ACCA Paper F1
Accountant in Business Class Notes June 2011
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ACCA Paper F1
Accountant in Business Class Notes June 2011
© The Accountancy College Ltd, January 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Accountancy College Limited.
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Contents PAGE INTRODUCTION TO THE PAPER
5
CHAPTER 1:
RECRUITMENT AND SELECTION
7
CHAPTER 2:
DIVERSITY
15
CHAPTER 3:
TRAINING AND DEVELOPMENT
19
CHAPTER 4:
PERSONAL EFFECTIVENESS
25
CHAPTER 5:
PERFORMANCE APPRAISAL
37
CHAPTER 6:
LEADING PEOPLE
41
CHAPTER 7:
INDIVIDUALS AND GROUPS
57
CHAPTER 8:
MOTIVATING PEOPLE
63
CHAPTER 9:
THE ROLE OF ACCOUNTING
71
CHAPTER 10: THE MACRO-ECONOMIC ENVIRONMENT
91
CHAPTER 11: THE BUSINESS ENVIRONMENT
97
CHAPTER 12: BUSINESS ORGANISATION
105
CHAPTER 13: ORGANISATIONAL CULTURE
115
CHAPTER 14: CORPORATE GOVERNANCE
121
CHAPTER 15: ETHICAL CONSIDERATIONS
125
CHAPTER 16: IT AND SYSTEMS
131
CHAPTER 17: CONTROL AND SECURITY
137
CHAPTER 18: FRAUD
145
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Introduction to the paper
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IN T R O D U C T I O N T O T H E P A P E R
AIM OF THE PAPER The aim of the paper is to introduce knowledge and understanding of the business and its environment and the influence this has on how organisations are structured and on the role of the accounting and other key business functions in contributing to the efficient, effective and ethical management and development of an organisation and its people and systems.
OUTLINE OF THE SYLLABUS 1.
Business organisation structure, governance and management
2.
Key environmental influences and constraints on business and accounting
3.
History and role of accounting in business
4.
Specific functions of accounting and internal financial control
5.
Leading and managing individuals and teams
6.
Recruiting and developing effective employees.
FORMAT OF THE EXAM PAPER The syllabus is assessed by a two hour computer-based examination. The examination consists of a mixture of 2 mark and 1 mark questions.
FAQS How do I get the most from my course? ●
Try and be seated and pick up your handout by the start of the lecture. This will ensure we have the maximum lecture time. Your course notes will be in divided into chapters, please make sure you bring the relevant chapters with you to class.
●
Manage your time effectively. If you have a busy work schedule use your study planner to catch up. Do not allow yourself to fall behind.
●
If you have any difficulties or questions please do not hesitate to contact me either before the lecture or during the break as most students are in a desperate hurry to leave at the end of the lecture. Alternatively, you can always email me or phone me through our helpline.
●
In the event of an emergency you can come for the same lecture on a corresponding part-time course as all the courses run parallel to each other. It is crucially important that you attend the full course of lectures.
●
Try to read the business section of a decent newspaper at least once a week to get an idea of what is going on in the business world.
●
Practice as many questions as you can. You should aim to have attempted every question in the revision kit at least twice before the exam.
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Chapter 1
Recruitment and selection
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CHAPTER 1 – RECRUITMENT AND SELECTION
CHAPTER CONTENTS THE RECRUITMENT AND SELECTION PROCESS ------------------------- 9 THE DIFFERENCE BETWEEN RECRUITMENT AND SELECTION
9
STAGES IN THE RECRUITMENT AND SELECTION PROCESS
9
DETAILED RECRUITMENT STAGES
10
DETAILED SELECTION STAGES
10
POSSIBLE METHODS OF RECRUITMENT ------------------------------- 11 JOB ADVERTISEMENTS
11
RECRUITMENT AGENCIES
11
POSSIBLE METHODS OF SELECTION ----------------------------------- 12
8
INTERVIEWS
12
ASSESSMENT CENTRES
13
REFERENCES
13
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CHAPTER 1 – RECRUITMENT AND SELECTION
THE RECRUITMENT AND SELECTION PROCESS No organisation will be successful without the correct staff. Choosing incorrect staff can result in: ●
Poor quality work
●
Poor morale
●
High staff turnover
●
Wasted time and money in recruiting more staff.
There are a number of ways to obtain the correct staff: ●
Promote from inside the organisation
●
Recruit from outside the organisation.
The difference between recruitment and selection Recruitment is the process of establishing that vacancies exist and communicating these vacancies to an appropriate pool of candidates. (Recruit or promote?) Selection is the process of filtering candidates in order to select the individual best suited to a particular vacancy.
Stages in the recruitment and selection process The first consideration is the type of job to be offered. ●
If the job already exists then it will be important to start with a job analysis
●
If the job requires getting specific tasks done then again a job analysis would be a sensible place to start
●
If the role of the job is likely to change then a person specification may be more appropriate
●
A job analysis will mean looking for someone with particular skills and experience
●
A person specification will mean looking for someone with a particular personality.
Rodgers’ 7 point person specification Rodgers gives a list of 7 qualities that might be important: ●
Physical make-up
●
Attainments
●
General intelligence
●
Special aptitudes
●
Interests
●
Disposition
●
Circumstances.
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CHAPTER 1 – RECRUITMENT AND SELECTION
Detailed recruitment stages ●
Gap analysis (if the job does not already exist)
●
Identify vacancies
●
Make decision to recruit
●
Job analysis (if the job is new)
●
Advertise.
Detailed selection stages ●
CVs reviewed
●
Interviews / Assessment centres carried out
●
Selection of candidate
●
Offer letter to candidate
●
Induction.
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CHAPTER 1 – RECRUITMENT AND SELECTION
POSSIBLE METHODS OF RECRUITMENT The main two methods of recruitment are either: ●
The organisation doing its own recruitment by placing job adverts
●
The organisation using a recruitment agent to carry out the recruitment.
Job advertisements Jobs should be advertised in an appropriate way. Possible places include: ●
Internet
●
Specialist journals
●
Local press
●
National press.
Job advertisements normally contain the following: ●
Job description
●
Brief overview of the organisation
●
Salary
●
Person specification
●
Contact information.
A variation on this is where the organisation ‘advertises’ at a recruitment fair (this is often used for graduate recruitment).
Recruitment agencies There are two main approaches to using recruitment agencies: ●
Potential candidates go to the agency. The agency then tries to place them in a job.
●
The organisation goes to the agency with a high level role. The agency then tries to find a person to fill that role. This is often referred to as ‘headhunting’.
The advantages of using an agency include: ●
It is less distracting for managers
●
It may be faster
●
Gaining access to all the people on the agency’s books
●
The agency has knowledge of how to recruit staff
●
The agency has knowledge of salaries expected.
Disadvantages of using an agency include: ●
The agency will not know what the organisation is like
●
The agency may recommend people so it can meet its own targets
●
It can be expensive.
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CHAPTER 1 – RECRUITMENT AND SELECTION
POSSIBLE METHODS OF SELECTION The main methods of selecting staff are: ●
Application forms / CVs
●
Interviews
●
Aptitude tests
●
Assessment centres.
Whichever method is chosen it is normal to ask the candidate to supply references.
Interviews Interviews are still used as part of the main selection process in most jobs. The reasons for this include: ●
They are flexible enough to allow for different approaches
●
They allow the interviewer to ask questions
●
They allow the interviewer to assess interpersonal skills.
There are a number of difficulties with interviews ●
They are artificial
●
They require the interviewer to be skilled and well-prepared
●
They can lead to the halo effect and cloning
●
They are time consuming.
Types of Interviews: ●
Individual
●
Panel
●
Selection Boards.
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CHAPTER 1 – RECRUITMENT AND SELECTION
Assessment centres An assessment centre is NOT a place. An assessment centre is where a variety of selection methods are used to select candidates. These methods include: ●
Interviews
●
Group exercises
●
Role playing
●
Practical tests.
The advantages of using assessment centres instead of just interviews include: ●
They can be used to see how candidates deal with others
●
The candidates can be observed over a longer period of time
●
The candidates can be given practical tasks that reflect the job.
The disadvantages of using assessment centres include: ●
Candidates will do well in some areas and not others
●
It is possible to coach candidates to perform well at practical tests
●
May be expensive.
References There are a number of problems with using references as part of the section process. These include: ●
They may be unsuitable
●
They may be biased
●
They may be too brief.
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CHAPTER 1 – RECRUITMENT AND SELECTION
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Chapter 2
Diversity
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C H A P T E R 2 – D IV E R S I T Y
CHAPTER CONTENTS EQUAL OPPORTUNITIES ------------------------------------------------ 17 DIVERSITY --------------------------------------------------------------- 18
16
WHAT IS MEANT BY DIVERSITY?
18
DIVERSITY MANAGEMENT
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C H A P T E R 2 – D IV E R S I T Y
EQUAL OPPORTUNITIES Equal opportunities means ensure individuals are treated fairly in the employment process. In other words everyone has the right to be treated fairly at work. In many countries, this is enforced by legislation. For example, in the UK there is the Equality Act 2010 which outlaws discrimination on many grounds, such as sex, race and disability. There are a number of reasons why a company might wish to do more than they are legally obliged to. These include: ●
Feeling they have a moral duty
●
To keep customers happy.
Obviously this is important for recruitment and selection but also includes: ●
Equal opportunities for training
●
Equal opportunities for promotion
●
Equal treatment in times of redundancies.
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C H A P T E R 2 – D IV E R S I T Y
DIVERSITY What is meant by diversity? The idea of diversity means the organisation recognising that people are different and looking for ways to use the different viewpoints this brings. The organisation may try to have a workforce with a variety of: ●
Religions
●
Races
●
Marital status
●
Genders
●
Sexual orientations.
