range of areas need to be examined in the review of board performance. The OECD (2018, pp. 7–8) recommends
the following
The performance and effectiveness of the board can be measured by the following ‘four dimensions’
1. Quality of the monitoring and risk-management role.
2. Quality of strategic and other business-related advice.
3. Board dynamics and board members’ pro-active participation
4. Board composition and diversity

223 Directors departure Directors may resign from their position during the current term or, alternatively, choose not to stand for re-election at the
end of their current board term
 Corporate governance can be greatly enhanced if directors who resign on a point of principle follow the Bosch
Bosch Committee Committee

recommendation recommendation and make their concerns known either to shareholders or to the relevant regulator (Bosch 1995).

223 Director removal A vote by shareholders at a general meeting can also remove a director from office.

Under Australian law, shareholders have three ways to force a motion to remove individual directors by way of an ordinary
resolution requiring support of 50 per cent of the votes cast.

1. any individual or group of shareholders holding 5 per cent of the votes can require the board to call an extraordinary
general meeting, and the meeting is held at the company’s expense.

2. any individual or group of shareholders holding 5 per cent of the votes are also able to call a general meeting at their
own expense, which is unlikely due to the substantial costs involved.

3. where a company has already called a general meeting, shareholders holding 5 per cent of the votes — or 100 members
entitled to vote — can seek to give the company notice of a proposed resolution to be put to the meeting, including removal of
directors.

224 Two-Strikes Rule Two-Strikes Rule — Shareholders Spill the Whole Board of Listed Company

The two-strikes rule provides that the entire board can be removed after a shareholder vote ‘to spill the board’

However, this spill vote can only occur after the eligible shareholders have voted twice against the remuneration report.
shareholders who hold key management positions or are conflicted in some other way are not eligible to vote.
The first strike occurs where 25 per cent or more of the eligible shareholders vote ‘No’ on the mandatory resolution
by the board
that shareholders accept the corporation’s remuneration report presented in the annual report.
Following the first strike, the company’s subsequent remuneration report (i.e. in the next annual report) must explain the
board’s
action in response to the negative vote or, if no action was taken, the board’s reason for inaction.
The second strike occurs where, once again, 25 per cent or more of eligible votes are ‘No’ in respect of the second
year’s board resolution
to shareholders that the remuneration report be accepted.

Following the second strike, and at the same annual general meeting at which it occurs, a resolution to ‘spill’ (i.e. remove the
whole board) must be put to shareholders.
 Other than the managing director, all directors who were on the board when it resolved for the second time to put the
remuneration report
to shareholders must be subject to the spill vote.
The shareholders’ meeting to elect a new board must take place within 90 days.

225 Disqualification Specific ‘wrongs’ that may lead to disqualification include

• responsibility for certain civil wrongs (which are specified in legislation)
• financial market misconduct
• responsibility for multiple insolvencies
• significant dishonest actions and corporate crimes
• civil and criminal wrongs in relation to anti-competitive conduct in markets for goods and services.
Disqualification may be ‘automatic’. Circumstances surrounding a director may mean that, without any formal declaration of
disqualification occurring, a person is disqualified - typically for a period of 5 years.
Disqualification may also occur because of an order of the court
disqualification can be prescribed by regulatory agencies where directors and other senior officers have been involved in
226 multiple
insolvencies or have breached relevant probity provisions.
Disqualification aims to act as a deterrent to would-be offenders and helps protect the public from exposure to persons who
may reoffend.

226 Diversity One key area where the subject of diversity arises is in relation to discrimination in employment. This relates to fairness.
227 Diversity is an important factor in performance.

It is necessary to create an environment where diversity becomes part of the culture of good corporate governance generally.

This can result in long-term high performance of the organisation and a contribution to the capabilities of the entire community.

229 Executive remuneration & Some boards and executives took higher risks when their remuneration was based upon short-term financial performance,
performance effectively acting for personal gain.

having a say on pay The pressure to link performance and pay has seen some jurisdictions mandate the disclosure of executive remuneration to

shareholders and the wider community, described as ‘having a say on pay’ in countries such as Australia, the UK and the US

This type of tax generally creates an incentive to both rein in executive pay and lift up worker wages, all while
Overpaid Executive generating
Gross Receipts Tax significant new capital for vital public investments
231 Payments for past and Recommendation 8.2 of the ASX Principles states
‘a listed entity should separately disclose its policies and practices regarding the remuneration of nonexecutive directors and
future performance the
remuneration of executive directors and other senior executives.

Non-executive directors should not be remunerated according to performance achieved or to be achieved, except to the extent
Non executive directors that they
hold shares in the company and benefit from a rising share price.
Their remuneration should be based primarily on a reasonable return for time dedicated to the corporation’s
business
The payment of non-executive directors is best undertaken by deliberation of the entire board.

232 Executive directors Performance-Based Remuneration

Payments to economic agents (in this case, executive directors and other managers — sometimes also including other
‘incentivised’
employees) typically consist of ‘fixed’ and ‘at-risk’ remuneration components.

The fixed portion represents a base payment that is constant regardless of individual and/or corporation performance,
such as flat annual salaries

The at-risk portion (i.e. failure to perform means that the recipient will suffer reduced or non-payment) is based on the agent
and/or entity reaching certain goals and performance benchmarks.
Remuneration of executives is often referred to as packaged.
Performance payments should not just be a reward for past superior performance but should be designed to motivate future
performance.

The concept of repayment of undeserved remuneration is another important control measure, sometimes referred to as a
232 Clawback ‘clawback’
This concept is consistent with a rule in the US Sarbanes–Oxley Act 2002 and Provision 37 in the UK FRC Code
Recommendation 8.2
report should ‘include a summary of the entity’s policies and practices regarding the deferral of performance-based
remuneration and

the reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material
misstatement in the entity’s financial statements’ (ASX)

The four objectives of the revised regime announced by APRA

 • strengthen governance of remuneration frameworks and outcomes, in particular through an expanded Board role, where the
Board needs
to be active and have direct oversight;
• set overarching remuneration objectives that inform design of all remuneration arrangements and influence remuneration
outcomes;
• limit the use of financial performance metrics (share price and profit-based); and

• set minimum deferral periods (up to seven years) for senior executives to provide more ‘skin-in-thegame’ through better
alignment to the time horizon of risk and performance outcomes (APRA 2019a)

233 Disclosure, Transparency Best practice corporate governance requires that there should be transparency in setting directors’ remuneration

and Remuneration A key governance principle is that no individual should be involved in setting or determining their own remuneration levels
Australian shareholders must approve the overall fee cap available to the non-executive directors.
For example, the report notes that in Germany, public limited corporations must provide a breakdown of total
earnings
of each member of the management board.
The DoddFrank Act (US) has given shareholders a non-binding vote on top executive compensation.

This lack of independence comes from working as employees within the company and under the authority of senior
236 Auditing the financial management.
Boards must realise that this lack of independence exists and be aware of the potential pressures faced by internal auditors
statements from other
237 (Internal Auditor) employees and management that may affect their independence.
Boards should therefore consider the measures that can be taken to give the internal audit function some degree of
independence
from management.

