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ACCA-AB: ACCOUNTING IN BUSINESS

ACCA - AB
ACCOUNTANT in
BUSINESS
Sunway TES

WORKBOOK
(Student Copy)
Version: Jan 2019
ACCA-AB: ACCOUNTING IN BUSINESS

CONTENT

CONTENT ........................................................................................................................................... 2
CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION ..................................................16
1.1 What Are Business Organisations and Why Are They Formed ....................................................... 17
1.1.1. Definition of a Business Organisation ....................................................................... 17
1.1.2 Why Do Organisation Exist? ...................................................................................... 17
1.1.3 Sectors in Which Business Organisation Operate ..................................................... 18
1.2 Common Features and difference of Business Organisations .......................................................... 19
1.2.1. Common Features of a Business Organisation ......................................................... 19
1.2.2. How Do Business Organisations Differ? .................................................................... 20
1.3 Different Types of Business Organisations ....................................................................................... 21
CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION ...........................................................23
2.1 Stakeholders and the Agency Relationship in Business .................................................................. 24
2.1.1. Definition of Stakeholders ........................................................................................ 24
2.1.2. The Concept of Agency .............................................................................................. 24
2.1.3. Agents in Profit and Not-For-Profit Organisations.................................................... 25
2.2 Internal, Connected and External Stakeholder ............................................................................... 26
2.2.1. Categories of Stakeholders ....................................................................................... 26
2.2.2. Impact of Stakeholders on Organisations ................................................................. 26
2.2.3. Objectives of Stakeholders ....................................................................................... 27
2.2.4. Interaction of Different Stakeholder Groups and Conflicting Objectives ................. 27
2.3 Power and Influence of Various Stakeholder Groups ..................................................................... 29
2.3.1. Mendelow’s Stakeholder Mapping Matrix ............................................................... 29
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING BUSINESS..........30
INTRODUCTION......................................................................................................................................... 31
3.1 Political System and Government Policy .......................................................................................... 32
3.1.1. Sources of Legal Authority ...................................................................................... 32
3.1.2. Effect of Political and Legal Factors on Companies .................................................. 33
3.1.3. Influencing the Government ..................................................................................... 34
3.2 The Law and the Protection of the Employee .................................................................................. 35
3.2.1. Employee Protection from Discrimination (Equal Opportunities) ............................ 35
3.2.2. Dismissal.................................................................................................................... 35
ACCA-AB: ACCOUNTING IN BUSINESS

3.2.3. Resignation................................................................................................................ 36
3.2.4. Redundancy............................................................................................................... 37
3.2.5. Retirement ................................................................................................................ 38
3.2.6. Responsibility of Employer and Employee ................................................................ 38
3.3 Principles of Data Protection and Security ...................................................................................... 39
3.3.1 Data Protection Legislations ..................................................................................... 39
3.3.2 Underlying Principles ................................................................................................ 40
3.3.3 Data Security ............................................................................................................. 40
3.3.4 Threats to Data ......................................................................................................... 41
3.3.5 Responsibility of Employer and Employee ................................................................ 41
3.4 How the Law promotes and Protects Health and Safety in the Workplace .................................... 42
3.4.1 The Importance of Health and Safety ....................................................................... 42
3.4.2 Health and Safety Legislations .................................................................................. 42
3.4.3 Responsibility of Employer and Employee ................................................................ 43
3.5 Principles of Consumer Protection .................................................................................................. 44
3.5.1. Contracts .................................................................................................................. 44
3.5.2. Sales of Goods .......................................................................................................... 45
CHAPTER 4: MACROECONOMIC FACTORS ..........................................................................................46
4.1 Background and Structure of Macro-Economy ............................................................................... 47
4.1.1 Structure and Objective of the Economy .................................................................. 47
4.1.2 Factors which Affect the Economy ........................................................................... 50
4.1.3 Determination of National Income ........................................................................ 53
4.2 Main Determinants of the Level of Business Activity in the Economy ............................................ 55
4.2.1 Main Determinants of Business Activity................................................................... 55
4.2.2 Business Cycle ........................................................................................................... 57
4.3. Impact of Economic Issues .............................................................................................................. 59
4.3.1. Inflation ..................................................................................................................... 59
4.3.2. Unemployment ......................................................................................................... 60
4.3.3. Stagnation ................................................................................................................. 62
4.3.4. International Payments Disequilibrium .................................................................... 64
4.4. Main Types of Economic Policy ....................................................................................................... 66
4.4.1 Economic Policies Implemented by Government ..................................................... 66
4.4.2 Supra-national Bodies ............................................................................................... 68

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4.5. Impact of Fiscal and Monetary Policy Measures ............................................................................. 69


4.5.1 Fiscal Policy ............................................................................................................... 69
4.5.2 Monetary policy ........................................................................................................ 71
CHAPTER 5: MICROECONOMIC FACTORS............................................................................................72
5.1 Concept of Demand and Supply ...................................................................................................... 73
5.1.1. Demand .................................................................................................................... 73
5.1.2. Supply ........................................................................................................................ 76
5.1.3. Price Equilibrium ....................................................................................................... 78
5.1.4. Price Regulations....................................................................................................... 78
5.1.5. Consumer Surplus and Producer Surplus.................................................................. 79
5.1.6. Concept of Utility/satisfaction .................................................................................. 79
5.2. Elasticity of Demand ........................................................................................................................ 82
5.2.1. Price Elasticity of Demand......................................................................................... 82
5.2.2. Elasticity of Supply .................................................................................................... 86
5.3. Economic Behaviour of Costs .......................................................................................................... 87
5.3.1 Costs in the Short-Term ............................................................................................ 87
5.3.2 Costs in the Long-Term ............................................................................................. 89
5.4. Type of Markets ............................................................................................................................... 91
CHAPTER 6: SOCIAL, ENVIRONMENTAL AND TECHNOLOGICAL FACTORS .............................................93
6.1. Medium and Long-Term Effects ...................................................................................................... 94
6.1.1. Factors of Social Environment .................................................................................. 94
6.1.2. Medium Term and Long Term Effect on business outcomes and the economy ...... 96
6.2. Impact of Changes On the Organisation ......................................................................................... 97
6.2.1. Social Structure ........................................................................................................ 97
6.2.2. Values ........................................................................................................................ 97
6.2.3. Attitudes .................................................................................................................. 97
6.2.4. Tastes ........................................................................................................................ 98
6.3. Measures Taken by the Government .............................................................................................. 99
6.3.1. Measures................................................................................................................... 99
6.4. Potential Effects of Technological Change .................................................................................... 101
6.4.1. Downsizing .............................................................................................................. 101
6.4.2. Delayering ............................................................................................................... 101
6.4.3. Outsourcing ............................................................................................................. 102

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6.5. Impact of Technological Changes on Business Processes ............................................................. 104


6.5.1. Impact of Technological Changes ............................................................................ 104
6.5.2. Change of Business Models .................................................................................... 105
6.5.3. Business Processes affected by Technological Changes ..................................... 106
6.5.4. Impact of Technological Changes on Society ...................................................... 106
6.6. The Business and its environment................................................................................................. 108
6.6.1 Limiting the impact, the organisation has on the environment ............................. 108
6.7. Benefits of Economic Sustainability .............................................................................................. 111
CHAPTER 7: COMPETITIVE FACTORS................................................................................................. 113
7.1 Porter’s Five Forces Model ............................................................................................................ 114
7.2 Porter’s Value Chain ..................................................................................................................... 117
7.2.1. Primary Activities .................................................................................................... 118
7.2.2. Secondary Activities ................................................................................................ 118
7.3 SWOT in a Market and Main Sources of Competitive Advantage ................................................. 120
7.3.1. Competitive Advantage........................................................................................... 121
7.3.2. Strategic Choice ...................................................................................................... 122
7.4 Activities That Affect Competitiveness.......................................................................................... 124
CHAPTER 8 THE FORMAL AND INFORMAL BUSINESS ORGANISATION ................................................ 126
8.1 Informal Organisation and its Relationship with Formal Organisation ......................................... 127
8.1.1. Formal Organisation................................................................................................ 127
8.1.2. Informal Organisation ............................................................................................ 127
8.1.3. Difference between Informal and Formal Organisation ......................................... 128
8.2 Introduction to Committees .......................................................................................................... 130
8.2.1 Definition of a Committee ...................................................................................... 130
8.2.2 Purposes of a Committee........................................................................................ 130
8.2.3 The Rules of Procedures of a Committee ............................................................... 131
8.2.4 Advantages of Committees ..................................................................................... 131
8.2.5 Disadvantages of Committees ................................................................................ 132
8.3 Types of Committees ..................................................................................................................... 133
8.3.1 Types of Committees .............................................................................................. 133
8.4 Roles of the Chair and Secretary of a Committee ......................................................................... 135
8.4.1 Role of the Chairperson .......................................................................................... 135
8.4.2 Role of the Secretary............................................................................................... 136