The organisation might try to achieve this through numerical targets.
Diversity management Diversity management means actively encouraging a diverse workforce. There are a number of benefits: ●
More creative ideas
●
More viewpoints considered when making decisions
●
Better understanding of customers
●
Increased chance of being successful in new markets.
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Chapter 3
Training and development
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CHAPTER 3 – TRAINING AND DEVELOPMENT
CHAPTER CONTENTS TRAINING AND DEVELOPMENT ---------------------------------------- 21 WHAT IS THE DIFFERENCE BETWEEN TRAINING AND DEVELOPMENT?
21
THE BENEFITS OF TRAINING AND DEVELOPMENT AT WORK
21
THE TRAINING AND DEVELOPMENT PROCESS------------------------ 22
20
METHODS OF EVALUATING TRAINING
22
TYPES OF DEVELOPMENT
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CHAPTER 3 – TRAINING AND DEVELOPMENT
TRAINING AND DEVELOPMENT What is the development?
difference
between
training
and
Training is: ●
needed so a person can carry out their present job
●
mainly concerned with technical skills
●
usually given by a superior.
Development is: ●
giving a person skills they may use in the future
●
often concerned with soft skills
●
the responsibility of everyone in the organisation.
The benefits of training and development at work Training benefits the organisation since ●
Staff will have more skills
●
More work can be delegated to them
●
They will require less supervision
●
Work should be better quality
●
Customer service should be improved.
Training benefits the individual since ●
Work should be more interesting
●
The individual should have a higher self-esteem
●
The skills will be transferable to other jobs.
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CHAPTER 3 – TRAINING AND DEVELOPMENT
THE TRAINING AND DEVELOPMENT PROCESS Organisations and individuals will only receive the above benefits if training and development are planned properly. The process is: ●
Assess the training needs of the organisation
●
Decide what the objectives of any training should be
●
Plan how the training will be carried out
●
Deliver the training
●
Evaluate the training.
Methods of evaluating training Training can be evaluated by: ●
Asking trainees what they thought
●
Measuring what trainees have learned
●
Measuring changes in job behaviour after attending training
●
Impact of training on organisational results
●
Impact on training on its value to the organisation.
Types of development The types of development include: Management development
Develop management skills and experience
Career development
Secondments and transfers
Professional development
Following CPD courses from professional bodies
Personal development
To improve competences
Kolb’s experiential learning Kolb suggested that much of our learning comes from experience ●
Experience
provides basis for
●
Observation and reflection
Which we convert into abstract concepts
●
Hypothesis and conceptualisation
Which provides ideas which can be tested
●
Experimentation
Which creates new experiences.
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CHAPTER 3 – TRAINING AND DEVELOPMENT
Honey and Mumford’s learning styles Learning is the acquisition of knowledge to effect a change in behaviour. Honey and Mumford suggested 4 learning styles that individuals may exhibit ●
Activist – learns through doing
●
Reflector – learns through watching
●
Theorist - learns through understanding theories
●
Pragmatist – learns through applying theories.
Learning Organisation Is an organisation that facilitates the acquiring & sharing of knowledge.
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CHAPTER 3 – TRAINING AND DEVELOPMENT
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Chapter 4
Personal effectiveness
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CHAPTER 4 – PERSONAL EFFECTIVENESS
CHAPTER CONTENTS WHAT IS COMMUNICATION? ------------------------------------------- 27 THE COMMUNICATION PROCESS
27
FORMAL AND INFORMAL COMMUNICATION
27
FEATURES OF EFFECTIVE COMMUNICATION
28
BARRIERS TO EFFECTIVE COMMUNICATION
29
CONSEQUENCES OF INEFFECTIVE COMMUNICATION
29
METHODS AND PATTERNS OF COMMUNICATION -------------------- 30 TECHNIQUES FOR IMPROVING PERSONAL EFFECTIVENESS -------- 32 THE PERSONAL DEVELOPMENT PLAN
32
WHAT IS TIME MANAGEMENT? ----------------------------------------- 33 TOOLS AND METHODS TO ENCOURAGE EFFECTIVE TIME MANAGEMENT
34
HOW IT CAN HELP TIME MANAGEMENT
34
MENTORING, COACHING AND COUNSELLING ------------------------ 35
26
WHAT IS MENTORING
35
WHAT IS COACHING
35
WHAT IS COUNSELLING?
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CHAPTER 4 – PERSONAL EFFECTIVENESS
WHAT IS COMMUNICATION? A process which involves the exchange of information between people. Communication is an essential process within an organisation. It is used to ●
share ideas
●
give instructions
●
provide feedback
●
address social needs.
The communication process NOISE Sender
Encode
Transmit
Receive
Decode
Feedback
Formal and informal communication Formal communication moves in 3 major directions: ●
Vertical
●
Horizontal or Lateral
●
Diagonal
Formal communication can be in written or verbal form via ●
Meetings
●
Interviews
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CHAPTER 4 – PERSONAL EFFECTIVENESS
●
Memos
●
Emails
●
Letters
●
Faxes
●
Notices
Informal communication moves in any direction. When used in the organisation it serves mainly as a social tool rather than a means to ensure that tasks are performed. Informal communication includes rumour, gossip and stories, which is often transmitted via the grapevine.
Features of effective communication For communication to be effective, information must be: ●
Understood by the receiver
●
Sent via the appropriate channel
●
exchanged at the appropriate time
●
as detailed as is appropriate
The 5 C’s of Communication – Concise, Complete, Correct, – Courteous & Clear
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CHAPTER 4 – PERSONAL EFFECTIVENESS
Barriers to effective communication These could include ●
Information overload
●
Inappropriate language
●
Deliberate distortion
●
Lack of time
●
Conflict
●
Fear
Consequences of ineffective communication When communication is ineffective this results in ●
De-motivated staff
●
Poor decision making by management due to insufficient information
●
Staff being unclear about their roles
●
Ideas not being shared
●
Individuals’ social needs not being met
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CHAPTER 4 – PERSONAL EFFECTIVENESS
METHODS AND PATTERNS OF COMMUNICATION There are several ways in which information can be communicated. These can be categorised as: ●
Verbal
●
Written
●
Visual
●
Body Language.
Within an organisation a number of different communication patterns exist. These patterns can be categorized as centralised and decentralised.
Centralised Communication patterns include –
Wheel
Chain
Y
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CHAPTER 4 – PERSONAL EFFECTIVENESS
Decentralised Communication patterns include – Circle
All-Channel
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CHAPTER 4 – PERSONAL EFFECTIVENESS
TECHNIQUES EFFECTIVENESS
FOR
IMPROVING
PERSONAL
There are several techniques which management may use to help employees improve their personal effectiveness. These include personal development plans and effective time management.
The Personal development plan (PDP) This is a structured approach used to help individuals develop new skills and plan their careers. When developing a Personal Development Plan (or PDP) the following should be taken into account: ●
Current role
●
Current strengths and weaknesses (SWOT)
●
Career aspirations.
An effective PDP should enable both the individual and manager to set: ●
Short and Long term objectives
●
Training/development plan.
Any objectives set should be SMART ●
Specific
●
Measurable
●
Achievable
●
Relevant
●
Timebound.
For the personal development plan to be effective management should ensure that regular review and discussions are included in the process. The individual’s performance should be also monitored and measured against the short and long term objectives set. Finally, management must ensure that the individual receives appropriate feedback regularly.
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CHAPTER 4 – PERSONAL EFFECTIVENESS
WHAT IS TIME MANAGEMENT? The effective and efficient use of time. Time is a unique resource, which cannot be stored or bought in surplus. Therefore everyone concerned should ensure that the best use is made of this scarce resource. Poorly managed time can lead to: ●
Stress
●
Poor quality of work
●
Low productivity
●
Double bookings
●
Missed deadlines.
Ineffective time management can be caused by: ●
Ability
●
Workload
●
Organisational culture
●
Personality
●
Lack of delegation
●
Structure and layout of work place
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CHAPTER 4 – PERSONAL EFFECTIVENESS
Tools and methods management
to
encourage
effective
time
Some methods used to manage time effectively include prioritisation and scheduling. Tools which can be useful are: ●
Diaries and calendars
●
To do lists
●
Delegation
●
Assertiveness.
How IT can help time management Most organisations use information technology to enable individuals to manage their time, for example electronic time sheets are used by management to provide a check on how people are spending time at work. Software packages are made available in various applications which individuals use to manage their time. Applications such as Microsoft Outlook can be used to create ‘to do’ lists and to manage diaries.
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CHAPTER 4 – PERSONAL EFFECTIVENESS
MENTORING, COACHING AND COUNSELLING What is mentoring? The process whereby a more experienced member of staff helps a lesser experienced colleague to improve their progress in the organisation. Some organisations assign new employees with a mentor to help smooth their progress on joining. Mentoring provides benefits to both the mentor and the mentee Mentor
Mentee
A new perspective
Access to experience
Challenge to established thinking
A safe way to ask questions
Satisfaction
Access to a network
What is coaching? A process where an individual is provided with assistance and support in setting goals in order to achieve a specific objective/outcome. Coaching is usually carried out on a one to one basis. The coach provides guidance and support but it is up to the individual to set and achieve the goals.
What is counselling? A purposeful relationship in which an individual helps another to help himself. Counselling is non-directive – meaning that the individual being counselled is not told what to do. Instead he/she is given the opportunity to explore various possibilities and find his/her own solutions. A counsellor must have specific skills/abilities, including ●
The ability to observe
●
Sensitivity
●
Empathy
●
Impartiality
●
Discretion.