International auditing standards mandate external auditors to professionally evaluate the accuracy of financial statements and
237 External auditor related
information within an identified framework.
The reports themselves are prepared by the responsible party (the board and senior management)

The auditor’s report is most importantly addressed to the ‘intended users’ — including the shareholders and other users
Once checks have been completed, the auditor will give a statement of their professional-judgement– based opinion, upon
which
intended users are entitled to rely.
Auditors must obtain evidence to support their opinions, and failure to do so can result in liability for misstatement in reports,
affecting
 shareholders Even so, the fundamental liability
for materially incorrect information being in the reports is that of the board and management.

240 Improving corporate Risk Management

Risk management enables a company to maximise opportunities and minimise losses (of all types) by assessing the different
governance types
of risk and improving safety, quality and business performance.
The successful management of risk and the laying down of guidelines on how risk is to be assessed can have additional
positive benefits.
Risk management has been defined as ‘the culture, processes and structures which come together to optimise the
management
of potential opportunities and adverse effects’
Risk management is a process designed to serve a number of goals including to identify, analyse, evaluate, treat, monitor and
communicate the information gathered for the benefit of the company.
The nature of the data collected will depend very much on the activities undertaken by the company.
Risks may be associated with any activity, function or process of the company.
Identifying, evaluating and addressing risk are essential features of modern management techniques.

241 Internal Control and ISA 315 defines a system of internal control as:
The system designed, implemented and maintained by those charged with governance, management and other personnel, to
Risk Management provide
reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations, and compliance with applicable laws and regulations.
ISA'S internal control (i) Control environment;
5 components (ii) The entity’s risk assessment process;
(iii) The entity’s process to monitor the system of internal control;
(iv) The information system and communication; and
(v) Control activities (para. 12(m))
External auditors are required to report material weaknesses to the board on a timely basis and internal auditors are expected
to assist
in this process using as much independent judgement as possible.

Over the past two decades, organisations have invested heavily in improving the quality of their internal control systems
241 Internal Control because:
1. good internal control is good business
2. more organisations are required to report on the quality of internal control over financial reporting, compelling them to
develop specific
support for their certifications and assertions
 3. internal control assists in providing reasonable assurance that the entity is complying with applicable laws and regulations.
Risk control systems are important for ensuring that board policies regarding risk are effectively managed, so management
decisions are undertaken safely and unknown risks are minimised.
The GGP are a set of principles and guidelines developed to promote and guide effective corporate governance practices on a
global scale.
Sustainability reporting is an essential element of corporate governance because it relates to how a company manage risks
244 Sustainability Reporting and opportunities
related to sustainability and environmental, social and governance (ESG).

Part B
250 Legal system In civil law countries, detailed legislative prescriptions seek to clarify almost every aspect of law in society.
In common law countries, many laws originated through the court system and become legislation overtime.
In these common law countires, the courts review these precise legislative forms and make interpretive decisions that give
additional, and sometimes
new, meaning to the legislation.
Under the Anglo-American system, some of the most important laws that underlie corporate life include general community-
wide laws on:
• the rights of individuals such as employees
• contracts
• negligence
• property
• ownership rights
• arrangement of these rights when a company is insolvent.

251 Proof, Penalties and Civil law deals with disputes between individuals or organisations (e.g. breaches of civil rights, breaches of contract)

Redress — Criminal and Civil Criminal law focuses on offenses against society as a whole (e.g. murder, drug supply and corporate crime).

The key difference between civil and criminal law in Australia is that criminal law has a higher onus of proof than civil law.
In criminal cases, the onus of proof is on the prosecution, who must prove its case against the accused to a high standard of
beyond reasonable doubt in court.
In civil cases, the plaintiff must establish their case on a balance of probabilities.
In countries using the common law system, no court would normally contemplate conducting a trial that involves both civil and
criminal
matters at the same time.

252 Laws Leading to Criminal A criminal is a person who has been found guilty after being charged with a crime.
 In common law countries (which almost always includes those Anglo-American company law traditions), crimes require the
Penalties person charged
to be subject to a court trial in which prosecutor has the duty to establish facts proving beyond reasonable doubt that the crime
was committed.

Criminal sanctions can take many forms but, most commonly will be in the form of fines and/or jail
252 Criminal sanction sentences.
It is also common in legislation for other outcomes to be relevant so that criminal actions result in compensation or damages
being payable to those who
have been adversely affected by the crimes.

252 Laws with Civil Outcomes In common law jurisdictions, the fundamental characteristic of a civil case is that any aggrieved party can bring an action.
In a civil case, the court requires each party to argue its case as strongly as possible and the person with the case that is
and Penalties determined to be
stronger relation to the relevant law will win.
The concept of civil penalty means that a penalty has been prescribed within the relevant legislation.
This will be a penalty in relation to conduct that requires proof according to the 'balance of probabilities' and not 'beyond
reasonable doubt'.
Penalties that apply will be pecuniary penalties payable to the state.
The term 'pecuniary penalty' is applied in place of the term 'fine', as fines are criminal penalties.

The potential victims of wrongdoings by corporations include a variety of stakeholders who deal with corporations, including
253 Redress Compared with shareholders,
Penalties lenders, suppliers, customers and final consumers, and indeed the whole economy.
The deliberately non-legal term ‘redress’ is used here to describe generally the ways in which wrongdoers can be
Redress required to correct the
harm they have caused.
the principal concern here is to regard redress not as a penalty but rather as part of the process of putting corporate
governance matters right
and of keeping these matters in good order for the future.
Injunctions are hearings where courts try to act quickly to prevent wrongs from continuing or becoming worse by getting a
corporation.

254 Penalty Penalties are different from remedies as they are meant to punish a wrongdoer.
Punishment obviously goes beyond simply redressing wrongs — as well as working in conjunction with redress

257 Obligation to employees A board is responsible for ensuring that appropriate policies are set for its activities.
It is the responsibility of management to implement these policies on behalf of the board and the shareholders
 Whistleblower protection whereby laws have been enacted in an attempt to mitigate retaliatory responses against those who
expose
corporate misconduct.
Boards have a duty to be aware of the issues and to be sure that these issues are being appropriately addressed within the
organisation, according to policies that are set at board level and are consistent with legal obligations and community
standards.

A trade union, also known as a labour union (or just a ‘union’), is a term for a group of workers who have banded together to
261 Trade and Labour Unions achieve collective
representation of their interests.
Unions are typically large and powerful and commonly seek to achieve outcomes through collective bargaining with
employers.
Actions that can be taken by unions
go-slows (deliberately working slowly),
(workers performing their duties with over-attention to strict detail compared to normal workplace practice, causing deliberate
work to rule difficulties for employers)
strikes (refusing to work).

Measures that governments take to suppress or deter anticompetitive practices, promote the efficient and competitive
262 Competition policy operation of markets
and bring about economic growth
Vital component of competition policy is an effective competition law that prohibits or otherwise deals with specific anti-
competitive practices, such as
cartels and monopolies.
A competitive market is one where enough corporations exist, at arm’s length from each other, for consumers to have freedom
of choice, with
a wide range of alternative products and efficiency-based pricing.

A monopolistic market structure is one where a few powerful corporations, or perhaps even only one corporation, dominate.
Monopolist corporations able to reduce supply below the competitive level in order to maximise profits, including through
artificially high prices

The logical purpose of seeking competitive advantage is to develop an overwhelming competitive advantage and eventually
263 Competition and Stakeholders achieve a monopoly.