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CHAPTER 9: BUSINESS ORGANISATION STRUCTURE AND DESIGN ...................................................... 137


9.1 The Different Ways Organisations May Be Structured: ................................................................ 138
9.1.1 Components of Organisation .................................................................................. 138
9.1.2 The Different Types of Formal Business Organisation Structures .......................... 140
9.2 Organisational Structure Concept ................................................................................................. 148
9.2.1 Separation of Ownership and Management........................................................... 148
9.2.2 Separation of Direction and Management ............................................................. 149
9.2.3 Span of Control and Scalar Chain ............................................................................ 149
9,2,4 Tall and Flat Organisations ...................................................................................... 150
9.2.5 Outsourcing and Offshoring .................................................................................... 152
9.2.6 Shared Services Approach....................................................................................... 153
9.3 Characteristics of Strategic, Tactical and Operational Levels ........................................................ 154
9.3.1 Strategic Level ......................................................................................................... 154
9.3.2 Tactical Level ........................................................................................................... 155
9.3.3 Operational Level .................................................................................................... 156
9.4 Centralisation and Decentralisation .............................................................................................. 157
9.4.1 Centralisation ................................................................................................................ 157
9.4.2 Decentralisation ...................................................................................................... 158
9.5 Main Departments in a Business Organisation ............................................................................. 159
9.5.1. Research and Development .................................................................................... 159
9.5.2. Purchasing ............................................................................................................... 160
9.5.3. Production............................................................................................................... 160
9.5.4. Direct Service Provision .......................................................................................... 161
9.5.5. Marketing (to be discussed later) ........................................................................... 161
9.5.6. Administration ........................................................................................................ 162
9.5.7. Finance (to be discussed in Chapter 12) ................................................................. 162
9.6 Role of Marketing in an Organisation ............................................................................................... 163
9.6.1. Marketing Orientation ............................................................................................ 164
9.6.2. Marketing Mix ......................................................................................................... 164
9.6.3. The Relationship of Marketing Plan and the Strategic Plan ................................... 165
CHAPTER 10: ORGANISATIONAL CULTURE IN BUSINESS .................................................................... 166
10.1 Organisational Culture & the Factors shaping the culture ............................................................ 167
10.1.1. Organisation Culture ........................................................................................... 167

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10.1.2. Factors ................................................................................................................. 167


10.2 Contributions made by Writers on Culture ................................................................................... 169
10.2.1. Schein – Determinants of Organisational Culture .............................................. 169
10.2.2. Handy – Four Cultural Stereotypes ..................................................................... 170
10.2.3. Hofstede – International Perspectives on Culture .............................................. 171
CHAPTER 11: GOVERNANCE AND SOCIAL RESPONSIBILITY IN BUSINESS ............................................ 173
11.1 Agency Concept ............................................................................................................................. 174
11.1.1. Ownership and Control ....................................................................................... 174
11.2 Corporate Governance and Social Responsibility.......................................................................... 176
11.2.1. Corporate Governance ........................................................................................ 176
11.2.2. Corporate Social Responsibility (CSR) ................................................................. 177
11.3 Effective Corporate Governance ................................................................................................... 179
11.3.1. The UK Corporate Governance Code 2012 ......................................................... 179
11.3.2. The Board of Directors ........................................................................................ 179
11.3.3. Public Oversight .................................................................................................. 184
11.4 Taking account of Social Responsibility objectives through analysis of needs Social and
Environmental Responsibility of Business Organisations to Stakeholders.................................... 185
11.4.1. Stakeholder Analysis ........................................................................................... 185
11.4.2. Strategies for Social Responsibility ..................................................................... 186
11.4.3. Social and Environmental Responsibilities of Businesses ................................... 186
CHAPTER 12: THE RELATIONSHIP BETWEEN ACCOUNTING AND OTHER BUSINESS FUNCTIONS ........... 187
12.1 Accounting and Other Key Functions Within the Business ........................................................... 188
12.1.1. What is a Budget? ............................................................................................... 188
12.1.2. Accounting and Procurement ............................................................................. 188
12.1.3. Accounting and Production................................................................................. 189
12.1.4. Accounting and Marketing .................................................................................. 190
12.1.5. Effective Service Provision .................................................................................. 191
CHAPTER 13: ACCOUNTING AND FINANCE FUNCTIONS WITHIN BUSINESS ......................................... 192
13.1 Contribution of the Accounting Function ...................................................................................... 193
13.1.1. Accounting Function and the Organisation’s Policies, Procedures and Performance
............................................................................................................................. 194
13.1.2. Recording Financial Information ......................................................................... 194
13.1.3. Codifying and Processing Financial Information ................................................. 194
13.1.4. Preparing Financial Statements .......................................................................... 194

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13.2 Main Management Accounting and Performance Management Functions in Business .............. 196
13.2.1. Recording and Analysing Costs and Revenues .................................................... 197
13.2.2. Providing Management Accounting Information for Decision-Making .............. 197
13.2.3. Planning and Preparing Budgets and Exercising Budgetary Control .................. 198
13.3 Main Finance and Treasury Function ............................................................................................ 199
13.4 Main Audit and Assurance Roles in Business ................................................................................ 201
13.4.1. Internal Audit ...................................................................................................... 201
13.4.2. External Audit...................................................................................................... 202
CHAPTER 14: PRINCIPLES OF LAW AND REGULATION GOVERNING ACCOUNTING AND AUDIT ............ 204
14.1 Basic Legal Requirement of Keeping Records ............................................................................... 205
14.1.1. Legal Requirement of Keeping Records .............................................................. 205
14.1.2. The Legislation .................................................................................................... 205
14.1.3. Accounting Standards ......................................................................................... 206
CHAPTER 15: INTERNAL AND EXTERNAL FINANCIAL INFORMATION .................................................. 208
15.1 Purposes of Financial Information ................................................................................................ 209
15.2 Main Purposes of Management Accounting Reports ................................................................... 211
15.2.1. Cost Schedules .................................................................................................... 211
15.2.2. Budgets ............................................................................................................... 212
15.2.3. Variance Reporting.............................................................................................. 213
CHAPTER 16: FINANCIAL SYSTEMS, PROCEDURES AND RELATED IT APPLICATIONS ............................ 215
16.1 Organisation’s System Requirements ........................................................................................... 216
16.1.1. Main Purposes of Business and Financial Systems ............................................. 216
16.1.2. Requirements to Achieving Objectives and Policies ........................................... 216
16.2 Main Types of Financial Systems Used Within an Organisation ................................................... 218
16.2.1. Accountability Towards Clients’ Money.............................................................. 218
16.2.2. Types of Financial System ................................................................................... 218
16.2.3. Consequences of Ineffective Accounting Systems .............................................. 220
16.3 Improvements to Accounting Systems .......................................................................................... 222
16.3.1. Purchases System Control Procedures ............................................................... 222
16.3.2. Sales System Control Procedures........................................................................ 223
16.3.3. Cash System Control Procedures ........................................................................ 225
16.3.4. Payroll System Control Procedures ..................................................................... 226
16.4 Business Uses of Computers and IT Software Applications .......................................................... 227

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16.4.1. IT Software Application ....................................................................................... 227