During counselling the use of open questions is most effective to help draw out the as much information as possible to facilitate the process.
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CHAPTER 4 – PERSONAL EFFECTIVENESS
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Chapter 5
Performance appraisal
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C H A P T E R 5 – P E R F O R M A N C E A P P R A IS A L
CHAPTER CONTENTS PERFORMANCE APPRAISAL --------------------------------------------- 39
38
WHAT IS PERFORMANCE APPRAISAL?
39
THE APPRAISAL INTERVIEW
39
WHY ARE APPRAISALS IMPORTANT?
39
ASSESSING INDIVIDUAL PERFORMANCE
40
ASSESSING THE APPRAISAL PROCESS
40
BARRIERS TO EFFECTIVE APPRAISAL
40
WHAT IS MANAGEMENT?
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C H A P T E R 5 – P E R F O R M A N C E A P P R A IS A L
PERFORMANCE APPRAISAL What is performance appraisal? Appraisal is an ongoing process where a manager helps the individual to establish objectives and then measures performance towards those targets. The primary element of the performance appraisal is the appraisal interview but an effective appraisal should also include feedback throughout the appraisal period.
The appraisal interview The appraisal interview provides the opportunity for the individual and manager to discuss ●
The past
●
The present
●
The future.
The results of an effective appraisal interview are ●
Objectives for the coming period
●
Training/development plan
●
Agreement regarding reward/bonus
●
Documentation of the discussion
●
Grading.
Why are appraisals important? Benefits of appraisals include ●
Better communication
●
More feedback for staff
●
Increased recognition
●
Improved control.
Appraisals are an important control mechanism, as it provides an opportunity to assess the performance of individuals within an organisation. Since it is a control system, appraisal can be described as (TARA) ●
Targets
●
Actuals
●
Review
●
Action
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C H A P T E R 5 – P E R F O R M A N C E A P P R A IS A L
Assessing individual performance An individual’s performance can be assessed through ●
Achievement of objectives
●
Feedback from internal customers
●
Feedback from external customers
●
Feedback from colleagues
●
Self-appraisal
●
Volume of work achieved
●
Attendance at training courses.
Assessing the appraisal process Assessing the effectiveness the appraisal system can be obtained by looking at ●
Take up of training
●
Improvements in employee satisfaction
●
Improvement in employee effectiveness
●
Feedback from employees
●
Impact on internal recruitment/career planning
●
Cost/Benefit analysis
●
Staff turnover.
A good appraisal system should be (the 4 F’s) ●
Frequent
●
Factual
●
Fair
●
Firm.
Barriers to effective appraisal Some of the barriers to effective appraisal include ●
Lack of structure
●
Lack of preparation
●
Fear of being judged
●
Lack of commitment
●
Lack of understanding
●
Lack of follow up
●
Lack of opportunity to feed back to management
●
Bureaucratic system.
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Chapter 6
Leading people
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C H A P T E R 6 – L E A D IN G P E O P L E
CHAPTER CONTENTS LEADING AND MANAGING PEOPLE ------------------------------------ 43 THE CLASSICAL SCHOOL ------------------------------------------------ 44 FAYOL – RULES OF MANAGERIAL CONDUCT
44
TAYLOR – SCIENTIFIC MANAGEMENT
45
THE HUMAN RELATIONS SCHOOL -------------------------------------- 46 THE ROLE OF A MANAGER – DRUCKER
46
THE ROLE OF A MANAGER – MINTZBERG
46
SUPERVISORS
47
AUTHORITY AND RESPONSIBILITY------------------------------------ 48 WHAT IS AUTHORITY?
48
WHAT IS RESPONSIBILITY?
48
WHAT IS DELEGATION?
48
WHAT IS POWER?
48
WHAT IS LEADERSHIP?
49
THEORIES OF LEADERSHIP – TRAIT THEORY ------------------------ 50 THEORIES OF LEADERSHIP – ACTION CENTRED LEADERSHIP ----- 51 THEORIES OF LEADERSHIP – BLAKE AND MOUTON ----------------- 52 THEORIES OF LEADERSHIP – THE ASHRIDGE MODEL --------------- 53 THEORIES OF LEADERSHIP – FIEDLER -------------------------------- 54
42
WHAT IS CONTINGENCY THEORY?
54
WHAT IS SITUATIONAL LEADERSHIP?
54
FUNCTIONAL LEADERS
55
LEADERSHIP AND CHANGE - BENNIS
55
LEADERSHIP AND CHANGE - KOTTER
55
LEADERSHIP AND CHANGE – HEIFETZ
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C H A P T E R 6 – L E A D IN G P E O P L E
LEADING AND MANAGING PEOPLE What is management? Fayol identified 5 management roles which help provide an explanation of what management is. They are: ●
Planning
●
Organising
●
Commanding
●
Controlling
●
Co-ordinating
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C H A P T E R 6 – L E A D IN G P E O P L E
THE CLASSICAL SCHOOL Taylor and Fayol are classical theorists.
Fayol – Rules of managerial conduct Fayol also identified 14 rules of managerial conduct: ●
Division of work
●
Authority
●
Discipline
●
Unity of Command
●
Unity of Direction
●
Subordination of general interests
●
Remuneration
●
Centralisation
●
Scalar chain
●
Order
●
Equity
●
Tenure of personnel
●
Initiative
●
Esprit de corps.
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C H A P T E R 6 – L E A D IN G P E O P L E
Taylor – scientific management Taylor advocated one best way of doing every task: ●
Scientific analysis
●
Identification of ideal method – Specialisation
●
Training
●
Reward – Money as a motivator
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C H A P T E R 6 – L E A D IN G P E O P L E
THE HUMAN RELATIONS SCHOOL The Human Relations School owes much to the work of Elton Mayo, who performed the Hawthorne Experiments.
Several important ideas came out of the Hawthorne Experiments: ●
The importance of groups at work
●
The value of inclusion
●
Motivational Theory.
The role of a manager – Drucker Drucker sees managers as having 5 roles: ●
Setting objectives
●
Organising
●
Motivating and Communicating
●
Establishing yardsticks
●
Developing people.
The role of a manager – Mintzberg Mintzberg identifies 3 types of role that a manager has: Interpersonal Figurehead
Performing legal or ceremonial duties
Leader
Motivating and inspiring
Liaison
Developing networks outside the organisation
Informational Monitor
Collecting, filtering of information
Disseminator
Sharing, communicating information inside the organisation
Spokesperson
Sharing information outside the organisation
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C H A P T E R 6 – L E A D IN G P E O P L E
Decisional Entrepreneur
Looking to the future
Resource Allocator
Deciding between projects
Disturbance Handler
Resolving disputes
Negotiator
Representing the organisation at negotiations
Supervisors Supervisors are the lowest level of management within the organisation. They are sometimes referred to as front line managers or team leaders. They carry out the same roles as managers, but at a lower level. Aside from management responsibilities, supervisors sometimes have operational responsibilities. A supervisor’s main role is to ensure that specified tasks are performed correctly & efficiently by individuals & groups.
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C H A P T E R 6 – L E A D IN G P E O P L E
AUTHORITY AND RESPONSIBILITY What is authority? The right to get others to perform certain actions which comes from an individual’s position in the hierarchy. The 2 main types of authority are: ●
Formal/Line
●
Staff/Functional
What is responsibility? The degree to which an individual can be called to account for their actions. Responsibility is a duty owed and cannot be delegated. Matching authority correspondence.
and
responsibility
is
referred
to
as
the
principle
of
What is delegation? The process which involves a manager passing down authority to a subordinate, but maintaining ultimate responsibility.
What is power? The ability to do things or get things done, regardless of authority. French and Raven identified 5 sources of power: ●
Reward
●
Referent/Charismatic
●
Coercive
●
Expert
●
Legitimate
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C H A P T E R 6 – L E A D IN G P E O P L E
What is leadership? Encouraging others to work willingly towards goals. Leadership is related to the concepts of power and motivation. Managers have authority, leaders have power. Leadership is concerned with setting goals and inspiring people to commit to achievement of organisational goals. A leader is someone “who exercises influence over other people”
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C H A P T E R 6 – L E A D IN G P E O P L E
THEORIES OF LEADERSHIP – TRAIT THEORY Some theorists believe characteristics, such as:
leadership
●
Self assurance
●
Above average intelligence
●
Helicopter factor
●
Entrepreneurial skill
●
Health
●
Above average height (!)
●
Co-operation
●
Tact
●
Courtesy
50
stems
from
having
the
right
traits
or
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C H A P T E R 6 – L E A D IN G P E O P L E
THEORIES OF LEADERSHIP
LEADERSHIP
–
ACTION
CENTRED
Adair maintains that good leadership is about balancing 3 sets of needs
Task
Team
●
The task
●
The team
●
The Individual
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Individual
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C H A P T E R 6 – L E A D IN G P E O P L E
THEORIES OF LEADERSHIP – BLAKE AND MOUTON Blake and Mouton identified 2 variables impacting leadership style:
Team/People
9
0 0
9 Task/Production
Blake and Mouton identified 5 extreme styles: ●
Task Manager
●
Country Club Manager
●
Impoverished Manager
●
Middle Road Manager
●
Team manager.
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C H A P T E R 6 – L E A D IN G P E O P L E
THEORIES OF LEADERSHIP – THE ASHRIDGE MODEL The Ashridge model identifies 4 management styles along a continuum.
Tells
●
Tells
●
Sells
●
Consults
●
Joins
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Sells
Consults
Joins
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C H A P T E R 6 – L E A D IN G P E O P L E
THEORIES OF LEADERSHIP – FIEDLER The most appropriate leadership style depends on the situation in which the leader finds himself.