264 Regulating anti-competitive Abuse of market power

behavior Abuse of market power is prohibited.
The prohibition on misuse of market power is aimed at preventing powerful entities from taking advantage of that market
power for the purpose
 of disadvantaging weaker organisations.
However, some corporations are able to obtain significant market power, for example, through their size, technology or
branding. It is not in
the best interests of consumers to allow these corporations to compete so vigorously that they use their market power to
destroy,
eliminate or harm competitors.

265 Predatory Pricing Predatory pricing is the supply of goods or services below cost price over a period of time.
Predatory pricing is a prohibited activity because the likely real ambition is for powerful corporations to eliminate less powerful
competitiors who cannot sustain the ongoing losses of competing at artificially low prices.
This eventually allows the powerful corporation to become dominant and then to set higher prices and exploit customers
through artificially
high prices based on monopolistic market positioning.

A significant underlying reason for many mergers and acquisitions is to reduce the number of competitors in a market for
267 Mergers and Acquisitions goods and services.
Regulations are in place that prohibit or limit mergers and acquisitions unless they are formally approved.

267 Cartel Conduct Cartel conduct involves the existence of a cartel provision in a contract, arrangement or understanding between competitors.
Such collusion is effectively a form of conspiracy, and conspiracies to cause harm are usually considered particularly harshly
by
societies and legislatures.
Collusive behaviour any horizontal agreement or even a mere understanding between competitors in a market that affects
Collusive behavior competition.
It is the agreement between competitors who should be actively competing rather than conspiring that makes collusion highly
inappropriate.

268 Types of cartel behavior Cartel behaviour can be categorised into four different types of conduct
• output restrictions
Conduct where competitors agree to apply restrictions on output that will cause shortages in markets and thus result in price
rises.
Such price rises will advantage suppliers and are the reverse of a competitive situation where competitors help push
prices down.
• allocating customers, suppliers or territories
Dividing up markets, customers or regions between competitors is another way of limiting competition. Also known
as market sharing, this
activity creates artificial monopolies in respect of segments of the market.
Customers in such an environment therefore do not receive the same level of choice or price competition.
 • bid-rigging

Competitive tenders and quoting are used by customers to let suppliers compete vigorously against each other to win work.
Bid-rigging is where competitors collude when asked to tender or bid for work.
To ensure that prices are maintained, all competitors may agree to submit similar pricing, or allow one of the competitors to
win the work by
having the rest of the cartel artificially inflate prices.
• price-fixing
where competitors collude to create common prices.
two competitors agreeing to supply goods to customers at the same price.
By fixing prices, competitors are able to maintain profits and have less incentive to improve their efforts.

When determining if price-fixing has taken place, we need to focus on identifying an agreement between suppliers. This is
important because when there is
one price-setting activity that may look unlawful but is actually permitted. This is so-called parallel conduct and
price-following.

When a single corporation decides, in the absence of agreements or understandings with competitors (which would amount to
270 Exclusive dealing collusion and
therefore cartel conduct), to deal only with certain customers or geographic regions.

This type of conduct is generally permitted, but prohibitions may exist if it is shown to lessen competition substantailly.
There are three core characteristics that apply to regulating exclusive dealing.
1. It is not cartel conduct.
2. The unilateral refusal to deal will be unlawful if, on the balance of probabilities, there is found to be a ‘substantial
lessening
of competition in a market’
3. ‘Third-line forcing’, which is a specific type of exclusive dealing, is perceived to be anti-competitive and harmful to
Third line forcing competition.
An example is where a supplier forces a customer to also purchase another item from a third party.
Third-line forcing is not illegal ‘per se’. This means that, unlike price agreements between competitors and resale price
maintenance, which are
simply not permitted, it is market tested to see if competition in a market is substantially lessened; if it isn’t then it may be
permitted.

Resale price maintenance occurs when a supplier stipulates that the goods it provides must only be resold at or
271 Resale Price Maintenance above a certain minimum price.
As this leads to maintaining prices, it is regarded as anti-competitive.
A supplier cannot dictate, suggest or encourage a minimum selling price by any means whatsoever
 While ‘recommended retail/resale prices’ may be provided for products and/or services, crucially such prices must be termed
‘recommended’
Resale price maintenance is an example of vertical power being used in a market.

Loss leading most-commonly occurs at the retail level. In the simplest loss leading situation, the supplier (a manufacturer or
271 Loss leader wholesaler)
supplies to their customer (a retailer) and the retailer in turn sells to their customer (commonly the final consumer).
A loss leader is a product that is sold below cost price to entice resellers/customers into a selling outlet.
Loss leaders are intended by the retailer to lead customers into the store, not only to buy that product but also to buy other
products.
The competition law recognises that loss leading may cause harm to the supplier.

Some anti-competitive behaviour is automatically illegal, while other behaviour is only illegal if it is shown to have a
272 Approvals Procedures substantial effect on competition in the market.
As a result, there may be times when behaviour that is good for competition is automatically illegal when it should be
permitted.
we might see conduct that appears to lessen competition in a market — but which on another view can be regarded as pro
competition.
To allow for necessary exceptions and orderly commerce, competition regulations usually provide the opportunity for
companies to apply for
permission (called authorisations and notification in Australia) to perform otherwise potentially unlawful activities without
breaching the law.
Any such exception-approvals will be formally given by the local competition regulatory agency.

Domestic consumers use the goods and services they buy at home or in domestic environments and consumer protection
273 Obligations to consumers laws typically
and customers set out to protect them as the first priority.

Corporations (as suppliers) recognise that long-term support from consumers of their outputs will be important for long-term
corporate performance.
Consumer protection is designed to work for consumers and the economy as a whole, even where there is no direct
contractual relationship with suppliers and manufacturers.

273 Caveat emptor ‘let the buyer beware’

273 Regulation and Consumer Rules have been developed to ensure goods are safe and meet certain standards.

Protection In particular, goods must be fit for purpose and sold with warranties that include rights to exchange and repair them.
 The legislation providing these protections is not just focused on consumer protection — it is also an attempt by governments
to ensure good
business practices that will lead to business success.

Consumer protection law is establishing whether corporate behaviour or conduct, including advertising, is misleading or
274 Misleading Conduct deceptive.
The deliberate use of half-truths or the omission of relevant information limits the accuracy of what is being communicated and
and Representations is, therefore,
not acceptable.
This is an interesting feature of consumer protection, as often the interests of competitors promote actions at no
cost to consumers or
the regulator.

Extreme exaggeration has been found not to be misleading in advertising, especially where the exaggeration does not relate
276 Puffery to objective facts.
Such extreme subjective exaggeration is sometimes called puffery.
Puffery is acceptable because, if statements or representations really are puffery, the courts assume that consumers could not
possibly treat the exaggerations as serious, let alone be misled.

The area of unconscionable conduct is an important area of consumer protection that comprises laws designed to stop
276 Unconscionable Conduct consumers from
being harmed by unfair or unfairly imposed or created contracts.
These contracts and the obligations arising from them will not be allowed where the circumstances make the contracts or the
consequences harsh or unfair and
involve a more powerful party taking advantage of another weaker party.

277 This type of conduct is not limited to transactions with end consumers. It can also occue in business-to-business transactions.