16.4.2. Manual vs Automated Accounting ...................................................................... 228
CHAPTER 17: APPLICATION OF INTERNAL CONTROLS ........................................................................ 230
17.1 Internal Controls and Internal Check ............................................................................................ 231
17.1.1. Internal Control Systems (COSO Framework) ..................................................... 231
17.1.2. Control Activities (SPAMSOAP) ........................................................................... 232
17.1.3. Types of Internal Controls ................................................................................... 233
17.1.4 Internal Checks........................................................................................................ 234
17.2 Features of Effective Internal Financial Control Procedures & Their Importance ........................ 236
17.3 Responsibilities of Management for Internal Financial Control .................................................... 238
17.3.1. Responsibilities ................................................................................................... 238
17.4 Types of IT and IS used .................................................................................................................. 240
17.4.1. Different Types of Information Systems ............................................................. 240
17.4.2. Types of Networks .............................................................................................. 243
17.5 Features of Protecting the Security of IT Systems and Software .................................................. 244
17.6 General and Application System Controls ..................................................................................... 246
17.6.1. General Controls ................................................................................................. 246
17.6.2. Application Systems Controls.............................................................................. 247
17.6.3. Contingency Controls .......................................................................................... 248
CHAPTER 18: FRAUD AND FRAUDULENT BEHAVIOUR AND THEIR PREVENTION IN BUSINESS ............. 249
18.1 Circumstances of Arising of Fraud ................................................................................................. 250
18.2 Types of Fraud and Its Implication on Organisations .................................................................... 253
18.2.1. Types of Fraud ..................................................................................................... 253
18.2.2. Implications of Fraud on Organisations .............................................................. 254
18.3 Roles and Duties of Individual Managers in Fraud Detection and Prevention.............................. 255
18.3.1. Management Roles and Responsibilities in Fraud Detection ............................. 255
18.4 Money Laundering ........................................................................................................................ 257
18.5 Recognised Offences Under Money Laundering Regulations ....................................................... 258
18.6 Methods for Detecting, Preventing and Reporting of Money Laundering.................................... 260
CHAPTER 19: LEADERSHIP AND MANAGING INDIVIDUALS AND TEAMS ............................................. 262
19.1 Definition and Distinction of the Terms ........................................................................................ 263
19.1.1. Leadership ........................................................................................................... 263
19.1.2. Management ....................................................................................................... 264

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19.1.3. Supervision .......................................................................................................... 264


19.1.4. Distinction between Leadership, Management and Supervision ....................... 265
19.2 Nature of Management ................................................................................................................. 266
19.2.1 Classical / Scientific Theories of Management – Fayol & Taylor ............................ 266
19.2.2 The Human Relation School – Mayo ....................................................................... 268
19.2.3 The Functions of a Manager – Mintzberg & Drucker.............................................. 269
19.3 Managerial Authority and Responsibility ...................................................................................... 272
19.4 Situational, Functional and Contingency Approaches to Leadership ............................................ 275
19.4.1. John Adair: Action-Centred Leadership Theory .................................................. 275
19.4.2. Fiedler: Contingency Theory ............................................................................... 276
19.4.3. Warren Bennis ..................................................................................................... 277
19.4.4. Heifetz: Dispersed Leadership ............................................................................ 278
19.4.5. John Kotter .......................................................................................................... 278
19.5 Ashridge and Blake and Mouton Models ...................................................................................... 279
19.5.1. Ashridge Management College ........................................................................... 279
19.5.2. Blake and Mouton: The Managerial Grid ............................................................ 280
CHAPTER 20: RECRUITMENT AND SELECTION OF EMPLOYEES ........................................................... 282
20.1 Importance of Effective Recruitment and Selection ..................................................................... 283
20.2 Stages of Recruitment and Selection Process ............................................................................... 285
20.2.1. Step 1: Personnel Planning and Forecasting ...................................................... 285
20.2.2. Step 2: Recruiting ................................................................................................ 286
20.2.3. Step 3: Selecting .................................................................................................. 287
20.3 Roles Involved in Recruitment and Selections of Employees........................................................ 291
20.4 Methods to Meet Recruitment Needs .......................................................................................... 293
20.5 Purposes and Benefits of Diversity in The Human Resource Plan................................................. 295
20.5.1. Diversity Policy .................................................................................................... 295
20.5.2. Equal Opportunity ............................................................................................... 295
20.5.3. Discrimination ..................................................................................................... 296
20.5.4. Steps taken to implement diversity and equal opportunities policy .................. 297
CHAPTER 21: INDIVIDUAL AND GROUP BEHAVIOUR IN BUSINESS ORGANISATIONS ........................... 299
21.1 Main Characteristics of Individual and Group Behaviour.............................................................. 300
21.1.1. Individual Behaviour ........................................................................................... 300
21.1.2. Individual Behaviour at Work ............................................................................. 302

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21.1.3 Group Behaviour ..................................................................................................... 305


21.2 Contributions to Organisational Success ....................................................................................... 306
21.2.1 Contributions of Individuals .................................................................................... 306
21.2.2 Contributions of Teams ........................................................................................... 306
21.3 Approaches to Work...................................................................................................................... 308
CHAPTER 22: TEAM FORMATION, DEVELOPMENT, MANAGEMENT AND MOTIVATION ...................... 309
22.1 Group and Team ............................................................................................................................ 310
22.2 Role of Manager in Building the Team and Developing Individuals Within the Team .................. 312
22.2.1 Belbin’s Team Roles Theory .................................................................................... 312
22.2.2 Tuckman’s Theory of Team Development .............................................................. 314
22.3 Characteristics of Effective and Ineffective Teams ....................................................................... 316
22.3.1. Effective Teams ................................................................................................... 316
22.3.2. Ineffective Teams ................................................................................................ 316
22.3.3. Groupthink .......................................................................................................... 317
22.4 Tools and Techniques That Can Be Used to Build the Team ......................................................... 319
22.4.1. Teambuilding....................................................................................................... 319
22.4.2. Team Effectiveness ............................................................................................. 321
CHAPTER 23: MOTIVATING INDIVIDUALS AND GROUPS .................................................................... 323
23.1 Motivation ..................................................................................................................................... 324
23.2 Content and Process Theories of Motivation ................................................................................ 326
23.2.1. Content and Process Theories ............................................................................ 326
23.2.2. The Maslow’s Hierarchy of Needs Theory (1943) ............................................... 326
23.2.3. The Herzberg’s Two-Factor Theory ..................................................................... 327
23.2.4. The David McClelland Motivation Theory (1953) .................................................... 330
23.2.5. Douglas McGregor’s Theory X and Theory Y....................................................... 331
23.2.6. Victor Vroom’s Expectancy Theory .................................................................... 331
23.3 Type of Intrinsic and Extrinsic Reward .......................................................................................... 333
23.4 Design Reward Systems and Implement to Motivate Teams and Individuals .............................. 335
CHAPTER 24: LEARNING AND TRAINING AT WORK ........................................................................... 338
24.1 Importance of Learning and Development in the Workplace ....................................................... 339
24.1.1. Definition of Learning ......................................................................................... 339
24.1.2. The Importance of Learning ................................................................................ 340
24.2 Learning Process ............................................................................................................................ 341

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24.2.1 The Behaviourist Theories........................................................................................... 341


24.2.2 The Cognitive Approach .......................................................................................... 341
24.2.3 Humanist Learning Perspective .............................................................................. 342
24.3 Role of the Human Resources Department and Individual Managers in Learning Process .......... 345
24.3.1 Roles of Training Manager .......................................................................................... 345
24.3.2 Role of Heads of Department ..................................................................................... 346
24.3.3 Differences in the Roles and Responsibilities of Human Resource Manager and Other
Functional Department .......................................................................................................... 347
24.4 Training and Development Process ............................................................................................... 348
24.4.1. Stage 1: Identifying Needs .................................................................................. 348
24.4.2. Stage 2: Setting Objectives.................................................................................. 349
24.4.3. Stage 3: Programme Design ................................................................................ 349
24.4.4. Stage 4: Delivery (execution of the training) ...................................................... 350
24.4.5. Stage 5: Validation .............................................................................................. 352
24.5 Training, Development and Education .......................................................................................... 354
24.5.1 Training, Development & Education ........................................................................... 354
24.5.2 The Differences & Benefits of Training and Development ......................................... 355
CHAPTER 25: REVIEW AND APPRAISAL OF INDIVIDUAL PERFORMANCE ............................................ 357
25.1 Importance of Performance Assessment ...................................................................................... 358
25.1.1. Importance of Performance Assessment ............................................................ 358
25.1.2. Assessing Performance ....................................................................................... 359
25.2 Performance Appraisal and its Purpose ........................................................................................ 360
25.2.1. Purpose of Performance Appraisal System......................................................... 360
25.3 Process of Performance Appraisal ................................................................................................ 362
25.3.1. Performance Appraisal Process .......................................................................... 362
25.3.2. The Performance Appraisal Interview ................................................................ 362
25.3.3. Giving Feedback .................................................................................................. 364
25.3.4. Appraisal Interview Techniques .......................................................................... 365
25.4 Effective Appraisal ......................................................................................................................... 367
25.4.1. Benefits of Having an Effective Appraisal Process: ............................................. 367
25.4.2. Barriers to Effective Appraisal............................................................................. 367
25.4.3. Overcoming Barriers Performance to Effective Appraisal .................................. 369
CHAPTER 26: PERSONAL EFFECTIVENESS TECHNIQUE ....................................................................... 370