Fiedler noted 3 variables ●
Leader/member relations
●
Task structure
●
Power
These variables combine in a number of ways creating situations which are extremely favourable / unfavourable or moderately favourable / unfavourable -
Leader / member relations
Favourable Leader is liked / respected
Task structure Power
Well structured Leader has power
Unfavourable Leader is not liked / respected Vague and unstructured Leader lacks power
In extreme situations a psychologically distant style is most effective.
In moderate situations a psychologically close style would be most effective.
Fiedler’s theory is an example of contingency theory.
What is contingency theory? There is no one perfect management style to suit all situations. The right style depends on the situation in which the leader finds himself.
What is situational leadership? Situational leadership refers to the ability to adapt leadership style to suit a changing situation.
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C H A P T E R 6 – L E A D IN G P E O P L E
Functional leaders Functional leaders have expert power. They are able to influence other through their knowledge and expertise.
Leadership and change - Bennis Bennis distinguishes between 2 types of leader: ●
Transactional
●
Transformational
He focuses on the need to inspire change rather than impose it.
Leadership and change - Kotter Kotter identifies 6 approaches to managing change: ●
Participation and involvement
●
Education and Communication
●
Facilitation and Support
●
Manipulation and co-optation
●
Negotiation and Agreement
●
Explicit and Implicit Coercion
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C H A P T E R 6 – L E A D IN G P E O P L E
Leadership and change – Heifetz Heifetz suggests that the traditional model was for leaders to have all the answers, make all the decisions and impose change on the workers. Instead he advocates that leaders provide support and guidance to help workers find solutions and implement change themselves. Heifetz identifies 2 types of change: ●
Technical change
●
Adaptive change
When dealing with adaptive change, Heifetz suggests the following approach: ●
Recognition
●
Application of appropriate pressure
●
Focus
●
Ownership
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Chapter 7
Individuals and groups
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CHAPTER 7 – INDIVIDUALS AND GROUPS
CHAPTER CONTENTS GROUPS AND TEAMS ---------------------------------------------------- 59 WHAT IS A GROUP?
59
WHAT IS A TEAM?
59
WHY ARE TEAMS USEFUL?
59
TEAM FORMATION ------------------------------------------------------- 60 TEAM ROLES - BELBIN
60
TEAM FORMATION – TUCKMAN
60
TEAM EFFECTIVENESS
61
WHAT IS A COMMITTEE?
61
INDIVIDUALS ------------------------------------------------------------ 62 INDIVIDUAL BEHAVIOUR
58
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CHAPTER 7 – INDIVIDUALS AND GROUPS
GROUPS AND TEAMS What is a group? “Any collection of people who perceive themselves to be a group.” Attributes of groups: ●
Shared identity
●
Leadership
●
Loyalty
●
A common purpose.
Groups can be either formal or informal.
What is a team? A number of people, who possess complementary skills, and are committed to common goals and purpose, for which they hold themselves accountable.
Why are teams useful? There are a number of benefits to team working: ●
Efficiency
●
Effectiveness
●
Motivation
●
Blending skills
●
Generating ideas
●
Better decision making.
There are also limitations of team working: ●
Conflict
●
Groupthink.
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CHAPTER 7 – INDIVIDUALS AND GROUPS
TEAM FORMATION Team roles - Belbin When forming a fully functional team, Belbin advocates that members should be able to perform a well balanced mix of roles. These roles are not fixed to one individual member. Members can carry out more than one role. These roles are: ●
Plant
●
Resource investigator
●
Co-ordinator (Leader)
●
Shaper
●
Monitor-Evaluator
●
Team worker
●
Implementer (Company Worker)
●
Completer-Finisher
●
Specialist (Expert).
Team formation – Tuckman Tuckman suggests that groups develop into teams by going through 4 stages: ●
Forming
●
Storming
●
Norming
●
Performing.
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CHAPTER 7 – INDIVIDUALS AND GROUPS
Other writers have included two additional stages: ●
Dorming
●
Mourning/Adjourning.
Team effectiveness Effectiveness and cohesion usually go together. Cohesion can be increased through: ●
Team size
●
Homogeneity of members
●
External threat
●
Team reward
●
Strong leadership
●
Goal congruence.
Woodcock identifies blockages to effective teamwork. Remove the blockage, and the team will be effective. ●
Inappropriate leadership
●
Unqualified membership
●
Unconstructive climate
●
Unclear objectives
●
Poor achievement
●
Ineffective work methods
●
Insufficient openness
●
Undeveloped individuals
●
Low creative capacity
●
Unconstructive relationships.
What is a committee? A committee is a group of people responsible for a particular issue. A committee could be: ●
Temporary
●
Permanent.
Examples of committees ●
Health and Safety Committee
●
Audit Committee
●
Ethics Committee.
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CHAPTER 7 – INDIVIDUALS AND GROUPS
INDIVIDUALS Individual behaviour There are a number of factors which influence an individual’s behaviour and performance at work. These include: ●
Attitude – persistent feelings & behaviour tendencies directed towards specific people, ideas, objects etc
●
Intelligence
●
Personality – influences an individual’s behaviour & performance
●
Motivation Level – why people choose to do one thing rather than another
●
Perception – individuals select, organise & interpret the stimuli they receive.
Three types of behaviour that can be demonstrated by an individual: ●
Assertive
●
Aggressive
●
Passive.
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Chapter 8
Motivating people
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CHAPTER 8 – MOTIVATING PEOPLE
CHAPTER CONTENTS MOTIVATION ------------------------------------------------------------- 65 WHAT IS MOTIVATION?
65
THEORIES OF MOTIVATION -------------------------------------------- 66 CONTENT THEORY – MASLOW: THE HIERARCHY OF NEEDS
66
CONTENT THEORY – HERZBERG: HYGIENE-MOTIVATION THEORY
67
PROCESS THEORY – VROOM: EXPECTANCY THEORY
67
MCGREGOR: THEORY X AND THEORY Y
68
REWARDS AND INCENTIVES ------------------------------------------- 69
64
INTRINSIC VS EXTRINSIC REWARD
69
REWARD SYSTEMS
69
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CHAPTER 8 – MOTIVATING PEOPLE
MOTIVATION What is motivation? The urge to take action to achieve a specific goal. Why is motivation important? Some of the benefits of motivation to the organisation and individual and team include:
The Organisation ●
Increased output
●
Lower staff turnover
●
Better quality of work
●
Greater commitment
●
Less absenteeism
●
Innovation
The Individual ●
Improved morale
●
Greater sense of purpose
●
Improved self esteem
●
More challenging work
The Team Motivation can also improve teamwork, by: ●
Increasing goal congruence
●
Reducing conflict.
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CHAPTER 8 – MOTIVATING PEOPLE
THEORIES OF MOTIVATION Theories of motivation can be classified into 2 main types: ●
Content Theory – what are the things that motivate people.
●
Process Theory – how can people be motivated.
Content Theory – Maslow: The hierarchy of needs Maslow believed all human beings are driven by a set of needs which can be set in a hierarchy. Individuals become motivated once they have the opportunity to fulfil these needs.
Self-fulfilment Self-actualisation
Ego/Esteem
Social
Safety/Security
Basic/Physiological
●
Basic/Physiological
●
Safety/Security
●
Social
●
Ego/Esteem
●
Self-fulfilment/Self-actualisation
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CHAPTER 8 – MOTIVATING PEOPLE
Content theory – Herzberg: hygiene-motivation theory Herzberg theory is based on two factors involved in motivation: ●
The need to avoid unpleasantness - hygiene factors
●
The need for personal growth – motivator factors.
The hygiene factors are concerned with the environment and conditions of work. These factors can stop people from being dissatisfied at work, but are not enough to motivate them. The motivator factors are connected to the work itself and help to create job satisfaction which leads to motivation. This theory is also referred to as the Two Factor Theory: hygiene factors and motivator factors.
Process theory – Vroom: expectancy theory Vroom was more interested in the process individuals go through in order to become motivated. He believes that how motivated an individual is to achieve a task depends on the extent to which the results of his efforts will contribute to his personal needs and/or goals. He developed a formula which he believed measured motivation: V
x
E
=
F
V = Valence
E = Expectancy
F = Force of motivation
Vroom believed that the force of an individual’s motivation depends on two factors: ●
Valence: the strength of his preference for a certain outcome/reward
●
Expectancy: the individual’s perception the behaviour will result in the outcome/reward.
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CHAPTER 8 – MOTIVATING PEOPLE
McGregor: theory X and theory Y Theory X and theory Y relates to the assumptions a manager has about his staff. Theory X assumes people dislike work and responsibility, and will avoid it is possible. As a result: ●
Workers only do what they are told to
●
Workers must be forced to work.
Theory Y assumes people do not dislike work, and can be motivated to seek challenge and responsibility in work. As a result: ●
Workers make their own decisions
●
Workers are self-motivated.
Theories X and Y are assumptions and not actual types of people. However, if a manager treats his employees as if they are Theory X, they will behave like Theory X workers which could result in de-motivation. If a manager treats employees as if Theory Y were true, then their behaviour will change accordingly.
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CHAPTER 8 – MOTIVATING PEOPLE
REWARDS AND INCENTIVES A reward is A token given to an individual/team in recognition of their success or contribution. A reward can be monetary or non monetary. An incentive is The offer of a reward given to an individual/team in order to motivate them to behave in a way to earn it.
Intrinsic vs extrinsic reward Rewards can be intrinsic or extrinsic: Extrinsic rewards are external to the control of individual and is dependent on the decision of others ●
For example: pay, praise and benefits.