Part C
280 Financial Markets Places where ownership rights in corporations are traded.
Financial markets are complex, people-driven structures.
2 basic corporate governance observations:
1. Shareholders require a satisfactory return on their investment.
2. Managers need to ensure that corporations perform well.

Regulators exist to ensure that the companies and others who work within the marketplace comply with the rules governing
281 The Role of Market Regulators the conduct of business.
Information, properly or improperly used, influences the way in which participants and the markets itself behaves, as any
market is the sum of those who comprise its constituen elements.
 The situation where people who have access to privileged commercial knowledge use it to their own advantage before others
283 Insider Trading can in the market place.
A key feature of public corporations is their separation of management and ownership.
Understanding the rules is important, as financial markets operate under two governing theories: efficiency of markets and
investor confidence.

Efficiency is measure by the speed with which information provided to market participants is reflected in the share price.
Investor confidence revolved around the concept of a level playing field where everyone has an equal opportunity to compete
in the market.

Acts undertaken by individuals or groups of individuals designed to manipulate the stock market and cause individual
285 Market Manipulation company stocks to rise or fall depending on the nature of the acts
involved.

Market manipulation, like insider trading, may take place from inside a corporation or by those outside the corporation.
Market manipulation needs to be controlled in order to achieve reasonably appropriate and fair distribution of benefits and the
correct and orderly conduct of markets.

286 Types of Market Manipulation • Churning involves the placing of buy or sell orders for shares with the object of artificially increasing the market turnover.
Activities This increased activity will stimulate market interest and often will be successful in creating activity-driven surges.
• Pools are organised groups of investors who agree to buy the shares of particular corporations and, as prices rise due to
growing market interest, to sell at a time before the market price collapses.
Given that the prices were induced upards by the pool, large profits may be derived at the expense of the other buyers in the
market.
To make the pool effective, it is common for the pool to appoint a single manager to trade as instucted on behalf of the entire
pool.
• Runs involve groups of market participants who work together with the intention of creating market effects by either buying
shares or disseminating rumours in order to attract new buyers into
the market. Sharp increaes in the share price can be a direct result.

A prospectus is a document issues by a corporation to establish the terms of an equity issue (or a debt raising). It provides
287 background to the company, the finance requirements and the financial
and management status of the company so that investors can make an informed decision about whether to invest.

Bribery involves the payment of money or the provision of benefits, undertaken with a degree of secrecy, and intended to
288 Bribery and Corruption obtain benefits of some kind.
 Those receiving the benefit use their position or knowledge to make a personal gain, by acting in the interests of the person
making the payment instead of acting according to their duty under their
contract of employment.

290 Rogue Trading A rogue trader is normally an employee (or other authorised person) who engages in unauthorised trading.
The motivation may be personal gain or simply hubris - excessive pride.

Schemes involving earlier investors (potentially including through share-based transactions) being given a return by simply
Ponzi Schemes diverting the capital contributions of later investors to the earlier
investors.

A significant problem for corporate regulators relates to directors and sometimes larger shareholders who control companies
291 as de-facto directors without actually being appointed and who
deliberately use limited liability to avoid liabilities.
This applies only within smaller corporations - normally private corporations.

Companies that have emerged after the collapse of another company through insolvency, often with the same directors and
Phoenix Companies the same or similar line of business.
These companies often leave a trail of unpaid debt.

293 Shareholder Representation Table 4.7

Disclosure by organisation members (former or current) of illegal, immoral or illegitimate practices under the control of their
298 Whistleblowing employers, to person or organisation that may be able to effect action.
 Ethics and Governance
Module 5: Corporate Accountability
PageKey term/ Concept Description
Part A
309 Corporations Come into existence and continue to operate via legislative and regulatory compliance.
Source economic capital resources from shareholders and lenders to whom they owe a fiduciary duty and are
therefore accountable.
These resources are then used to produce profits.
use of profits 1. Keep within the company to fund future operations.
2. returned to the providers of the capital (shareholders and lenders) as repayments of capital

shareholder responsibility The market value placed on a company reflects the riskiness and quantum of its future expected returns.

A new view, known as corporate social responsibility, suggests that companies operate under an implied social license, recognizing
corporate social responsibilit their use of
environmental resources and human capital, and requiring a return for their use.

313 Traditional reports Only focussed on the financial information to measure the organization success or failure.

This is not designed to meet the information need of stakeholders interest in sustainability, community and environmental outcome.
shareholders along with debt capital providers are the primary intended audience for the financial reporting.

Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in
Objective of financial reportinmaking
decisions relating to providing resources to the entity.
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or management’s actions that affect the use of the entity’s economic
resources (para. 1.2).
(c) exercising rights to vote on or otherwise influence,
focus onthe rights of shareholders and lenders, specifically those who are not involved in management, and who have limited power
to obtain
information about the organisation.
shareholders, along with debt capital providers, are the primary intended audience for financial reporting.

313 Isuues related to Financial This implies a very narrow interpretation of accountability,
reporting restricting reporting only to those aspects associated with financial performance
financial reporting alone cannot answer important questions about social and environmental performance
313 Increasingly recognised that accounting has a broader scope beyond financial matters and that accounting reports should incorporate
Need for change financial
and non-financial information related to sustainability.
Organisations unable to demonstrate good corporate citizenship pose potential risks.
Increase in social and environmental legislation being adopted around the world.

Growing recognition that other stakeholders have a right to information about the social and environmental impact of companies.

314 Formation of the International Sustainability Standards Board (ISSB) under International Financial reporting standards foundation
New developments (IFRS)
The ISSB released two standIFRS S1 and IFRS S2, in 2023
These standards provide guidance for the disclosure of sustainability-related financial information, and disclosures of climate-related
risks
and opportunities respectively.
shift in historical investor attitudes towards sustainability

314 5 elements of financial reportAssets, liabilities, equity, income, expenses

314 Many important social and environmental resources that are of interest to stakeholders do not satisfy the definition of an asset as they
Elements of financial reporti are public
goods not controlled by an entity and not exchanged in market transactions.

So organisations are not required to account for their use in financial reports, even if they are integral to commercial processes.
Any reduction in the quality of these resources are also not recognised by the entity (unless fines are imposed).
The framing of these accounting elements represents a limitation of financial reporting.
A separate conceptual framework for non-financial information may be considered desirable.

315 IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that ‘the amount recognised as a provision shall
Discounting cash flow be the best estimate
of the expenditure required to settle the present obligation at the end of the reporting period’
Discounting future cash flows is also commonly used in cost–benefit analysis of various courses of action contemplated by
organisations where
costs (in the form of cash outflows) are compared with the benefits (in the form of cash inflows).
When the concept of discounting is considered in relation to social and environmental issues, notwithstanding that some of the related
costs may
not be in the form of cash outflows, ethical problems can arise.
Seen as shifting the problems of one generation on to future generations — something that is arguably not consistent with the
sustainability agenda.
316 For all five elements of financial accounting, both relevance and faithful representation are key considerations as they are considered
Relevance and faithful as
representation fundamental qualitative characteristics of financial reporting.
The complexity of measuring sustainability impacts raises concerns about whether current measures meet the standards of faithful
representation
required in financial accounting.