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26.1 Importance of Effective Time Management ................................................................................. 371


26.2 Barriers to Effective Time Management ....................................................................................... 372
26.2.1. Barriers to Effective Time Management ............................................................. 372
26.2.2. Overcoming Barriers to Effective Time Management ........................................ 372
26.2.3. Work Planning ..................................................................................................... 373
26.2.4. Managing People in Relation to Time Management .......................................... 375
26.3 Role of Information Technology in Improving Personal Effectiveness.......................................... 376
26.4 CONSEQUENCES OF INEFFECTIVENESS AT WORK ......................................................................... 378
26.4.1 Ineffectiveness At Work .............................................................................................. 378
26.4.2 Effect of Individual or Team Ineffectiveness on Organisational Performance ....... 379
CHAPTER 27: COMPETENCE FRAMEWORKS AND PERSONAL DEVELOPMENT ..................................... 380
27.1 Competence Framework ............................................................................................................... 381
27.1.1 Competency ................................................................................................................ 381
27.1.2 Types of competencies ............................................................................................... 381
27.2. How A Competence Framework Underpins Professional Development Needs?.......................... 383
27.2.1. Benefits of Professional Competency Framework .............................................. 383
27.2.2. Developing A Competency Framework............................................................... 383
27.3 Personal and Continuous Professional Development ................................................................... 385
27.3.1. Personal Development ........................................................................................ 385
27.3.2. Continuous Professional Development (CPD)..................................................... 385
27.3.3. Management Development ................................................................................ 386
27.3.4. Career Development ........................................................................................... 386
27.4. Purpose and Benefits of Coaching, Mentoring and Counselling ................................................... 387
27.4.1 Coaching .................................................................................................................. 387
27.4.2 Mentoring ............................................................................................................... 387
27.4.3 Counselling .............................................................................................................. 389
27.5. Personal Development Plan .......................................................................................................... 391
CHAPTER 28: CONFLICT ................................................................................................................... 394
28.1 Conflict at Work and its Effect on Personal and Organisational Performance ............................. 395
28.2 Managing Conflict......................................................................................................................... 397
28.2.1. Ways in which Conflict can be Resolved or Referred ......................................... 397
28.2.2. Grievances ........................................................................................................... 399
28.2.3. Discipline ............................................................................................................. 400

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28.2.4. Negotiation ......................................................................................................... 400


CHAPTER 29: COMMUNICATING IN BUSINESS .................................................................................. 402
29.1 Methods of Communication.......................................................................................................... 403
29.1.1. Define Communication ....................................................................................... 403
29.1.2. The Three Main Purposes of Communication in an Organisation .............. 403
29.1.3. Methods of Communication ............................................................................... 403
29.1.4. Factors That Affect the Choice of an Appropriate Medium for Communication 404
29.2 Type of Information and The Purposes for Which It Is Applied at Different Levels ...................... 405
29.3 Attributes of Good Quality Information ........................................................................................ 408
29.4 Simple Communication Model ...................................................................................................... 409
29.5 Formal and Informal Communication ........................................................................................... 411
29.5.1 Formal Communication........................................................................................... 411
29.5.2 Informal Communication ........................................................................................ 413
29.6 Consequences of Ineffective Communication ............................................................................... 414
29.6.1 Ineffective communication ..................................................................................... 414
29.6.2 Effective Communication ........................................................................................ 415
29.7 Barriers of Effective Communication ............................................................................................ 416
29.7.1 Communication Barriers ......................................................................................... 416
29.7.2 Overcoming Barriers ............................................................................................... 418
29.8 Main Patterns of Communication ................................................................................................. 421
CHAPTER 30: FUNDAMENTAL PRINCIPLES OF ETHICAL BEHAVIOUR ................................................... 424
30.1 Importance of Business Ethics ....................................................................................................... 425
30.2 Principles from IFAC (IESBA) Code of Ethics .................................................................................. 428
30.2.1. Integrity ............................................................................................................... 428
30.2.2. Objectivity ........................................................................................................... 429
30.2.3. Professional Competence and Due Care............................................................. 429
30.2.4. Confidentiality ..................................................................................................... 430
30.2.5. Professional Behaviour ....................................................................................... 430
30.3 Organisational Values .................................................................................................................... 432
30.3.1. Organisational Values ......................................................................................... 433
30.4 Concept of Acting in the Public Interest ........................................................................................ 435
CHAPTER 31: THE ROLE OF REGULATORY AND PROFESSIONAL BODIES .............................................. 437
31.1 Purpose of Codes of Ethics and Conduct....................................................................................... 438

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ACCA-AB: ACCOUNTING IN BUSINESS

31.2 Ethical Awareness and Unethical Behaviour Punishment............................................................. 440


31.2.1. Regulatory Bodies ............................................................................................... 440
31.2.2. Reporting Unethical Conduct .............................................................................. 443
31.3 Difference Between Profession and Other Occupations............................................................... 444
31.4 Role of the Accountant .................................................................................................................. 446
CHAPTER 32: CORPORATE CODES OF ETHICS, ETHICAL CONFLICTS AND DILEMMAS ........................... 447
32.1 Corporate Codes of Ethics ............................................................................................................. 448
32.1.1. Definition of Corporate Code of Ethics ............................................................... 448
32.1.2. Contents of Corporate Code of Ethics................................................................. 448
32.2 Benefits of A Corporate Code of Ethics ......................................................................................... 451
CHAPTER 33: ETHICAL CONFLICTS AND DILEMMAS ........................................................................... 452
33.1 Ethical Conflicts ............................................................................................................................. 453
33.1.1 Professional Accountants in Business ..................................................................... 453
33.1.2 Professional Accountants in Public Practice ........................................................... 454
33.2 Main Threats to Ethical Behaviour ................................................................................................ 455
33.3 Ethical Dilemmas ........................................................................................................................... 457
33.4 Main Safeguards Against Ethical Threats and Dilemmas .............................................................. 459

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

Learning Outcomes

At the end of the chapter, you should be able to:

TLO A1a. Define ‘business organisations’ and explain why they are formed.

TLO A1b. Describe common features of business organisations.

TLO A1c. Outline how business organisations differ.

TLO A1d. List the industrial and commercial sectors in which business organisations operate.

TLO A1e. Identify the different types of business organisation and their main characteristics:

i) Commercial
ii) Not-for-profit
iii) Public sector
iv) Non-governmental organisations
v) Cooperatives

Why are these learning outcomes important?

We are going to start by looking at what business organisations are. At the end of this lesson, even if you
do not have any previous experience of working in a job, you should be able to understand the features of
a business organisation, and the different types of organisations that carry on a business.

Antecedent and Descendant Topics

Antecedent topics in other papers to this lesson are derived from:

1. MA1
a. Section A1 Nature of Business Organization and Accounting Systems
As this lesson covers fundamental understanding of organizations, most accounting subjects would require
an understanding of organizations in general

Immediate Descendant topics in other papers to this lesson would be:

1. FFA
a. Section A1 The scope and purpose of, financial statements for external reporting

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

1.1 What Are Business Organisations and Why Are They Formed
Learning Outcome (ACCA Study Guide Area A, Topic A1a & A1d):
Define ‘business organisations’ and explain why they are formed.
List the industrial and commercial sectors in which business organisations operate.

1.1.1. Definition of a Business Organisation


A business organization is a collection of persons working to achieve a common objective through
structured and coordinated activities. The purpose of a business organisation is to carry on a business.

There is a difference between a business and a business organisation:

 A business is an operation for making goods or providing services, usually with the aim of making
a profit. One person acting on his or her own can run a business.
 A business organisation exists when two or more people act together to carry on a business.

Check understanding

Which of the following is not a characteristic of a small business?

A. independently owned and operated


B. dominant in its field
C. meets certain standards in terms of size
D. all of the above

1.1.2 Why Do Organisation Exist?


Organisation are formed to overcome the limitations of individuals. By creating an organisation, an
individual is able to achieve more effectively and efficiently. For example: A single person can operate a
small business, such as a local shop. But in most businesses, there is too much work or too many tasks for
one person.