Intrinsic rewards are internal to the individual and arises from performance of the work ●
For example: job status, satisfaction and achievement.
Intrinsic rewards could also be a result of job design ●
Job enrichment
●
Job enlargement
●
Job rotation.
Reward systems A good reward system should ●
Motivate employees
●
Decrease turnover
●
Attract prospective employees
●
Create goal congruence
●
Be fair and objective
●
Encourage innovation.
Examples of reward systems include: ●
Commission
●
Bonus schemes
●
Profit sharing
●
Management by Objective.
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CHAPTER 8 – MOTIVATING PEOPLE
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Chapter 9
The role of accounting
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
CHAPTER CONTENTS THE ROLE OF ACCOUNTING--------------------------------------------- 73 WHAT IS THE ROLE OF THE ACCOUNTING FUNCTION?
73
THE LAW GOVERNING THE ACCOUNTING FUNCTION ---------------- 74 REQUIREMENTS FOR FINANCIAL STATEMENTS
74
HOW ACCOUNTING STANDARDS ARE CREATED
75
THE HISTORY OF ACCOUNTING ---------------------------------------- 76 FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING ------- 77 TREASURY ---------------------------------------------------------------- 78 TAXATION ---------------------------------------------------------------- 79 FINANCIAL SYSTEMS ---------------------------------------------------- 80 FINANCIAL SYSTEMS - PAYROLL
80
FINANCIAL SYSTEMS – INVOICING (SALES)
81
FINANCIAL SYSTEMS – INVOICING (PURCHASES)
82
FINANCIAL SYSTEMS – CREDIT CONTROL
83
FINANCIAL SYSTEMS – CASH
84
FINANCIAL SYSTEMS – WORKING CAPITAL
84
COMPUTERISED SYSTEMS
84
ACCOUNTING AND OTHER BUSINESS FUNCTIONS ------------------- 85 ACCOUNTING AND PRODUCTION
85
ACCOUNTING AND PURCHASING
85
ACCOUNTING AND MARKETING
85
THE MARKETING DEPARTMENT ---------------------------------------- 86 WHAT IS MARKETING?
86
WHAT IS THE MARKETING MIX?
86
HOW DEPARTMENTS FIT TOGETHER – PORTER’S VALUE CHAIN --- 88 OTHER DEPARTMENTS
72
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
THE ROLE OF ACCOUNTING What is the role of the accounting function? The accounting function plays an important role within the organisation. This includes: ●
Establishing financial procedures
●
Implementing financial procedures
●
Monitoring performance.
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
THE LAW GOVERNING THE ACCOUNTING FUNCTION ●
Companies are usually required to submit their accounts to a government regulated department, eg Companies House in the UK.
●
Companies are accountable to the tax authorities in the country in which they are based.
●
Companies are required to retain their accounting records for a minimum period (eg 7 years).
●
Companies may be accountable to industry regulators.
●
Companies may also have to maintain a register of shareholders, or a register of directors.
Requirements for financial statements In the UK, the Companies Act requires financial statements to be true and fair. General requirements regarding the preparation of accounts include: ●
Following accounting standards
●
Following generally accepted best practice
●
Having information of sufficient quality
●
Having information of sufficient quantity
●
Being free from material misstatement.
Directors are responsible for the creation of financial statements. This responsibility is likely to be delegated to the Finance Director and the Finance department. Their production requires co-operation between different areas of the finance team, and may sometimes involve help from an external accounting firm. In order to produce financial statements of sufficient quality it will be necessary to keep a record of transactions throughout the year. Failure to comply with regulations can have serious consequences: ●
Failure to keep accounting records is a criminal offence
●
Failure to present a true and fair view is a criminal offence
●
Inaccurate tax records could lead to tax evasion
●
Poor accounting could lead to a qualified audit report
●
Poor accounting could lead to business failure.
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
How accounting standards are created The International Accounting Standards board (IASB) aims to develop a single set of international financial reporting standards (IFRS). The benefits of IFRSs include ●
No requirement to develop national standards
●
Reassurance for investors
●
Ease of preparation for multi-national companies.
Nearly 100 countries adopt international standards, or amend national standards to bring them in line with their international equivalents. The creation of a standard:
DP
Working Group
Discussion
Public Comment
ED
IFRS
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
THE HISTORY OF ACCOUNTING Accounting records have been kept for centuries
In the15th Century Luca Pacioli created the double entry system
As companies became more prevalent, accounting became more important
The growth in the separation of ownership and control further strengthened the need for good accounting practices
Accounting standards were developed to assist comparison
The increase in financial computer systems saw a reduction in manual bookkeeping
Large multinational companies now look to accountants to provide assistance on many areas of business
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
FINANCIAL ACCOUNTING
ACCOUNTING
AND
Management Accounting
MANAGEMENT
Financial Accounting
Users
Internal
Internal and External
Type of information
Planning Control Decision making
Financial Statements
Regulation
Generally accepted methods of best practice
Accounting standards Companies Act
Time period
Future orientation
Historical
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
TREASURY The treasury function deals with the following: ●
Cash management
●
Financing
●
Foreign currency
●
Tax
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
TAXATION One of the responsibilities within the finance department is calculation of the business tax liability. Businesses will seek to minimise their tax liability, whilst complying with legislation. ●
Tax mitigation
●
Tax avoidance
●
Tax evasion
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
FINANCIAL SYSTEMS A system is a collection of procedures and processes. A system can be manual as well as computerised. Many organisations have a procedures manual which documents all existing systems.
Financial systems - payroll The creation of a standard: Record hours worked
Record overtime worked
Obtain pay rates
Calculate pay
Calculate deductions
Net pay paid to employees
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
Financial systems – invoicing (sales) Order received
Order processed
Goods despatched
Invoice raised
Record in accounts
Payment received
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
Financial systems – invoicing (purchases) Authority to order
Order
Goods received
Invoice received
Invoice recorded
Payment made
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
Financial systems – credit control Receive Order
Credit check
Create customer account
Despatch goods
Invoice goods
Reminder letter(s)/Call(s)
Write off debt
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
Financial systems – cash This relates to payments to and from the bank ●
Receipts from customers
●
Payments to customers
●
Petty cash.
Financial systems – working capital Working capital is the amount of capital available for the day to day running of the organisation. It is made up of ●
Inventory
●
Receivables
●
Cash
●
Payables
Computerised systems Most companies now rely on automated financial systems. There are a variety of “off the shelf” packages available. Some organisations choose to purchase bespoke systems. There are advantages and disadvantages to having automated systems: Advantages
Disadvantages
●
Faster
●
Investment
●
Complex processing
●
Training
●
Human error
●
Corruption
●
Security
●
Not as portable as ledgers
●
Analysis
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
ACCOUNTING AND OTHER BUSINESS FUNCTIONS The accounting function can be of assistance to a number of other functions within the business.
Accounting and production Accounting can provide assistance with: ●
Budgeting
●
Performance measurement
●
Calculation of Overhead Absorption Rates
Accounting and purchasing Accounting can provide assistance with: ●
Budgeting
●
Variance analysis
●
Pricing
●
Payment
Accounting and marketing Accounting can provide assistance with: ●
Budgeting
●
Pricing
●
Market size and share
●
Assessment of campaigns
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
THE MARKETING DEPARTMENT The Marketing department fulfils an important role within the organization.
What is marketing? “The management process which identifies, anticipates and satisfies customer requirements (needs) efficiently and profitably” (Chartered Institute of Marketing).
A key marketing tool is the marketing mix.
What is the marketing mix? A set of controllable variables which can be blended to elicit a response from customers. The Marketing mix takes the form of the 4 Ps. The 4 Ps are: ●
Product
●
Price
●
Place
●
Promotion.
Product The product itself consists of 3 elements: ●
Core product
●
Actual product
●
Augmented product
Price There are 4 issues to consider when pricing a product: ●
Cost
●
Customers
●
Competitors
●
Corporate objectives
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
Promotion There are 5 elements to the promotion mix: ●
Advertising
●
Sales promotion
●
Personal selling
●
Public Relations
●
Direct marketing
Place There are 2 main choices to consider under the heading of place: ●
Selling direct
●
Selling via intermediaries.
Place also relates to all issues concerning the physical location where a product can be purchased and the logistics of distribution.
Marketing supports overall organisational strategy and can be viewed under the same headings as strategic planning: ●
Analysis
●
Choice
●
Implementation
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
HOW DEPARTMENTS FIT TOGETHER – PORTER’S VALUE CHAIN When considering the links between departments within the organisation, it can be useful to use Porter’s Value chain –
Infrastructure Procurement HRM Technology Inbound Logistics
Operations
Outbound Logistics
Sales and Marketing
Service
The Value Chain – Primary Activities ●
Inbound Logistics
●
Operations
●
Outbound Logistics
●
Marketing and Sales
●
Service
The Value Chain – Support Activities ●
Technology
●
HRM
●
Procurement
●
Infrastructure
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
Other departments R&D The R&D department is responsible for the development of new products and the improvement and amendment of existing products.
Admin The administrative function is responsible for the processing of transactions and any other administrative support required.
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C H A P T E R 9 – T H E R O L E O F A C C O U N T IN G
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Chapter 10
The macro-economic environment
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CHAPTER 10 – THE MACRO-ECONOMIC ENVIRONMENT
CHAPTER CONTENTS THE MACROECONOMIC ENVIRONMENT ------------------------------- 93 WHAT IS ECONOMICS?
93
WHAT IS MACROECONOMICS?