316 Focus on short term results current reporting practice tend to focus on a short term period (Eg: annual, bi annual or quaterly)
Managers are often rewarded in terms of performance such as annual profit.

This can discourage long term investments such as in technology which would provide long term social and environment benefits.
(operations that might not generate positive financial results for many years)

316 Social capital Social capital recognises the importance of employees, customers and the community in which organisations operate.
If a business fosters positive relationships with these groups by operating to a high standard consistent with shared values, this can
lead to
community support for activities and improved financial results via happy and productive workers and customers whose needs are
being met.
developing social capital might mean having to forego short-term economic benefits

316 Natural capital No business would be able to operate without access to natural resources
It makes sense to protect those resources. However, again, this might involve giving up the potential for short-term profit to make
long-term gains.

Thus, while financial accounting often leads to short-term thinking, corporate sustainability necessarily requires a long-term focus

317 entity assumption An organisation to be treated as an entity distinct from its owners, other organisations and other stakeholders.
Anthing entity does that does not affect its own financial position or performance (in that period or future periods)
is ignored.
This means that the externalities caused by reporting entities will typically be ignored, and that performance measures, such as
profitability
are incomplete from a broader societal perspective.

Part B
318 Increasing focus on global warming and the pursuit of net zero by 2050, the realisation that social and environmental issues have an
Recent events and forces impact on
organisations’ profitability and the increased popularity of socially responsible investments.
 increase in inflation after Covid 19

Modern slavery act (2018) In australia requires large entities to account for the modern slavery risks they face which expands even to their supply chain.

319 World Business Council for Sustainable Development (WBCSD) emphasises that a growing range of environmental issues have an
impact on a
Growing range of environmen
issues company’s profitability,

• revenue effects associated with market growth or decline due to changes in customer preferences for environmentally sustainable
products and production methods
• clean up costs or fines for non compliance with environmental regulations
• insurance cover incorporating environmental risk
• research and development programs to stay ahead of environmental regulation. The statement of financial position can also be
affected through,
for example: • impairments in the value of land as a result of contamination
• plant write-offs as a result of changes to clean production capacity
• changes in the net realisable value of stock related to consumer preferences for environmentally harmless products
It is likely that companies that are not perceived to be committed to sustainability will be at a competitive disadvantage.

319 The ISSB’s four key objectiv 1. to develop standards for a global baseline of sustainability disclosures;
2. to meet the information needs of investors;
3. to enable companies to provide comprehensive sustainability information to global capital markets; and

4. to facilitate interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups (IFRS 2023a).

320 ISSB Standards IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS 2023b)
IFRS S2 Climate-related Disclosures (IFRS 2023c).
Effective on or after 1 January 2024
320 Scope 1, 2 and 3 greenhouse gas emission disclosure requirements , which mandate that companies disclose
Australia’s mandatory climateall material greenhouse gas emissions in their value chain from their second reporting year onwards.
IFRS S1 and IFRS S2 focus on risks and opportunities that ‘could reasonably be expected to affect the entity’s cash flows, its access
to finance
or cost of capital over the short, medium or long term’
IFRS S1 and S2 are expected to demonstrate the link between sustainability information and organisational value more clearly to
stakeholders.

321 Brand and reputation Social and environmental performance can impact an organization's reputation, brand, and ability to attract talent.
 Companies like Nike, GAP, Reebook faced negative media attention for suppliers' child labor and poor working conditions in
developing countries.

In 2016, Panasonic and Samsung faced scrutiny for migrant workers' exploitation and misled pay in their Malaysian supply chains.

They have since addressed these allegations, facilitating human rights seminars and creating a whistleblower hotline.

As the GFC and recession intensify shareholder pressure, companies are developing new CSR models that align with their
core business goals and services.

321 Corporate Social Responsibility (CSR) plays a crucial role in risk management, providing non-financial information to help
Risk Management incentive management
understand and mitigate risks.

Both direct and indirect environmental costs, as well as the risks associated with tarnishing brand and reputation , affect profitability.
CSR reporting is to enable information users to assess these costs and predict what their future effect might be.

Transparent reporting can also reduce risk, as insurance coverage of environmental risks can be a significant cost to companies.
This information can help negotiate lower insurance premiums and financing costs, as well as help companies assess and predict the
future
effects of environmental costs.

321 The Task Force on Climate-related Financial Disclosures (TCFD) was established in 2015 to help companies understand investors'
TCFD needs
(Task force on Climate Finanrelated to climate related financial risk.
However, the quality of these disclosures is often low, with many companies not providing information on the financial impact of
Disclosures) climate change
or aligning it with their financial reporting.
As climate change becomes an accepted business reality, the insurance industry is increasingly interested in understanding the
exposure
organizations face regarding greenhouse gas emissions.
Work and monitoring responsibilities of the TCFD would be transferred to the ISSB from 2024 (IFRS 2023c).

322 External Benefits of CSR 1.cost of capital benefits

Voluntary disclosure theory (Verrecchia 1983; Healy & Palepu 1993) argues that a consequence of the enhanced disclosures is that
investors’
trust and confidence are increased, and an increased inflow of financial capital will occur, which has the potential to lower the capital
cost:
 CSR reporting can contribute to lowering the cost of capital through at least three channels.
i. Signalling the quality of the company.
ii. Expanding a company’s relevant disclosures to support stakeholder decision making.
iii. Reducing the uncertainty in assessing the company’s performance.

2. Improved analysts forecast

Reporting of such information is associated with an increase in analyst coverage and improved prediction of a company’s
future
financial performance.

3.improved general perception of the company

Reputation risk management is therefore crucial, and the CSR report provides greater transparency regarding a company’s impact
on,
and commitment to, the social, ecological and governance environments.

322 Socially responsible investmSelecting investments based on their social impact.

(SRI) Also be known as sustainable investing, green investing or ethical investing.
UNPRI commit to six principlSignatories (institutional investors) to the UNPRI commit to six principles.
1. We will incorporate ESG issues into investment analysis and decision making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles (UNPRI 2021)
323 Investment can be used to direct capital towards better-governed and better-managed companies that are positioned to contribute to
Different invester needs SRI the goals
address to of sustainable society.
Some investors look to sustainability factors
Investment screening methoTable 5.2
used by SRI 1. negative screening
2. norms based screening
3. positive screening

324 Social Entreprise Related to SRI is the concept of social enterprise as the potential subject of such an investment.
Businesses set up with a social objective in mind.

1. Innovation model. A company using this model develops products designed to assist communities that are disadvantaged.
Models of social entreprise
 2. Employment model. A company using this kind of approach employs people who are disadvantaged at a fair wage

3. Give back’ model. A company will typically sell one item but ensure that, for each sale, an item is donated to somebody in need.