Benefits Description
Business Size A collective of people working together may increase the size of the business
Specialization Experts in what they do. Tasks can be performed at faster rate and with less
errors
Synergy Maximizing individuals strength and minimizing weaknesses when working
together so total output would increase as compared when working alone.
Combined Resources People may come together in business to share their resources and
knowledge.
Satisfy Social Needs Humans are social beings and are happiest if they belong to a group. Working
in groups help satisfy the individual social needs through interaction.

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CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

1.1.3 Sectors in Which Business Organisation Operate


Business activities can be grouped into different categories, or sectors. It is useful to identify the sector
that a business organisation belongs to because businesses in the same sector often face similar
opportunities and problems or threats.

A commonly used guide to classify sectors for business organisations is the Standard Industrial
Classification (UK).

Example of business sector classification:

Industry / Sector Activity


Manufacturing Obtaining raw materials and, by using labour, processes and technology,
they are turned into a product.

Extractive/Raw materials Mining, processing and refining raw materials.

Energy Transforming one resource (wind) into another resource (electricity).

Intellectual Production Creating intellectual property.

Service Hotels, colleges, universities, banking, advertising and etc.

Check understanding

A person who organizes, manages and assumes the risks of starting and operating a business to make
a profit is called a(n):

A. Entrepreneur
B. Investor
C. Speculator
D. Small business person

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

1.2 Common Features and difference of Business Organisations


Learning Outcome (ACCA Study Guide Area A, Topic A1b & A1c):
Describe common features of business organisations.
Outline how business organisations differ.

1.2.1. Common Features of a Business Organisation


Diagram 1.2.1 (i) Common Features of a Business Organisation

Diagram 1.2.1 (ii) Examples of Common Features

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

1.2.2. How Do Business Organisations Differ?


Business organisations differ for even those that are established for the same purpose and under the same
flagship. The common features that help distinguish the different business organisations are usually
viewed from the following features:

Differing Feature Description


Size Size can be measured by the amount of income earned, the amount of assets
owned or the number of employees.
Legal status and control Unlimited companies or Limited companies.
Ownership and funding Business organisations may be owned and financed by one or more
individuals, by other organisations (banks), or by the government.

Objectives While most business organizations aim to make a profit (private-owned),


others are operated to provide services to the public (Government-
owned/public sector) not – for – profit.
Activities Farming, manufacturing, mining, telecommunications and retailing.
These are the core business of the organizations whether for profit or as non-
profit organizations.

Technology What technology is used in the company? An organisation like a business


solution provider (for example, Microsoft) will high be hi-technology
orientated whereas a minimart will have low technology orientation.

Culture Different business organizations may have different cultures Formal or


informal

Check understanding

1. The simplest form of business ownership is a:

A. Proprietorship.
B. Partnership.
C. Corporation.
D. Cooperative.

2. A ___________ is a business with two or more owners:

A. Corporation.
B. Conglomerate.
C. Partnership.
D. Public corporation.

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

1.3 Different Types of Business Organisations


Learning Outcome (ACCA Study Guide Area A, Topic A1e):
Identify the different types of business organisation and their main characteristics:

Commercial organisations:

Limited (2 types) Unlimited (2 types)

Private Limited Public limited Sole Trader Partnerships


Size Size vary from big to Size limited to the
small law of the country
where it operates in

Legal status The company is a


legally separated
entity (from its
shareholders)

Ownership Shareholders Public/anyone Owned by business


and funding Limited liability Limited liability partners
May be general
partnership, limited
partnership and
limited liability
partnership (LLP)
Objectives Profit making Profit making Profit making Profit making

Control Managers control Board of Owner controls


Directors/Managers
control

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CHAPTER 1: THE PURPOSE AND TYPES OF BUSINESS ORGANISATION

Other organisations:

Not-for-profit Public Sector NGOs Cooperatives


Size

Legal status

Ownership Funding from The government Funding by grants from Owned by its own
and funding membership or public is the government or donations workers or
fees, conduct owner. communities who take
revenue Funding from a share of profit
generating taxes and
activities, and charges
donations
Objectives Provide service To provide a NGOs are not-for-profit
to the less public service entities, aim of NGOs is
fortunate in the related to social and/or
societies political needs

Check understanding

1. Which of the following is an example of a non-profit organization?

A. Sunway wildlife Park


B. RHB Bank
C. YMCA
D. Air Malindo

2. The most effective form of business organization for raising capital is the:

A. joint venture
B. partnership
C. corporation
D. proprietorship

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

Learning Outcomes

At the end of the chapter, you should be able to:

TLO A2a. Define stakeholders and explain the agency relationship in business and how it may vary
in different types of business organisation.

TLO A2b. Define internal, connected and external stakeholders and explain their impact on the
organisation.

TLO A2c. Identify the main stakeholder groups and the objectives of each group.

TLO A2d. Explain how the different stakeholder groups interact and how their objectives may
conflict with one another.

TLO A2e. Compare the power and influence of various stakeholder groups and how their needs
should be accounted for, such as under the Mendelow framework.

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

2.1 Stakeholders and the Agency Relationship in Business


Learning Outcome (ACCA Study Guide Area A, Topic A2a):
Define stakeholders and explain the agency relationship in business and how it may vary in different types
of business organisation.

2.1.1. Definition of Stakeholders


Johnson, Scholes and Whittington (JSW) define a stakeholder as:

“Individuals or group of individuals who are affected by an organisation’s activities, and who in turn, affects
the way an organisation operates.”

2.1.2. The Concept of Agency


Diagram 2.1.2. The Concept of Agency

The relationship seems straightforward, but managers may also act on their own interest instead of the
shareholder’s interest.

Therefore, another independent agent is required to verify and validate the managers’ work to ensure that
the manager has the best interest of the shareholders in mind. This second agent is usually the external
auditor.

Check understanding

___________ is concerned with the branch of economics relating the behavior of principals and their
agents.

A. Financial Management
B. Profit maximization
C. Agency Theory
D. Corporate Social Responsibility

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

2.1.3. Agents in Profit and Not-For-Profit Organisations

Check understanding

Joe and Mike showed that ______________________can assure themselves that the ___________will
make optimal decisions only if appropriate incentives are given and only if they _______________ are
monitored.

A. Principals; agents; agents


B. Agents; principals; principals
C. Principals; agents; principals
D. Agents; principals; agents

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CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

2.2 Internal, Connected and External Stakeholder


Learning Outcome (ACCA Study Guide Area A, Topic A2b, A2c& A2d):
Define internal, connected and external stakeholders and explain their impact on the organisation.
Identify the main stakeholder groups and the objectives of each group.
Explain how the different stakeholder groups interact and how their objectives may conflict with one
another.

2.2.1. Categories of Stakeholders


Diagram 2.2.1 Categories of Stakeholders

Check understanding

Determine which of the following stakeholder is an external stakeholder?

a. The government
b. Employees
c. Institutional investors

2.2.2. Impact of Stakeholders on Organisations


Stakeholder can impact on organisations as they can influence in the following areas:

 They are conduits of information in and out of the organisation.


 They have power to affect the decision of the organisation.
 They can limit an organisation’s choices of strategies (long term action) to pursue.
 They embody culture that can affect how the organisation is run.
 They determine the success of the implementation of strategies by supporting them or otherwise.

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CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

2.2.3. Objectives of Stakeholders


Diagram 2.2.3 Objectives (end result) of stakeholders

2.2.4. Interaction of Different Stakeholder Groups and Conflicting Objectives


Stakeholders have their respective objectives and some of these objectives may be conflicting. Therefore,
organisation has to know how to deal with these differences to ensure a balance in the organisation and all
stakeholders are satisfied.

The following are some of the potential conflicts of interest among the different stakeholder groups:

Employees and Employees would want high salary and wages with less work but this may be
managers in conflict with managers who are charged with the responsibility to minimise
cost and maximise productivity when managing employees.

Customers and Customers would naturally want cheap products and services, which are of
shareholders the highest quality, but this would mean lower profit margins, and this is in
contradiction with the shareholders’ interest, which is high profit.

Managers and Managers would want to be free to do what they want and not be controlled
shareholders but shareholders would want more control to ensure that their interest is
protected.

General Public and The general public would want to be all organisations to have a good sense of
shareholders corporate social responsibility (CSR) that takes care of the environment and
the community at large, but this may cost the organisations more money,
which will reduce margins and eat into the shareholders’ dividends.