93
MACROECONOMIC POLICY
93
FISCAL AND MONETARY POLICY
93
MONETARY POLICY
93
FISCAL POLICY
94
DETERMINANTS OF ACTIVITY IN THE ECONOMY -------------------- 95 THE ECONOMIC CYCLE -------------------------------------------------- 96
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CHAPTER 10 – THE MACRO-ECONOMIC ENVIRONMENT
THE MACROECONOMIC ENVIRONMENT What is economics? The study of the production, distribution and consumption of goods and services.
What is macroeconomics? The branch of economics that deals with the performance, structure and behaviour of the economy as a whole.
Macroeconomic factors Macroeconomics is concerned with: ●
The overall demand for goods in the economy
●
The total output of goods in the economy
●
The supply of factors of production
●
National Income
●
National Expenditure
●
Government Policy.
Macroeconomic policy Most governments will have similar macroeconomic aims ●
Economic growth
●
Low inflation
●
Low unemployment
●
Balance of payments.
Fiscal and monetary policy In order to maintain stability adjustments to the economy.
and
encourage
growth,
governments
make
Monetary policy With monetary policy, governments aim to impact the supply of money in the economy and hence spending. Governments have two main tools to affect the money supply: ●
Interest rates
●
Foreign exchange.
Monetary policy is usually described as either expansionary or contractionary ●
Expansionary (to boost the economy).
●
Contractionary (to cool the economy).
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CHAPTER 10 – THE MACRO-ECONOMIC ENVIRONMENT
Fiscal policy Fiscal policy relates to the level of government spending, borrowing and taxation used to manage the economy ●
Government spending
●
Taxation (Direct or indirect)
Fiscal policy is usually described as either expansionary, contractionary or neutral.
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CHAPTER 10 – THE MACRO-ECONOMIC ENVIRONMENT
DETERMINANTS OF ACTIVITY IN THE ECONOMY There are a number of factors which influence the level of activity within the economy: ●
Confidence
●
Aggregate demand
●
Supply of finance
●
Developments in the factors of production
●
Government policy
●
Exchange rate movements
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CHAPTER 10 – THE MACRO-ECONOMIC ENVIRONMENT
THE ECONOMIC CYCLE The economic cycle refers to fluctuations in economic activity over the longer term. The cycle alternates between periods of relatively rapid growth and periods of relative stagnation and decline. Output
Output Recession Depression Recovery
Time Boom
Recession
Depression
The impact of economic issues: ●
Unemployment
●
Inflation
●
Stagnation
●
Growth
●
Balance of payments disequilibrium.
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Chapter 11
The business environment
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CHAPTER CONTENTS THE BUSINESS ENVIRONMENT ----------------------------------------- 99 WHAT IS THE ENVIRONMENT?
99
PEST ANALYSIS --------------------------------------------------------- 100 POLITICAL/LEGAL FACTORS
100
SOCIO-CULTURAL FACTORS
101
TECHNOLOGICAL FACTORS
102
COMPETITION----------------------------------------------------------- 103
98
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C H A P T E R 1 1 – T H E B U S IN E S S E N V I R O N M E N T
THE BUSINESS ENVIRONMENT What is the environment? The world beyond the boundary of our organisation. Before making any decisions about the future, an organisation needs to understand the environment in which it operates. This can be done via PEST analysis.
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C H A P T E R 1 1 – T H E B U S IN E S S E N V I R O N M E N T
PEST ANALYSIS Political/Legal Economic Socio-Cultural Technological
Political/legal factors Organisations will need to consider: ●
Legislation
●
Regulation
●
Broader political issues.
This may impact the organisation at a number of levels: ●
Globally (supra-national organisations)
●
Nationally
●
Locally.
Protecting employees – health and safety at work Many countries (including the UK) have legislation in place to protect individuals at work. Employers must provide: ●
Safe entrance and exit to and from workplaces
●
A safe working environment
●
Safe processes
●
Safe equipment
●
Appropriate training
●
Appropriate investigation of accidents/injuries at work.
Employees must: ●
Consider their own safety at work
●
Consider the safety of those around them
●
Comply with safety guidelines at work.
Health and Safety is a legal issue which employers must take seriously. There are other reasons to take Health and Safety seriously: ●
Ethics
●
Motivation
●
Reputation
●
Financial issues eg damages
●
Loss of business.
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C H A P T E R 1 1 – T H E B U S IN E S S E N V I R O N M E N T
Protecting confidentiality – data protection and data security What is data protection? Organisations may hold information regarding their customers and employees. Data protection relates to the protection of these individuals against the misuse of personal information by the organisation.
The principles of data protection Legislation varies from country to country, but would be likely to cover the following points: ●
Personal data should be acquired and processed lawfully
●
Data should not be used for purposes incompatible with the original collection purpose
●
Data collected should be relevant for the purpose of processing, and should not be excessive
●
Data collected should be accurate, and be kept up to date
●
Data should not be kept for longer than required
●
The organisation should make every effort to protect personal data from unlawful processing, loss, destruction or damage.
What is data security? Data security relates to keeping data safe from corruption, unauthorised access or alteration. There are a number of risks to data security: ●
Physical damage
●
Human damage
●
Operational problems
●
Data corruption.
DAVID & TRACEY – shouldn’t there be a heading ECONOMIC FACTORS? Debbie
Socio-cultural factors Social and cultural influences vary from country to country. Some factors to consider might include: ●
Religion
●
Attitude to globalisation
●
Language
●
Work/life balance
●
Distribution of wealth
●
Population distribution
●
Health
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●
Life expectancy and age distribution
●
Local ethical issues/values
●
Local tastes/trends.
Sometimes a government may take specific action to address social issues: ●
Health
●
Population structure
●
Housing
●
Employment.
Technological factors Technology can influence many aspects of the organisation: ●
Production methods
●
Marketing and distribution
●
Structure
●
Communication
●
Product development
●
Purchasing.
Technology and the organisational structure Technology has led to an increase in the following: ●
Downsizing
●
Delayering
●
Outsourcing.
Technology and the consumer Technology has changed the way we live: ●
Homeworking
●
On-line shopping
●
On-line banking
●
Distance learning
●
Home entertainment.
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C H A P T E R 1 1 – T H E B U S IN E S S E N V I R O N M E N T
COMPETITION Competitors are also part of the environment and require analysis. This could be done via Porter’s 5 Forces. The five forces are used to assess the attractiveness, or profit potential within an industry. Once the organisation has identified the risks inherent in the environment, they can take action to mitigate those risks.
The threat of new entrants
The bargaining power of buyers
Rivalry and competition
The bargaining power of suppliers
The threat of substitutes
●
The threat of new entrants (reduced by the existence of barriers to entry)
●
The bargaining power of buyers
●
The bargaining power of suppliers
●
The threat of substitutes
●
Rivalry and competition within the industry (influenced by barriers to exit).
Porter stated that a firm wishing to obtain competitive advantage over its rivals is faced with three options: 1.
Cost Leadership Strategy.
2.
Differentiation Strategy.
3.
Focus Strategy (Cost or Differentiation).
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Chapter 12
Business organisation
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CHAPTER CONTENTS BUSINESS ORGANISATIONS AND STRUCTURE ---------------------- 107 WHAT IS AN ORGANISATION?
107
ORGANISATIONAL STRUCTURE
107
INFLUENCES ON ORGANISATIONAL STRUCTURE
108
CENTRALISATION OR DECENTRALISATION?
109
STAKEHOLDERS --------------------------------------------------------- 111 INTERNAL STAKEHOLDERS
111
CONNECTED STAKEHOLDERS
111
EXTERNAL STAKEHOLDERS
112
STAKEHOLDER CONFLICT
112
THE INFORMAL ORGANISATION -------------------------------------- 113
106
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
BUSINESS ORGANISATIONS AND STRUCTURE What is an organisation? An organisation is a social arrangement for the controlled performance of collective goals. (Buchanan and Huczynski). There are many different types of organisation: ●
Commercial – Profit seeking organisations
●
NFP – Not for Profit organisations like charities or schools
●
Public sector – Government owned organisations or departments
●
Co-operatives – Owned and controlled by the members for the benefit of the members.
Organisational structure Organisations can be arranged in several ways ●
Entrepreneurial/Simple
●
Functional
●
Divisional
●
Matrix.
Entrepreneurial/Simple Boss
Team
Functional Boss
Finance
Sales
Mktg
Divisional Boss
Div 1
Fin
Sales
Div 1
Mktg
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Fin
Sales
Div 1
Mktg
Fin
Sales
Mktg
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
Matrix Functions
Divisions
Sales
Mktg
HR
Finance
Div 1 Div 2 Div 3
Influences on organisational structure There are many factors influencing the organisational structure ●
Environment
●
Culture
●
Staff
●
Tasks
●
Span of control
●
Scalar chain
●
Centralisation
Span of control The number of people reporting to one manager. Influences on the span of control: ●
Geographical distribution
●
Ability
●
Personality
●
Support
●
Organisational culture
●
Scalar chain.
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
Scalar chain The number of levels in the hierarchy. Long scalar chain + narrow span of control = tall, narrow structure -
Short scalar chain + wide span of control = flat structure -
Centralisation or decentralisation? Who makes the decisions?
Advantages and disadvantages of decentralisation: Advantages: ●
Faster decisions
●
Expert decisions
●
Motivation
●
Development
●
Frees up strategic apex.
Disadvantages: ●
Duplication
●
Comparison
●
Training
●
Inconsistency
●
Dysfunctional decisions.
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
Levels of planning within the organisation Anthony’s hierarchy – 3 levels of planning:
Strategic
● ● ●
Long term Whole organisation Fundamental decisions
Tactical
● ●
Divisions Regions
Operational / Functional
● ● ●
Day to day Functional Short term
The Strategic Planning Process The Rational approach to strategic planning breaks the process down into three distinct steps: 1.