324 Organisations need to explicitly consider to whom they believe they owe a responsibility, and for what aspects of their performance,
Perceived CR & accountabilibefore
they decide what information they will report, and how and to whom they report.
Determining to whom the organisation owes a responsibility involves considering who has specific rights

325 views of Friedman Including corporate managers believe that main priority is maximising the profit.
shareholder school of thoughthis thought process is further strengthen by corporate managers are directly remunerated based on the profits.

organisations, public or private, earn their right to operate within the community. This right is provided by the society in which they
Alternative view to Freidema exist, and not
(Right to operate) solely by those parties with a direct financial interest or by government.
This view holds that organisations do not have an inherent right to resources and must not just focus on maximising the welfare of
one
stakeholder group to the possible detriment of others.
325 Business roundtable 2019 page 325
list of commitments

326
Need for CSR To many people, the notions of a shareholder primacy perspective and corporate social responsibilities are mutually exclusive.
focusing only on shareholders’ financial return is not consistent with the concept of sustainable development. Sustainable
shareholder primacy vs development
social contract requires taking into account a business’s environmental and social impact.
table 5.3

328 Early notions assuming corporations would conduct themselves in accordance with CSR principles. Over time, regulation has
Corporate Social increased, and
Responsibility modern definitions focus on compliance with both the spirit and the letter of the law.
CSR involves considering a wide range of stakeholders and balancing their interests.

Definitions of corporate accountabilities typically extend the responsibilities of corporations beyond their shareholders alone, including
activities beyond the provision of goods and services.
 However, the question of whether corporations can realistically balance the needs of other stakeholders with the fundamental
question of
maximising shareholder wealth is a topic of debate.
Corporate accountability is evidenced by CSR or sustainability reporting, which involves measuring and reporting on economic,
environmental,
social, and governance aspects and processes of an organization.
CSR reporting is a process where an organization publicly discloses information about its interactions with and impact on various
societies
and environments, with the nature of this reporting varying widely between organizations and across time.

329 impact that an entity has on parties that are external to the organisation where such external parties did not agree or take part in the
An externality actions
causing, or the decisions leading to, the cost or benefit.
Externalities can be viewed as positive (benefits) or negative (costs)

Gov intervension in regards tGovernment intervention can be employed as a means of placing costs on the use of resources that might otherwise go unrecorded.
Externality eg: potential introduction of carbon related taxes
330 CSR in externality This will also involve identifying the potential stakeholders and how they are being affected.

330 Identifying target stakeholderorganisation has to identify the:

• objectives of the reporting process (why report?)
• stakeholders to be addressed by the reporting process (for whom is the report intended?)

• information requirements of the stakeholders (what issues is the entity held responsible and accountable for by its stakeholders
— or what issues should the report cover?)

Part C
Theories related to CSR
332 Enlightened self-interest theory, linked to shareholder primacy perspective, explains the circumstances under which corporations may
Enlightened self interest consider
CSR-related activities if they result in increased shareholder value.

This perspective suggests that CSR activities can improve employee recruitment, innovation, customer confidence, risk management,
competitiveness, operational efficiency, analyst interest, and capital attraction.
However, this dominant view has been questioned in recent decades due to concerns about social and environmental issues and the
inability
to separate values and ethics from economic activities.
 Alternative theories of CSR have emerged, addressing these criticisms and promoting a more balanced view of corporate
responsibility.
These arguments tend to reflect the teleological positions of utilitarianism and ethical egoism

333 a stakeholder of an organisation can be broadly defined as ‘a party that is affected by, or has an effect upon, the organisation in
who are stakeholders question’.

Stakeholders often include diverse groups such as employees, management, shareholders, communities, society, government etc.

333 Stakeholder theory Two branches

1. Normative stakeholder theory
A normative, or ethical, perspective on stakeholder theory is deeply rooted in deontological ethical theory, which emphasises duties
and values.
stakeholders for an organisation have inherent worth, and therefore, all stakeholders have the right to be treated fairly by any
organisation.
Managers have a fiduciary duty to all stakeholders, rather than just shareholders.

When conflicts and competing interests arise between stakeholders, management should strive to achieve an optimal balance, rather
than focus purely on shareholders.
Accountability is an important part of stakeholder relationships in normative stakeholder theory.

As this theory is normative in nature, it emphasises what organisations should do and provides prescriptions about behaviour.
This is not how organisations actually act — but rather an ideal of behaviour.
334 2. Managerial stakeholder theory
focuses on the stakeholders considered to have power and influence.
managerial action is based on advancing the interests of the organisation.
Therefore, it does not reject positive interaction with all stakeholders; however, the underlying purpose of the interaction is self-
interest
(and in many ways it is similar to enlightened self-interest).

stakeholders who are regarded as more important or powerful in their ability to influence shareholder value will attract additional effort
and attention from managers.

334 Oraginsational legitimacy legitimacy itself is seen as a resource on which an organisation depends for survival.

It is a resource that the organisation is thought to be able to influence or manipulate through various disclosure-related strategies.
social contract between an organisation and the society in which it operates underpins legitimacy theory.
335 A theory that deals with the concept that entities such as businesses have a social contract to perform a range of actions in order to
Legitimacy Theory receive approval and other rewards.

The main premise of legitimacy theory is that an organisation will take action to manage community perceptions in order to survive.
Corporations need to at least appear to be operating within the established rules of society, that is, within the bounds of the social
contract.
CSR is one strategic tool that organisations can use to influence the community’s perceptions of them.

Lindblom (1994) Lindblom (1994) suggests a number of courses of action that organisations can take to obtain, maintain or repair legitimacy.
suggested actions to • Change and inform
maintain legitimacy • Change perceptions without actual change
• Deflect attention and manipulate perceptions
• Change criteria for evaluation
what is regarded as acceptable or legitimate behaviour will change over time, as society changes

335 institutional Theory An approach that has emerged as a result of dissatisfaction with the preceding approaches.
It adopts a different perspective on corporate accountability that focuses on explaining why organisations tend to appear more similar
over time.
Institutional theory looks not only at individual organisations, but also at organisational fields (e.g. industries)

institutional theory is less normative and not so grounded in ethical theory, focusing more on explaining realworld behaviour.
336 Institutional theory is useful because the practice of CSR has changed considerably over the last decades.

Institutionalisation is a process of homogenisation (usually referred to as isomorphism) in organisational practices over time.

Institutionalisation results in the widespread adoption of innovation or new practices in a field to the point of stability or even inertia.

3 main isomorphic processesAccording to DiMaggio and Powell (1983) there are three main isomorphic processes:
• coercive — when powerful stakeholders pressure number of organisations in a field to adopt a practice leading to conformity with
DiMaggio and Powell (1983) that practice
• mimetic — when organisations imitate the behaviour of their peers and competitors to gain competitive advantage and reduce
uncertainty
• normative — when group norms are established that pressure organisations to change practices

According to institutional theory, organisations conform and homogenise because failing to do so threatens their legitimacy,
access to resources and survival capabilities.
According to the theory, CSR reporting is becoming institutionalised over time and has become an established norm.
 Part D
338 Involves making responsible decisions and taking actions that are in the interests of protecting the natural world, with particular
Environmental sustainability emphasis on preserving the capability of the environment to support human life.

Compelling arguments There are several compelling arguments for environmental sustainability:

From a humanistic perspective, environmental sustainability is critical because humans rely on the natural environment for survival
and therefore have a responsibility to address the problems they cause.
The intergenerational argument contends that not being sustainable is an unfair burden to place on future generations, who ultimately
will have to live with the consequences of our current behavior.
The naturalistic argument claims that nature has an intrinsic value, and deserves preservation for its own sake.