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

Check understanding

For the following stakeholders, determine the conflict of objectives between them:

A. Shareholders VS Managers

B. Shareholders VS Employees

C. Customers VS Shareholders

D. Shareholders VS Organisation

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 2: THE STAKEHOLDERS IN BUSINESS ORGANISATION

2.3 Power and Influence of Various Stakeholder Groups


Learning Outcome (ACCA Study Guide Area A, Topic A2e):
Compare the power and influence of various stakeholder groups and how their needs should be accounted
for, such as under the Mendelow framework.

2.3.1. Mendelow’s Stakeholder Mapping Matrix


Organisations do not have unlimited resources. Nor are organisations able to make everybody happy. It is
important that an organisation uses the right amount of resources and focus on making the right
stakeholders happy. Using the Mendelow’s Matrix, an organisation is able to classify the stakeholders:

Diagram 2.3.1. Mendelow’s Matrix

NOTE: To use Mendelow’s Matrix effectively, it must be used as frequently as necessary, and the
organisation’s strategy must be adjusted accordingly. This is because stakeholders can move between the
quadrants!

For example, non-unionised employees may be in the “High interest, Low power” quadrant, but if they
suddenly join trade union, they will move to the “High interest, High power” quadrant, and the organisation
will have to adjust its strategy accordingly.

Check understanding

1. Stakeholders with low power and low interest should be ignored (True / False)

2. What should organizations seek to do with stakeholders who have high interest and low power?
A. Do Nothing
B. keep Informed
C. Keep Satisfied
D. Invest Maximum Effort

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
BUSINESS
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING BUSINESS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO A3a. Explain how the political system and government policy affect the organisation.

TLO A3b. Describe the source of legal authority, including supra-national bodies, national and
regional governments.

TLO A3c. Explain how the law protects the employee and the implications of employment and
legislation for the manager and the organisation.

TLO A3d. Identify the principles of data protection and security.

TLO A3e. Explain how the law promotes and protects health and safety in the workplace.

TLO A3f. Recognise the responsibility of the individual and organisation for compliance with laws
on data protection, security and health and safety.

TLO A3g. Outline principles of consumer protection such as sale of goods and simple contract.

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
BUSINESS
INTRODUCTION

The External Environment & The Organisation

In the following Chapter 3 – 8, we will dive into how an organisation will interact the external environment
which it operates in. The PESTLE analysis method is used to analyse the external business environment.

P Political Factors Chapter 3

Macro-Economic Factors Chapter 4


E
Micro-Economic Factors Chapter 5

S Social and Demographic Factors Chapter 6

T Technological Factors Chapter 6

L Legal Factors Chapter 3

E Environmental Factors Chapter 6

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
BUSINESS
3.1 Political System and Government Policy
Learning Outcome (ACCA Study Guide Area A, Topic A3a & A3b):
Explain how the political system and government policy affect the organisation.
Describe the source of legal authority, including supra-national bodies, national and regional governments.

Political factors: usually mean “Government policy”, which is basically the behaviour of the government of
the country, when dealing with particular issues.

Example of Government policy: Price control (Maximum legal price), Tax Policies, Foreign Trade Policies.

Legal Factors: The Legal Environment defines the confines of how businesses should be conducted in a
country, in simple terms, “setting the rules of the game.” Everyone should be playing by the same rules.
For example, the most basic legal requirement for every enterprise is to apply for a licence and operates
with the license which has to be renewed.

This set of rules is called the “Legal Framework” of a country. E.g.: Company Act.

 Legal framework normally includes the Company Acts, Data protection Act, Health and safety at
work Act, Environmental Protection Act and etc.

3.1.1. Sources of Legal Authority


Regional government Each of these regional or state governments has laws that govern their
jurisdictional areas.

National government: The federal government sets laws for a country.

Supranational bodies Due to globalisation of trade many supranational organisations such as the
European Union (EU) and the World Trade Organisation (WTO) have
emerged to govern and regulate trade amongst member countries.

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CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
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3.1.2. Effect of Political and Legal Factors on Companies
The political and legal environment:

Diagram 3.1.2. Effect of political and legal factors on companies

Capacity expansion The government can reduce taxes and provide incentives.
Demand The government can be a buyer where they can increase the demand.
Divestments and Investments Government may encourage investments in certain sectors by giving
incentives.
Emerging industries Government can encourage growth by giving grants and encourage
research and development.
Tariff and import quotas Increasing tariffs and reduce import quotas, to protect local industries
from foreign competition.

The possibility or chance that government behaviour may severely damage a business is called political
risk. Hence, business may take measures to reduce political risk. (give some examples of political risk).

Check understanding

Government policies can only affect economic conditions to a mild extent (TRUE/FALSE).

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
BUSINESS
3.1.3. Influencing the Government
As the government has the power to influence and change the business environment, it is the interest of
companies to influence government policies. This can be done by understanding the interest and the power
of the government in issues pertaining to the business environment. Thus, creating a 2-way relationship
between private sector and public sector.

The following are some of the actions a company may take to influence government policies:
Area Description
Participation of the The company may want to involve the government in its decision-making
government in process especially if it is a large company (Berhad). Politicians as non-executive
decisions directors (NEDs).
Influencing the Companies or organisation may indirectly influence the government by
taxpayers influencing the taxpayers, the general public. Pressures from the general public
may force the government to change its policies.
Lobby groups Organisations may also employ lobby groups (organisations paid to represent
special interests in the government) to present their case to ministers.

Check understanding

A company hires gangsters to threaten certain members of the government to give the company additional
privileges. This is an (acceptable / unacceptable) method of influencing government.

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ACCA-AB: ACCOUNTING IN BUSINESS
CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
BUSINESS
3.2 The Law and the Protection of the Employee
Learning Outcome (ACCA Study Guide Area A, Topic A3c & A3f):
Explain how the law protects the employee and the implications of employment and legislation for the
manager and the organisation.
Recognise the responsibility of the individual and organisation for compliance with laws on security

3.2.1. Employee Protection from Discrimination (Equal Opportunities)


Employment legislations ensure an organisation treats all its employees equally. Discrimination is illegal
and occurs when employees are unfairly judged on factors like race, age, gender and marital status. Clear
set of policies against discrimination should be established by management.

EXAM NOTE: It is important to understand the concept of equity. Equity is the idea that you will get the right
reward/consequence for your actions. For example, if you work harder than someone else, you should be
paid more. Equity is similar to fairness.

Any action by an organisation that does not provide enough equity to employees is discrimination. No
employees should suffer from discrimination by the organisation in four stages namely: interviewing,
Selection, at work or during employment and termination.

Check understanding

Jessica and Paul, with the same amount of experience, are doing the same job, with the same duties. Paul
receives a lower remuneration than Jessica. This (is / is not) discrimination.

3.2.2. Dismissal
There are three categories of dismissal:

1. Termination of contract by employer


2. The conclusion of a fixed-term contract without renewal
3. Resignation by the employee where the employer has breached the contract of employment

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CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
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Types of Dismissals (Further details will be discussed in ACCA F4)

 Constructive Dismissal

Constructive dismissal happens when the employer’s behaviour has become so intolerable that the
employee has no option but to resign.

The employee will then end his/her obligation to the employer and the employee will have the right
to make claims of unfair dismissal or wrongful dismissal against the employer in court.

 Unfair Dismissal

Unfair dismissal happens when an employee is terminated by the employer contrary to the
requirements of the Employment Rights Act 1996. It is automatically unfair for an employer to dismiss
an employee, regardless of length of service.

Fair reasons for dismissal (fair dismissal) include:

o A reason related to the employee's conduct and capability or qualifications for the job.
o The employee's job was redundant.
o The employee had reached normal retirement age in accordance with the Employment
Equality (Age) Regulations 2006.
o A statutory duty or restriction prohibited (stop) the employment being continued.
o Some other substantial/very good reasons of a kind which justifies the dismissal.
 Wrongful dismissal

Wrongful dismissal happens when a contract of employment has been terminated by the employer
where it breaches one or more terms and conditions of the contract of employment, or a statutory
provision in Employment law.

3.2.3. Resignation
A resignation is when an employee gives up or quits his or her office or position.

Individuals may resign from an organisation due to either avoidable or unavoidable reasons:

Avoidable Interpersonal conflicts, unsuitable job responsibilities and salary, to


name a few.
Unavoidable Relocation of a spouse, medical reasons( chronic diseases )and death.

An exit interview is usually conducted when an employee leaves to ascertain the reasons so that if it is
avoidable, efforts should be made to retain the employee. If any changes need to be implemented to
improve the existing systems of the organisation, it should be promptly executed.

