ACCA's corporate governance and risk management principles - P1

10 principles have been discussed and ACCA believes they are fundamental to all systems of corporate governance that aspire to being the benchmark of good practice.

1. Boards, shareholders and stakeholders share a common understanding of the purpose and scope of corporate governance - good corporate governance is about boards directing and controlling the organisations in the interests of long-term owners. It is also about boards being accountable to company's owners and accounting properly for their stewardship to ensure sound internal control.

2. Boards lead by example - boards should set the right tone and behave accordingly, paying particular attention to ensuring the continuing ethical health for their organisations.

3. Boards appropriately empower executive management and committees.

4. Boards ensure their strategy actively considers both risk and reward over time.

5. Boards are balanced - boards should include both outside non-executive and executive members in the governance of the company. No single individual should be able to dominate decision making.

6. Executive remuneration promotes organisational performance and is transparent.

7. Organisation's risk management and control is objectively challenged, independently of line management - internal and external audit are potentially important sources of objective assessment and assurance.

8. Boards account to shareholders and, where appropriate, other stakeholders for their stewardship - a universal requirement is to disclose sufficient, appropriate, clear, balanced, reliable and timely financial, and other, information to those to whom boards should be accountable.

9. Shareholders and other significant stakeholders hold boards to account - probably through fully independent external audit process overseen by an effective audit committee.

10. Corporate governance evolves and improves over time.

Lean management information systems - P5

Management information system (MIS) is a system to convert data from internal and external sources into information and to communicate that information, in an appropriate form, to managers, enabling them to control the business.

Lean thinking originated from Toyota. Lean production/Toyota Production System has a goal of "to get the right things to the right place at the right time, the first time, while minimising waste and being open to change". Lean techniques can also be applied to service environment.

Since inaccurate information and the difficulties of accessing information can create waste, they must be solved. Lean thinking aims to create value to the information provided by the system, and there are three levels at which it can do this:
1. Lean can enhance the value of the data in the system and how it is organised, exchanged and retrieved.
2. Lean thinking can add value to information by virtue of how the information is organised and presented, eg. not including unnecessary detail.
3. Enabling information to flow to the users more efficiently; by addressing the processes of exchange, sharing and collaboration between the management accountants and the managers in a business.

Therefore, we can know whether the MIS are lean by looking at the efficiency, productivity and quality of information provided by the systems.

Modified internal rate of return (MIRR) - P4/P5

This article introduces the concept of MIRR and may be more useful for P5 than P4.
MIRR is developed to address the weaknesses of IRR. Both of them are used to identify the margin of safety of the project. IRR has a number of problems:
1. Multiple IRR can occur when the cash flows are unconventional. Conventional cash flows situation is when the project starts with investment cost and then cash inflows in later years.
2. Unrealistic reinvestment assumption. IRR assumes that cash flows of the project can be reinvested at IRR rate. This means that cash flows generated during the project life are being reinvested to the project at IRR rate but the more appropriate rate should be the cost of capital rate (because we calculate NPV by assuming cost of capital is the reinvestment rate).
3. There may be mutually exclusive projects (eg. IRR is more than cost of capital but NPV is negative). In this situation, NPV is more superior and preferred.

MIRR solves the above problems. It assumes that the reinvestment rate is cost of capital and this is the only difference compared to IRR. MIRR decision will be the same with NPV decision.
MIRR = (PV of return phase/PV of investment phase)^(1/n) x (1 x reinvestment rate) - 1.
MIRR will always be lower than IRR, showing the more realistic margin of safety.

Example: PV of cash inflows = $1000, PV of investment cost = $500, time period considered = 5, cost of capital = 10%. Calculate MIRR.
Solution: MIRR = (1000/500)^(1/5) x 1.1 - 1 = 26.4%. Clearly, the project is financially acceptable since MIRR is higher than cost of capital.

In P5, you may be required to calculate MIRR but it will not be tough, probably together with NPV and you can use the figures you calculated during NPV computation to calculate MIRR. In P4, you know that you can calculate MIRR in an alternative way: MIRR = (PV of terminal value of cash inflows/PV of investment phase)^n - 1. This is not covered in this article.

Getting it right in F8

Many students are able to give audit procedures without problem but still could not get through in exam. It is common that students can't understand why they fail eventhough they have provided good answer.

F8 is a very practical paper. The main problem in F8 is that we provided answers that are not practical or not relevant to the scenario. For some students it might be easy to remember the audit procedures in the book and apply in exam. However this can be one reason of failure because such answer may be irrelevant to the scenario.

A good way to deal with F8 is to keep the book away and practice past year questions. You only need the concept in the textbook, ignore all audit procedures listed. Do not look at the answer first because there is a danger that you will feel confident after looking at it. Compare your answer to examiner's answer and try to understand examiner's answer (do not remember) as examiner's answer is the practical and relevant one.

Change the habit of remembering text and go for exam. Through this you have increased your chance of passing. Then try past year questions by providing your own answer everytime, you will improve everytime. Your goal should be to obtain the audit common sense.