339 • Climate change - the change in global and regional climate patterns is associated with more intensive emission of atmospheric
key environmental carbod dioxide and other greenhouse gases resulting from the use of fossil fuels.
• Waste - is the by-product of production that cannot be reprocessed, recovered or purified. As global commerical activity escalates,
sustainability issues more waste is produced and discarded
or released into the environment in a manner that can cause harmful change.
• Pollution - businesses create pollution when production processes lead to the introduction of harmful substances or contaminants
into the natural environment.
• Biodiversity - refers to 'all the different kinds of life you'll find in one area'.

340 Social Sustainability Ability of a system to continue to function at a reasonable level of social well-being.
An organisation is socially sustainable when its activities not only meet the needs of its current stakeholders but also support the
ability of future generations
to maintain healthy communities.

Social sustainability has been considered the role of government, however, there is a growing acceptance that companies also have
Traditional view an important role to play.
Socially sustainable activities of an organisation may include maintaining mutually beneficial relationships with employees, customers,
the supply chain and the community.

Some topical issues in social sustainability include:

• Child labour.
• Ethical trading.
• Supply chain management.
340 The economic dimension of sustainability concerns organisations’ impact on the economic conditions of its stakeholders and on
Economic Sustainability economic systems at local, national and global levels.

In the case of an organisation, it means using available resources to their best advantage (both efficiently and responsibly)
Economic Stability Is an economic state in which there are only minor fluctuations.
Is important as we live in a market-based capitalistic society, and it is important that corporations remain economically viable and
vibrant in this system.

The GFC of 2007–08 pointed to deep flaws in the ways corporations operate.
• Long-term viability of businesses.
• Stability of the economic system.
• Transparency.

341 Linking environmental, It is important to jointly consider the three aspects of sustainability
economic and social three overlapping spheres or three pillars necessary to achieve sustainable development
UN Environment Programme (UNEP) and the environmental protection agencies (EPAs) of many nations focus on the environmental
sustainability pillar.
The World Trade Organization (WTO) and the Organisation for Economic Cooperation and Development (OECD) focus mainly on
economic sustainability.

A company or other reporting organisation that focuses on one pillar in isolation risks its sustainable future and reputation.
organisation should consider all three pillars in its sustainable business strategy and risk management.

As the GFC demonstrated, weakness in one pillar can have consequences for the other pillars.
342 Three pillars of 1. social
sustainable development 2. environmental
3. economic

343
Board of directors responsibilThere is a growing recognition that boards and those in charge of organisations have an increased responsibility for taking into
in sustainable reporting consideration broader factors that are beyond financial profits and performances.
It is argued that leaders of organisations have ethical responsibilities to create a sustainable society.
One important element of the business case, and a reflection of the increased demands from society, is that specific regulations are
asking organisations to report more
broadly than financial performance and position.

Modern slavery act from 1 July 2019 tthis requires businesses that meet the threshold to report on the steps that they have taken to address modern
 slavery risks in their operations and supply chains.

in Australia, large businesses that exceed relevant thresholds are required to report to the government their greenhouse gas
NGER ACT emissions,
greenhouse gas projects, energy use and production under the National Greenhouse and Energy Reporting Act 2007
There is evidence of a positive relationship between a business’s credibility on sustainability issues and its ability to win
and retain customers

344
B-Corporations A B-Corporation involves a certification process that recognises ‘a new type of company that uses the power of business to solve
social and environmental problems’

Companies that have been certified by B-Corporation are able to distinguish themselves from other companies by offering a positive
vision of a better way to do business.

Key Reporting Concepts

344 Accountability is the duty to provide a report, or an account, of the actions and decisions made about those areas of activity for which
Accountability an organisation is deemed to be responsible.

These may be financial or non-financial and usually focus on the use of resources that have been entrusted to an organisation’s care.
Therefore, a central aspect of corporate accountability and the role of corporate reporting is to inform relevant stakeholders about the
extent to which actions for which an organisation is
deemed to be responsible have been fulfilled.

345 Sustainability reporting is the process of producing a sustainability report (published by an organisation) about the economic,
Sustainability reporting environmental and social impacts caused by
the organisation’s everyday activities.
Organisation’s sustainability report include information about the organisation’s values and governance model, and links between its
corporate strategy and its commitment to a sustainable
global economy.

345 Natual capital world’s stocks of natural assets.

It includes air, water, land, soil, geology and biodiversity.
It is a finite resource, and the demands of a growing and increasingly prosperous global population means that escalating demands
are being placed on an already overstretched resource.

345
Natural capital accounting The process of calculating the total stocks and flows of natural capital available to and used by an organisation, or other possible
 reporting units, such as an ecosystem or region.

345 Is a process founded on integrated thinking (discussed next) that results in a periodic integrated report by an organisation about
Integrated reporting aspects of its value-creation process.
Borad-based reporting frameworks focused on financial and non-financial information that is developed by the International Integrated
Reporting Council.
International Integrated Reporting Council (IIRC) has produced a conceptual framework for the preparation of a concise, user oriented
corporate report entitled an ‘integrated report’.

An important component of integrated reporting is 'integrated thinking', which is the 'active consideration by a company of the
relationships between its various operating and functional
units and the capitals that the organisation uses and affects'
Advantages from undertaking integrated thinking are that it advances the alignment of the organisation's strategic focus with both its
financial and non-financial performance.

346 what is measurable Measurement refers to collecting, analysing and assigning quantitative values to an issue.
Measuring sustainability issues is important in corporations as it allows these issues to be integrated into established business
decision-making processes.
Measuring many social, environmental and sustainability issues is very challenging as ability to measure social, environmental and
sustainability issues is considerably less developed.

Reporting for social, environmental and sustainability issues as comprising:

• quantification — expressing an issue or change in numerical terms
• monetisation — converting a quantified value into currency as a standard unit of measurement
• narrative reporting — expressing an issue in qualitative form

346 Social reporting There are some areas for which we have better developed measures for social issues.
• labour practices and workplace
• human rights
• society
• product responsibilities
There are some areas in which social reporting and measurement is much harder.
• Social issues involve quality concerns and a level of subjectivity that can be hard to meaningfully capture
• In CSR reporting, the concept of entity is relaxed.
• Time is an important measure for social issues. . There is often a significant lag between an activity and
when the
impact of the activity is felt in a community or society.
347 Environmental reporting Environmental reporting accounts for how corporations draw from and affect the natural environment.
understanding and measuring environmental impact can be a very complex process.
The areas that have seen greater development of measurements and indicators include:
• materials usage and product resource consumption
• resource usage — including energy and water
• emissions, effluents and waste
• transport usage
• compliance with and breaches of mandatory and voluntary environmental regulations.

Environmental reporting is still a complex and challenging area, and some areas that have been identified as needing further
development include the following.
• Reporting on biodiversity (flora, fauna and ecosystems) is very challenging
• Similar to social reporting, environmental reporting includes measures of impact beyond the control of the organisation.
• Many environmental estimates include discount rates for future impact
• Environmental impact measurement is often confined to and ‘siloed’ in particular areas

348 IFRS S2 Green house gas Table 5.5

IFRS S2 requires disclosure of GHG information, including companies’ absolute GHG emissions generated classified as
disclosure Scope 1, 2 and 3.
Scope 3 emissions are divided into 15 categories (GHG Protocol 2011):
1. purchased goods and services
2. capital goods
3. fuel- and energy-related activities
4. upstream transportation and distribution
5. waste generated in operations
6. business travel
7. employee commuting
8. upstream leased assets
9. downstream transportation and distribution
10. processing of sold products
11. use of sold products
12. end-of-life treatment of sold products
13. downstream leased assets
14. franchises
15. investments.