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CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
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When an employee resigns, the managers need to ensure that the period of notice is observed and whether
there is a need to compensate the employee in lieu of any unclaimed benefits (e.g.: annual leaves). If the
employee wants to leave immediately without serving the notice period, there may be damages that the
employee has to pay. Terms and conditions of such notice and compensation or damages are usually
contained in the contract of employment.

Proper records need to be filed and the payroll department has to be informed accordingly.

3.2.4. Redundancy
Redundancy is when the office or position of the employee is no longer needed or useful.

This is dismissal under two conditions:

1. Cessation of the employer’s business.


2. Cessation or the expectation of cessation of a particular work that the employee is employed for.

When an employee is made redundant, the employee is legally entitled to compensation. He or she may
also be granted first choice of jobs in the event the business performance improves. However, an employee
is not entitled to redundancy payment IF:

1. Employer has made another offer of suitable alternative employment (same rank) but employee
rejects it unreasonably. E.g. He/she doesn’t want to work in a different branch
2. Employee is going to retire in at least two years’ time or is already enjoying pension (> 65). E.g.
He/she is 63 years’ old
3. Employee is supposed to be dismissed without notice because of his or her conducte.g.eg; bad
behaviour). E.g.: He/she is perpetually late for work after numerous reminders

Redundancies are definitely going to cost employers but the impact may be reduced (costs) by adopting
the following measures or actions:

 Last in First out (LIFO) (E.g.: Those with relatively shorter length of employment are the one who
will be made redundant)
 Retire staff who are over the retirement age
 Early retirements for those approaching retirement age
 Restrict recruitment
 Dismiss part – time and fixed term contract staff
 Offer redeployment and re – training

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3.2.5. Retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life.

Some organisations encourage early retirement and policies on who should retire and when they will retire
needs to be clearly spell out. This is to ensure that the organisation is not accused of ageism. Retirement
age is listed in the employment law. For The UK, the revised retirement age is 65.

The following are some of the reasons why organisations would encourage early retirement:

 Gives the younger employees opportunity to be promoted


 Cheaper than redundancies
 Too many old employees may cause imbalance

Check understanding

Thomas has rejected an offer to change to another position in the company after receiving training, for a
lower rank and remuneration, after his current position had been made redundant. Thomas is (entitled /
not entitled) to redundancy payment.

3.2.6. Responsibility of Employer and Employee

Employer  Establish policies of good practice.


 Encourage and reward compliance by employees.
Employee  Take responsibility for own health and safety, and security.
 Exert a certain degree of care and responsibility whilst working.

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CHAPTER 3: EXTERNAL ENVIRONMENT: POLITICAL AND LEGAL FACTORS AFFFECTING
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3.3 Principles of Data Protection and Security
Learning Outcome (ACCA Study Guide Area A, Topic A2d & A3f):
Identify the principles of data protection and security.
Recognise the responsibility of the individual and organisation for compliance with laws on data protection

Data Protection Legislation concerns data of individuals held by organisations has to be protected against
misuse and secured against loss or theft where privacy of individuals has to be protected.

Privacy: A condition of being free from being observed or disturbed by other people.

3.3.1 Data Protection Legislations


Data protection legislations protect individuals against misuse of his or her personal information held by
organisations.

The law requires personal and official records to be kept private and confidential. Therefore, data collected
of individuals has to be protected against misuse, such as identity thefts and harassment. Example: data
held by an organisation (SunwayTES) regarding customers may include information about their age,
address, contact number, etc…

The Data Protection Act 1998 has two main aims:

1. To protect individual privacy, and


2. To harmonise data protection legislations, so that there is free flow of personal data amongst the
EU states.

The data protection act only protects data subjects which are individuals. Organisations are not protected
by this Act (For example, if Coca-Cola’s secret recipe is leaked, it cannot use the act to retrieve or destroy
the data).

Check understanding

The Data Protection Act 1998 covers the data on _____ in a particular organisation. It asserts
that the data provided must be accurate, adequate and relevant.
A. Individuals
B. Organisation
C. Individuals and organisation
D. Government

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3.3.2 Underlying Principles
The Data Protection Act 1998, UK, has 8 underlying principles whereby Personal data shall be:

1. Processed fairly and lawfully and, in particular, shall not be processed.


2. Processed in accordance with the rights of data subjects under the Act. (e.g.: students/consumer)
3. Obtained only for one or more specified and lawful purposes, and shall not be further processed
in any manner incompatible with that purpose or those purposes.
4. Adequate, relevant and not excessive in relation to the purpose or purposes for which they are
processed. Example: A student’s details were obtained when he or her enrolled.
5. Accurate and, where necessary, kept up to date (the latest), as it will affect the data subject.
Example: When a student cleared their papers, their results will be updated.
6. Personal data processed for any purpose or purposes shall not be kept for longer than is necessary
for that purpose or those purposes. Example: Once a student completed their examination in all
their papers, personal data should be archived. (no longer active)
7. Appropriate technical and organizational measures shall be taken against unauthorised and
against accidental loss or destruction of, or damage to, personal data.
Example: secure systems such as firewalls to protect personal data and to disclose information
about a customer only after obtaining his or her consent/agreement/approval.
8. Shall not be transferred to a country or territory outside the European Economic Area (EU), unless
that country or territory ensures an adequate level of protection for the rights and freedoms of
data subjects in relation to the processing of personal data.

Rights of the data subject if data about the data subject is lost, destructed, or disclosed
unauthorised by data user include:
i) Seek compensation.
ii) Apply to court to put right the data or wipe off (delete) the data.
iii) Apply to access (username and password) the personal data.
iv) Sue the data user for damages or distress.

3.3.3 Data Security


Data and information is an item at risk of security breach. It can be damaged, lost or stolen in the same
way that equipment and valuables can. People may seek to sabotage or steal information from an
organisation for:

 Monetary or sale value;


 To gain competitive advantage, or
 Pure nuisance value.

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3.3.4 Threats to Data
The main types of risks/threats:
 Deliberate physical attacks: Theft or damage to the installation.
 Malicious damage: Hackers (unauthorised access), malware (virus – ridden software) and tampering
of data.
 Fraudulent attacks: To conduct fraudulent transactions by altering/changing data and programmes.
 Loss of confidentiality: Espionage/spy.

Check understanding

The following concerns Data Protection legislations, EXCEPT:


A. Openness and transparency
B. Good practice in obtaining, using and securing data
C. Fair treatment of employees’ welfare
D. An opportunity to rectify issues when an individual has cause for complaint

3.3.5 Responsibility of Employer and Employee


Employer  Maintain confidentiality of information.
 Protect information from unauthorised access/hackers.

Employee  Comply with all legislations or policies established by the organisation.


 Do not obstruct the implementation of policies and procedures for data protection,
security and health and safety (co-operate with employer).
 Do not gain unauthorised access to any confidential information.

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3.4 How the Law promotes and Protects Health and Safety in the Workplace
Learning Outcome (ACCA Study Guide Area A, Topic A3e & A3f):
Explain how the law promotes and protects health and safety in the workplace.
Recognise the responsibility of the individual and organisation for compliance with laws on health and
safety

3.4.1 The Importance of Health and Safety


Health, safety and well-being of employees at work are important for several reasons:

Diagram 3.4.1. Importance of Health and Safety

3.4.2 Health and Safety Legislations


The legislations in the UK provide the legal framework to promote, stimulate and encourage high standards
of health and safety. It sets out the general duties which employers have towards employees and members
of the public and employees have to themselves and to each other. The following scope define the Health
and Safety at the work place:

 The Health and Safety at Work Act (HSWA) 1974; and


 Management of Health and Safety at Work Regulations 1999.

The regulation was introduced to reinforce the Health and safety at Work Act 1974. It places duties on
employers and employees including those who are clients, designers, principal contractors or other
contractors. What it aims at is that employers are to look out what the risk are and take sensible measures
to tackle them.

Check understanding

The Health and safety at work Act 1974 is primarily concerns with duties and responsibilities of employer,
employee and some key stakeholders. (TRUE/FALSE)

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3.4.3 Responsibility of Employer and Employee
Diagram 3.4.3 Responsibility of Employer and Employee

Check understanding

The employers of organisations have significant responsibilities towards the employees’ health and
safety. However, that would not include:
A. Encouraging safe working practices and procedures.
B. Clearly identifying employees who are at safety risk.
C. Ensuring that employees are accident-free at all times.
D. Clearly communicating safety policy, practices and procedures.