Strategic Analysis
2.
Strategic Choice
3.
Strategic Implementation.
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
STAKEHOLDERS A stakeholder is anyone with an interest in the organisation. Stakeholders can be divided into 3 main groups: ●
Internal
●
Connected
●
External.
Internal stakeholders Stakeholder
Interest
●
Regular pay
Staff
Interesting work Career progression ●
Management
Influence Bonuses Prestige
Connected stakeholders Stakeholder
Interest
●
Quality product
Buyers
Reliable supply Credit terms ●
Suppliers
Timely payment Ongoing relationship
●
Bank
Security of investment Credit rating Regular payment
●
Shareholders
Dividends Capital growth Reputation Future plans
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
External stakeholders Stakeholder
Interest
●
Legislation
Government
Taxation Job creation ●
Local community
Pollution Employment Prosperity
●
Pressure groups
Ethics
●
Industry regulator
Regulation
Stakeholder conflict Sometimes stakeholder interests are in direct conflict, eg: ●
Staff vs Shareholders in relation to possible pay-rises
●
Customers vs Shareholders in relation to product enhancement.
There are a number of methods for dealing with Stakeholder conflict identified by Cyert & March: ●
Sequential attention
●
Satisficing
●
Prioritisation
●
Side payments/compensation.
Stakeholders can be mapped on Mendelow’s Matrix, in terms of their level of interest and power.
112
o
this can be used to track the changing influences between different stakeholder groups over time
o
& can be used to assess the likely impact that a strategy will have on different stakeholder groups.
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
THE INFORMAL ORGANISATION In addition to a formal organisational structure, informal relationships, power structures and communication networks exist. It can be particularly important to identify the informal organisation when attempting to implement change.
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C H A P T E R 1 2 – B U S IN E S S O R G A N I S A T IO N
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Chapter 13
Organisational culture
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C H A P T E R 1 3 – O R G A N I S A T IO N A L C U L T U R E
CHAPTER CONTENTS ORGANISATIONAL CULTURE ------------------------------------------ 117
116
WHAT IS ORGANISATIONAL CULTURE?
117
FACTORS INFLUENCING ORGANISATIONAL CULTURE
117
THE LINK BETWEEN LEADERSHIP AND ORGANISATIONAL CULTURE (SCHEIN)
118
THE LINK BETWEEN STRUCTURE AND ORGANISATIONAL CULTURE (HANDY)
118
THE LINK BETWEEN NATIONAL CULTURE AND ORGANISATIONAL CULTURE (HOFSTEDE)
119
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C H A P T E R 1 3 – O R G A N I S A T IO N A L C U L T U R E
ORGANISATIONAL CULTURE What is organisational culture? The way we do things around here. (Handy). The personality of an organisation ●
Values
●
Attitudes
●
Norms
●
Expectations
●
Rituals, routines and symbols.
Factors influencing organisational culture ●
Size
●
Technology
●
History
●
Ownership
●
Diversity
●
Age
●
Structure
●
Leadership
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C H A P T E R 1 3 – O R G A N I S A T IO N A L C U L T U R E
The link between leadership and organisational culture (Schein) The original leaders of an organisation create the culture. Subsequent leaders must understand and embody the culture. There are 3 levels of culture that leaders must appreciate: ●
Artefacts
●
Espoused values
●
Basic assumptions (the most difficult to identify and understand)
The link between structure and organisational culture (Handy) Structure is a major influence on culture. Handy popularised 4 cultural types or forms (originally identified by Harrison): ●
The Power culture (usually associated with the entrepreneurial structure)
●
The Role culture (usually associated with the functional structure)
●
The Task culture (usually associated with the matrix structure)
●
The Person culture (for example a doctors’ surgery)
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C H A P T E R 1 3 – O R G A N I S A T IO N A L C U L T U R E
The link between national culture and organisational culture (Hofstede) Hofstede believed that national culture can have a huge impact on organisational culture. He identified 5 dimensions along which national cultures tends to vary: ●
Power Distance (High or Low)
●
Uncertainty Avoidance (High or Low)
●
Individualism vs collectivism
●
Masculinity vs Femininity
●
Time Orientation – does the firm think long-term or short-term?
Hofstede is not attempting to stereotype nationalities, but to provide an insight into why behaviour and assumptions might differ across geographical regions. This can be particularly useful when expanding internationally.
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Chapter 14
Corporate governance
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C H A P T E R 1 4 – E T H I C A L C O N S ID E R A T I O N S
CHAPTER CONTENTS CORPORATE GOVERNANCE AND SOCIAL RESPONSIBILITY -------- 123
122
WHAT IS CORPORATE GOVERNANCE?
123
THE PRINCIPLES OF CORPORATE GOVERNANCE
123
GUIDANCE ON CORPORATE GOVERNANCE
123
THE ROLE OF NEDS
124
WHAT IS SOCIAL RESPONSIBILITY?
124
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CHAPTER 14 – CORPORATE GOVERNANCE
CORPORATE GOVERNANCE RESPONSIBILITY
AND
SOCIAL
What is corporate governance? The system by which organisations are directed and controlled. (The Cadbury Report)
Why is corporate governance required? Companies are owned by the shareholders, but run by the board of directors. Corporate governance ensures the company is run in the interests of the shareholders.
The principles of corporate governance The OECD lays out 5 principles of good governance: ●
The rights of shareholders
●
Equitable treatment of shareholders
●
Stakeholder relations
●
Disclosure and transparency
●
The responsibilities of the board.
Guidance on corporate governance All companies incorporated in the UK and listed on the London Stock Exchange (LSE) are required to report on how they have applied the UK Corporate Governance Code. Overseas companies listed on the LSE are required to disclose any significant differences between their application of corporate governance and the guidelines set out in the UK Corporate Governance Code. The UK Corporate Governance Code contains both general principles and specific provisions. Listed companies are required to report on how they have applied the Code, and where they have not complied with the Code, to provide explanations. A key issue in corporate governance is that of balance, eg: ●
The role of Non-executive directors (NEDs)
●
Chairman and chief executive should not be the same person.
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C H A P T E R 1 4 – E T H I C A L C O N S ID E R A T I O N S
The role of NEDs Executive directors are involved full-time with the running of the organisation. Non-executive directors devote some of their time to the organisation, but are not part of the executive management team. NEDs will usually be paid fees (eg a daily rate) to reflect the time/responsibility devoted to the organisation. They would not usually be remunerated via share options, as this could impact on their independence. At least half the board (excluding the chairman) should consist of NEDs. NEDs should be independent of the organisation and have an important role to play: ●
Industry expertise
●
Corporate conscience
●
Balance in decision making
●
Insight on corporate governance
●
Remuneration committee (at least 3 NEDs)
●
Audit committee (at least 3 NEDs).
What is social responsibility? Behaviour which stakeholders.
recognises
the
organisation’s
impact
on
society
and
its
More and more organisations are adopting a Stakeholder rather than a Shareholder view. This is further underlined by the OECD recommendation to promote good stakeholder relations. Many organisations attempt to include stakeholders in the decision making process via: ●
Questionnaires
●
Focus groups
●
Analysis of customer feedback
●
Consultation with the local community
●
Formal stakeholder analysis.
Although behaving in a socially responsible way may have an adverse impact on short term profits, it is generally considered to be the right decision for the longer term growth and success of the organisation.
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Chapter 15
Ethical considerations
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C H A P T E R 1 5 – E T H I C A L C O N S ID E R A T I O N S
CHAPTER CONTENTS ETHICAL CONSIDERATIONS ------------------------------------------- 127
126
WHAT IS ETHICS?
127
WHY IS ETHICS IMPORTANT?
127
ETHICS AND THE ORGANISATION
127
ETHICS AND THE INDIVIDUAL
127
APPROACHES TO ETHICS
128
THE ACCA CODE OF ETHICS
129
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C H A P T E R 1 5 – E T H I C A L C O N S ID E R A T I O N S
ETHICAL CONSIDERATIONS What is ethics? That branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions. The science of right and wrong.
Why is ethics important? As ethical issues become more important to society in general, and an organisation’s customers in particular; organisations need to recognise the value of ethics. An organisation failing to appreciate the importance of ethical issues will be out synch with its customers.
Ethics and the organisation From the organisations point of view, ethical behaviour: ●
Is part of a framework of good corporate governance
●
Could be a way of differentiating an organisation from the competition
●
Can often reassure shareholders
●
Can aid staff motivation.
Ethics and the individual From the customer’s point of view, ethical companies: ●
Conform to customers changing expectations
●
Will often be chosen in preference to unethical companies, despite higher prices.
From the employee’s point of view, ethical companies: ●
Will have an ethical framework in place leading to fewer difficult decisions and personal dilemmas
●
Will often be chosen in preference to unethical companies, with regard to employment.
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C H A P T E R 1 5 – E T H I C A L C O N S ID E R A T I O N S
Ethical considerations The moral issues facing and organisation differ from industry to industry – eg: Industry
Ethical Issues
●
Pollution
Manufacturing
Sourcing ●
Pharmaceuticals
Testing Pricing
●
All Industries
Health and Safety Employee welfare
Approaches to ethics Ethics Stakeholder View
Shareholder view Ethics is bad for business
Enlightened self-interest - Comply with the law - Provide employment - Generate wealth
The moral view
Ethics is good for business
Ethics is the right thing to do
- Competitive advantage - Pre-empt legislation - Wider investor base
- Above and beyond the law - Moral duty - Leave the world a better place
As members of the accounting profession we have: ●
A responsibility to influence ethical behaviour at work.
●
A duty to act in the public interest.