349
Economic reporting This includes financial performance measured by generally accepted accounting principles, but this by itself may be too limited.
 What is often unreported, but is desired by users of sustainability reports, is the organisation’s contribution to the sustainability of a
larger economic system.
This can include a wide variety of non-financial performance indicators and narratives usually aimed at economic
performance, market
presence and indirect economic impacts.

Cohen and collegaues (2012A study by Cohen and colleagues (2012) identified the indicators most commonly reported in large public corporations.
commonly reported indicator• market share — referring to the percentage or size of market share for the company
• quality rankings — such as prizes or performance against particular benchmarks
• customer satisfaction — including describing customer service initiatives, loyalty, awards or campaigns
• employee satisfaction — comparison of loyalty and awards and comparison to competitors
• turnover rates — employee turnover compared with competitors and industry averages
• innovation — describing innovations introduced across the organisation’s value chain.

Part E
351 mandatory reporting The move towards mandatory reporting has been caused by a range of factors.
These include govt regulation due to community pressure and lobby groups, as well as regulations arising in response to specific
corporate activity that has harmed the environment
or community.
Reporting is also required to enable govts to comply with international agreements to reduce emissions and pollution.

Mandatory reporting obligations are gathering pace, and some are jurisdictionally dependent. The two major developments in this
area are being driven by IFRS and the European Commission (EC).
IFRS, through the ISSB, has released IFRS S1 and IFRS S2 with an effective date of 1 January 2024.

As at August 2023, the ISSB is consulting on its next priorities, which will potentially include:
• biodiversity, ecosystems and ecosystem services
• human capita
• human rights
• integration in reporting (IFRS 2023d).
As at August 2023, the Australian Treasury had completed consultation on the design of a climaterelated financial disclosures regime
with a
view to implement Australian standards by the first tranche of entities from 1 July 2024 (The Treasury 2023).

The EC’s Directive on Corporate Sustainability Reporting (CSRD) requires:

include in a dedicated section of their management report the information necessary to understand the company’s impacts on
sustainability
 matters, and the information necessary to understand how sustainability matters affect the company’s development, performance and
position.
Read page 352

352 In Australia, corporate annual reports are required to comply with the Corporations Act, relevant accounting standards, and, if the
Requirements based on entity is listed, with the listing requirements of the ASX.
corporate act. In relation to reporting information about environmental performance, para. 299(1)(f) of the Corporations Act is relevant.
The section mandates directors to provide details in their annual report on an entity's performance under significant environmental
regulations
under Commonwealth or State/Territory laws.
Section 299A of the Corporations Act is also relevant.

Listed companies are required to include in the directors’ report any information that shareholders would reasonably require to make
an informed assessment of the company’s:
• operations
• financial position
• business strategies and prospects for future financial years

The Australian Securities and Investment Commission (ASIC) released a regulatory guide in 2019 to improve companies' compliance
with operating and financial review (OFR) reporting requirements.
The guide emphasizes the need for an OFR to discuss environmental and sustainability risks, considering the entity's nature and
business strategy.

Companies must comply with accounting standards, including IAS 37 and IAS 16, which define obligations relating to environmental
performance as either 'provisions' or 'contingent liabilities'.

354 Recommendation 7.4 states that 'a listed entity should disclose whether it has any material exposure to environmental or social risks
CSR-Related Corporate and, if is does, how it manages or intends to
Governance Disclosures manage those risks'.
Appendix 4G

National Greenhouse and NGER Act is administered by the Clean Energy Regulator (CER).
Energy Reporting Act The aim of the CER is to reduce emissions while encouraging business competitiveness.

Objectives of NGER Act are to:

• inform govt policy
• inform the Australian public
• help meet Australia's international reporting obligations
 • assist Commonwealth, state and territory govt programs and activities; and
• avoid duplication of similar reporting requirements in the states and territories

Businesses are required to apply for registration with the CER if they:
• are a constitutional corporation
• meet a reporting threshold for greenhouse gases or energy use or production for a reporting (financial year)

Corporate groups that meet an NGER threshold must report their:

• greenhouse gas emissions
• energy production
• energy consumption
• other information specified uder NGER legislation

355 A failure to report in accordance with the NGER Act exposes the reporting entity to penalties of up to 2000 penalty units for failure to
apply for registration, and daily fines of up to 100
penalty units for each day of non-compliance.

356 Requires entities based in or operating in Australia that have consolidated revenue in excess of $100 million per reporting period, to
Modern Slavery Act 2018 report on how they identify and address risks of
modern slavery in their operations and supply chains.

Persons conducting a business or undertaking (PCBU) must report notifiable incidents involving an employee, contractor or member
Work Health and Safety Act of the public that occur in the workplace to the
appropriate WHS regulator immediately.

359 Are a voluntary set of standards intended to act as a framework for financial institutions to identify, assess and manage social and
Equator Principles environmental risks in the projects they advise on or
consider financing.
The frameworks aims to ensure that negative impacts on communities, ecosystems and the climate are, ideally, avoided or otherwise
are minimised, mitigated or offset.

The Greenhouse Gas ProtocRepresents a partnership between the World Resources Institute and the World Business Council for Sustainable Development.

GHG Protocol objectives:

• to help companies prepare a GHG inventory that represents a true and fair account of their emissions, through the use of
standardised approaches and principles.
• to simplify and reduce the costs of compiling a GHG inventory.
 • to provide business with information that can be used to build an effective strategy to manage and reduce GHG emissions.

• to increase consistency and transparency in GHG accounting and reporting among various companies and GHG programs.

The Corporate Accounting and Reporting Standard (Corporate Standard) provides methodologies for businesses and other
organisations to report their total emissions of greenhouse
gases covered by the Kyoto Protocol.

The Protocol for Project Accounting (Project Protocol) is a set of methods and principles to enable organisations to quantify the
greenhouse gas benefits of projects that aim to mitigate
climate change by:
• reducing greenhouse gas emissions
• removing greenhouse gases from the atmosphere
• storing greenhouse gases

The Product Life Cycle Accounting and Reporting Standard represents a methodology to evaluate the full life cycle emissions of a
product.

The GHG Protocol Mitigation Goal Standard is intended to provide govt agencies with guidance for developing GHG emission
mitigation goals and monitoring and reporting how their
policies and actions are contributing to progress towards meeting those targets.

The GHG protocol Policy and Action Standard provides a standardised methodology for estimating and reporting how specific policies
and action (principally those of govt) have impacted
on greenhouse gas emissions and removals.

Part F

372
The UNFCCC requires countries to report on their total greenhouse gas emissions and to take steps to reduce emissions.
Climate changes risks are a widespread concern and this has brought pressure on organisations to be accountable for their
contribution to climate change.
Organisations that account for greenhouse gas emissions measure and report on emissions directly generated by the organisation's
activities, created in the generation of power used
by the organisation, and indirectly generated through ancillary activities.
Organisations are able to choose how to account for and report for their emissions.
Once common framework is the GHG Protocol.