What is a profession? Professions as opposed to other occupations have the following characteristics: ●
Theoretical knowledge gained through higher education (ie exams)
●
A governing body (ie the ACCA)
●
An ethical code (OPTIC).
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C H A P T E R 1 5 – E T H I C A L C O N S ID E R A T I O N S
The ACCA code of ethics The ACCA code is based on the International Federation of Accountants (IFAC) code of ethics for professional accountants.
Objectivity
Professional behaviour
Technical/Professional competence
Integrity
Confidentiality
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C H A P T E R 1 5 – E T H I C A L C O N S ID E R A T I O N S
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Chapter 16
IT and systems
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CHAPTER 16 – IT AND SYSTEMS
CHAPTER CONTENTS INFORMATION TECHNOLOGY AND SYSTEMS ------------------------ 133 DATA AND INFORMATION
133
WHAT IS DATA?
133
WHAT IS INFORMATION?
133
SOURCES OF INFORMATION
134
LEVELS OF INFORMATION – ANTHONY’S HIERARCHY
134
WHAT IS A SYSTEM? --------------------------------------------------- 135
132
IT SYSTEM
135
SECURITY OF IT SYSTEMS
136
SPREADSHEETS AND DATABASES
136
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CHAPTER 16 – IT AND SYSTEMS
INFORMATION TECHNOLOGY AND SYSTEMS Data and information It is important to be able to distinguish between information and data.
What is data? Data is raw facts and figures. Data can be categorised as follows: ●
Continuous
●
Discrete
●
Qualitative
●
Quantitative
●
Primary
●
Secondary
What is information? Information is data which has been processed so that it is meaningful to the individual who receives it. Data processing turns data into information. The qualities of good information: (ACCURATE) ●
Accurate
●
Complete
●
Cost effective
●
Understandable/User friendly
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CHAPTER 16 – IT AND SYSTEMS
●
Relevant
●
Adaptable
●
Timely
●
Easy to use
Sources of information Information can come from a variety of sources, both inside and outside the organisation Internal Financial Record Staff record Invoices Intranet Company brochures Customer records Management Accounts
External Government Statistics Trade publications Newspapers/journals Internet Industry intelligence Competitor Accounts Customers
Levels of information – Anthony’s hierarchy Different information is required at different levels within the organization.
Strategic
● ● ● ●
Longer term Summarised Uncertainty Infrequent
● ● ● ●
Immediate/Shorter term More detailed Greater certainty More frequent
Tactical
Operational / Functional
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CHAPTER 16 – IT AND SYSTEMS
WHAT IS A SYSTEM? A system is a collection of procedure and processes. Systems can be manual as well as automated. There are some advantages to automating a system.
Advantages of automation include: ●
Speed
●
Accuracy
●
Volume
●
Elimination of Human error
●
Complexity
●
Presentation.
IT system There are a variety of IT systems that can be used to provide information within the organization. These include: System ESS MIS
DSS
ES
KWS
OAS
TPS
Description Executive Support System Aids strategic decision making Management Information System Converts data from internal sources into information to aid managers make decisions Decision Support System Supports semi and unstructured decision making Expert System Captures human expertise in a limited area Knowledge Work System Helps to create and facilitate new knowledge into the organisation Office Automation System Helps to increase productivity of data and information workers Transaction Processing Software Performs and records routine transactions
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CHAPTER 16 – IT AND SYSTEMS
Security of IT systems IT systems need to be protected from corruption, unauthorised access or alteration. There are a number of risks to consider: ●
Physical damage
●
Human damage
●
Operational problems
●
Data corruption.
Spreadsheets and databases Spreadsheets are widely used by finance professionals as well as many other people within the organisation, as they ●
are simple to use
●
require little training
●
are widely recognised.
Spreadsheets are more appropriate for the short-term analysis of data, rather than long term storage. For the storage of large volumes of data, a database may be more appropriate.
What is a database? A database is a collection of structured data which can be manipulated.
Benefits of database
Drawbacks of Databases
Avoidance of duplication of data
Data security
One single source of data
Data privacy
Better security
More complex
Greater flexibility in use of data
Costly
Consistency
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Chapter 17
Control and security
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CHAPTER 17 –CONTROL AND SECURITY
CHAPTER CONTENTS CONTROL, SECURITY AND AUDIT ------------------------------------- 139 WHAT IS CONTROL?
139
WHAT IS INTERNAL CONTROL?
139
TYPES OF CONTROL
140
AUDITING --------------------------------------------------------------- 142
138
WHAT IS INTERNAL AUDITING?
142
LIMITATIONS OF INTERNAL AUDIT
142
WHAT IS EXTERNAL AUDITING?
142
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C H A P T E R 1 7 – C O N T R O L A N D S E C U R IT Y
CONTROL, SECURITY AND AUDIT What is control? Control is a guiding mechanism which encourages people to behave in a particular (goal congruent) way.
What is internal control? Any action undertaken by management to ensure that the goals and objectives set will be achieved. According to Turnbull guidelines the purpose of internal control is to ensure: ●
reliability of financial reporting
●
effectiveness and efficiency of operations
●
compliance with applicable laws and regulations.
●
safeguard Company Assets
●
the prevention and detection of fraud
The internal control framework includes: ●
The control environment
●
The risk assessment and response processes
●
The information systems relevant to financial reporting
●
Control activities
●
Monitoring of controls.
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CHAPTER 17 –CONTROL AND SECURITY
Types of control There are several categories of internal control –
●
Administrative and accounting controls
●
Prevent, detect and correct controls
●
Discretionary and non-discretionary controls
●
Voluntary and mandated control
●
Manual and automated controls
●
General and application controls
●
Financial and non-financial controls
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C H A P T E R 1 7 – C O N T R O L A N D S E C U R IT Y
Internal control is within an organisation is important because it: ●
Improves efficiency and effectiveness
●
Is good corporate governance
●
Is a legal requirement in some countries
●
Could prevent fraud
●
Alters the auditors approach to their work.
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CHAPTER 17 –CONTROL AND SECURITY
AUDITING It is important to distinguish between Internal and External auditing.
What is internal auditing? An independent appraisal of the effectiveness of an organisation’s operation and management by its own employees. Internal auditors guide, monitor and attempt to improve processes within an organization. Internal Audit is an important element of the risk management of the organisation and may be required to assess and advise on risk.
Limitations of internal audit ●
Independence
●
Resourcing
These limitations can be mitigated by the introduction of an Audit Committee.
What is external auditing? A periodic examination of the accounting records conducted by an independent third party, to assess whether they have been properly maintained are accurate and comply with established principles, legislation and accounting standards. External auditors will attempt to establish whether the accounts give a true and fair view of the financial state of the organisation. External auditing can act as an additional preventative control measure.
Internal vs external audit Internal Auditor
External Auditor
Employment
Employee
Third party
Requirement
No legal requirement Good Corporate Governance
Legal requirement for: ● Public companies ● Large companies ● Some public bodies
Assist management
Report to shareholders
Financial and operational matters
Financial matters
Role determined by management
Role determined by statutory duty
Scope
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C H A P T E R 1 7 – C O N T R O L A N D S E C U R IT Y
There are five different types of Audits: ●
Operational
●
Social
●
Management Investigations
●
Systems
●
Transactions.
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CHAPTER 17 –CONTROL AND SECURITY
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Chapter 18
Fraud
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CHAPTER 18 – FRAUD
CHAPTER CONTENTS IDENTIFYING AND PREVENTING FRAUD ----------------------------- 147
146
WHAT IS FRAUD?
147
THE PREREQUISITES OF FRAUD
147
FACTORS INCREASING THE RISK OF FRAUD
147
PREVENTING FRAUD
147
INTERNAL CONTROLS
148
PERSONNEL POLICIES AND PROCEDURES
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IMPLICATIONS OF FRAUD
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ROLE OF MANAGEMENT IN PREVENTING/DETECTING FRAUD
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ROLE OF INTERNAL AUDIT IN PREVENTING/DETECTING FRAUD
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CHAPTER 18 – FRAUD
IDENTIFYING AND PREVENTING FRAUD What is fraud? Fraud is an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an illegal or unjust advantage. (Auditing Practices Board). In the context of the organisation, fraud can occur in one of two categories: ●
Removal of Funds or Assets from the business
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Intentional misrepresentation of the financial position of the business.
Fraud may be perpetrated by a variety of people: ●
Management
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Employees
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Third parties.
The prerequisites of fraud For fraud to occur there must be: ●
Dishonesty
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Motive
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Opportunity
Factors increasing the risk of fraud When these factors are present there is a high risk that fraud may occur: ●
Poor control systems
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Poor control environment
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Lack of supervision
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Low morale
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Unusual transactions
Preventing fraud To prevent fraud the organisation needs to ensure that the following: ●
Adequate internal controls
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Personnel policies and procedures.
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CHAPTER 18 – FRAUD
Internal controls ●
Physical controls
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Segregation of duties
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Authorisation policies
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Management control
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Documentation
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Supervision
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Whistleblowing
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Personnel policies
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Investigation
Personnel policies and procedures Specific personnel controls for the prevention of fraud include: ●
Recruitment process
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Appraisals
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Staff development and training
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Emphasis on Ethics.
Implications of fraud This depends entirely on the scale of the fraud, which can range widely ●
Minor fraud
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Major fraud
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CHAPTER 18 – FRAUD
Role of management in preventing/detecting fraud Management has a variety of roles to play: ●
The board
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The audit committee
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Line management.
Role of internal audit in preventing/detecting fraud Directors decide the exact role of internal audit, however their duties are likely to involve: ●
Testing controls
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Investigating specific instances of potential fraud.
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