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3.5 Principles of Consumer Protection
Learning Outcome (ACCA Study Guide Area A, Topic A3g):
Outline principles of consumer protection such as sale of goods and simple contract.

3.5.1. Contracts
A contract is a legally binding agreement between two or more parties.

Elements of a contract:
Agreement: Between the parties where there is an offer and an acceptance.

Offer: : By one party made to another.

Acceptance: : By the party whom the offer was made.

Consideration: : Money or some value used for the exchange of the goods or service.

Therefore, for a contract to be binding there must be an agreement between the parties where one makes
an offer to another party who then accepts, with some consideration passing between them. Contracts
need not be written and it can be spoken. It can even be implied by behaviour.

A breach of contract happens when one party fails to carry out his part of the agreement.

Contracts are an important part of a business as it is the foundation of how businesses are conducted. In
the process of sales of goods and services, a contract is effected as the customer makes an offer to buy the
goods or services and the supplier accepts the offer and money is exchanged for the good or service as a
consideration.

Check understanding

1. John promises to give Clark his car if Clark will give him tuition to pass the ACCA exam. A binding
contract has (created / not been created).

EXAM NOTE: Contracts may be written in any way the parties involved like! This is to allow flexibility in the
contract and allow the contract to reflect the complex business environment. In the event of a breach, it
is the duty of the courts to decide what was really meant by the terms and conditions in the contract, and
whether that understanding had been broken.

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Check understanding

2. Consideration, an essential element in the formation of a valid contract, may be identified as:
A. The need for fairness in the contract
B. The intention of the parties to be legally bound
C. A balance in the terms of the agreement
D. The 'bargain' element of a contract

3.5.2. Sales of Goods


In the UK, the sale of goods is governed by the Sale of Goods Act 1979. The sale of goods is subject to the
following provisions:

Time of performance E.g.: when a customer orders a


it is important that the goods must be delivered at a stipulated birthday cake for 20/1/18. The
time and in the case of the supply of the goods for business or latest the cake must be ready to be
industrial use, there is no need to express the time, the time is collected is at 10am 20/1/18.( one
implied. off )

Seller’s Title/Right E.g.: the son cannot sell the father’s


A seller cannot sell something that does not belong to him. It is car because the son does not have
implied in the contract that the seller has the right to sell the the title to sell.
goods at the time of the sale.
Description of Goods E.g.: when the customer buy
If a purchase is made on a basis of a description of the goods and online, what he/she sells on the
after the goods has been delivered and it does not correspond to website must telly with the goods
the initial description, the contract is said to be breached by the he/she receives.
seller.
Satisfactory Quality E.g.: before goods are sold, it
The goods sold must be of satisfactory quality where it must meet should be inspected for:
the standard that a reasonable person would regard as
satisfactory, taking account of the price, description and any other  Fitness for all the purpose for
which the goods are commonly
relevant factors. supplied.
 Appearance and finishing.
 Freedom from minor defects.

Fitness of goods for a disclosed purpose E.g.: when the buyer is interested
If the buyer expressly or impliedly makes his purpose for the goods to buy a house who has aged
known to the seller, the seller is obliged to make sure the goods parents, the property agent must
provided are fit for that purpose, if it is reasonable for the buyer take the aged parents into
to rely on the seller's expertise. (s14(3) Sale of Goods Act 1979) consideration when making
enquiries of houses.

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CHAPTER 4: MACROECONOMIC FACTORS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO A4a. Define macroeconomic policy and explain its objectives.

TLO A4b. Explain the main determinants of the level of business activity in the economy and how
variations in the level of business activity affect individuals, households and businesses.

TLO A4c. Explain the impact of economic issues on the individual, the household and the business.

i) Inflation
ii) Unemployment
iii) Stagnation
iv) International payments disequilibrium

TLO A4d. Describe the main types of economic policy that may be implemented by government and
supra-national bodies to maximise economic welfare.

TLO A4e. Recognise the impact of fiscal and monetary policy measures on the individual, the household
and businesses.

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4.1 Background and Structure of Macro-Economy


Learning Outcome (ACCA Study Guide Area A, Topic A4a):
Define macroeconomic policy and explain its objectives.

Economics concerns the production, consumption and distribution of wealth, of goods and services of a
country.

The study of the economic factors helps businesses identify opportunities and threats and to anticipate
changes in supply and demand for its goods and services.

There are two broad aspects of economics studies:

 Microeconomics: Examines the economic behaviour of individual consumers, firms and industries.
 Macroeconomics: Examines the economy of the country as a whole. It examines the factors that
affect the aggregate demand of goods and services in an economy.

Objectives of Macroeconomic Policy

The macroeconomic policy focuses on achieving the economic goals of economic growth, full employment,
price stability, and balance-of-payment equilibrium.

4.1.1 Structure and Objective of the Economy


1. Income and Expenditure flow

Before you can examine the above topic, you must understand what a closed economy is. It is a scenario
where the participants in the economy of a country only trade inside the country. No economic activity
enters or leaves the country from outside. Also, there is no government interference.

The second concept you need to understand is supply. Supply is created when people work and create
goods and services (labour), which they then offer to potential buyers.

On the other side is the concept of demand. Demand is created when people want to buy goods and
services.

In a closed economy, People in the country buy goods and services from other people in the country, and
pay them with money, which is the representation of value. These suppliers that have received money will
then use that money to buy other goods and services, becoming buyers.

This can be illustrated by the following diagram of Circular Flow of Income, which uses firms and
households as economic participants:

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Therefore, in a closed economy the:

 Amount of expenditure should be equal to the total income of households; and


 Total sales value of the goods produced should be equal to the expenditure on goods and services
produced by firms.

In other words: Value of Supply = Value of Demand

The factors of production of a country (assets from which supply is produced) are:

 Land: Produces Rent


 Capital: Produces Interest
 Entrepreneurship: Produces Profit
 Labour: Produces Wages

2. Withdrawal and Injections into the circular flow of income

The above illustration is based on a closed economy but in real life, there are injections and withdrawals
from the economic system.

The injections can be in the form of:

 Government spending (G)


 Investment spending by firms (I)
 Export income (X)

The withdrawals from the system can be:

 Taxations (T)
 Household savings (S)
 Import expenditure (M)

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Therefore, a different diagram of Circular Flow of Income showing withdrawals and injections can be
illustrated as follows.

3. Measure of Economy Growth

Gross Domestic Product (GDP)

The size of a national economy is usually measured as its GDP. GDP is the amount of national output by
government agencies or firms, which produce goods and services.

There are several ways to measure GDP and two of them which are closely related in this syllabus are the
income approach and the expenditure approach.

 The Income Approach

GDP = R + i + P + W +SA

Where, R = Rents
i = Interests
P = Profits
W = Wages
SA = Statistical adjustments (corporate income taxes, dividends, undistributed corporate
profits)

Notice that the R, i, P and W are the outputs of the factors of production.

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 The Expenditure Approach

GDP = C + I+ G +(X-M) = Aggregate Demand(AD)

Where, C = Consumption
I = Investment by firms
G = Government spending
X = Exports
M = Imports

Gross National Product (GNP)

It is the amount of national output by government agencies or firms, which produce goods and services,
plus any income earned by residents from overseas investments, minus income earned within the domestic
economy by overseas residents. This means that it measures what the citizens of a country produced in
and outside of its borders of the country.

Technically, GNP = GDP + remittance in – remittance out

Some countries use GDP and some use GNP as a measure of its economic growth but the trend is moving
towards GDP as companies are becoming more global and it is very difficult to track the output of such
companies.

4.1.2 Factors which Affect the Economy


There are 2 factor which affect the economy:

1. Aggregate supply and aggregate demand


2. Multiplier in National Economy

Aggregate Demand (AD)

It is the total amount of goods and services demanded in the economy at a given overall price level and in
a given time period. It is represented by this formula:

C I G X-M AD

Consumer Investment Government Export - Aggregate


expenditure by firm Spending Import Demand

The AD is actually the GDP using the expenditure approach of measure.


Usually there is a negative relationship between aggregate demand and price levels.

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Aggregate Supply (AS)

It is the total supply of goods and services produced within an economy at a given overall price level in a
given time period.

Rising prices will signal businesses to expand production (SS) to meet a higher level of aggregate demand
(DD). Therefore, there should be a positive correlation between aggregate supply (quantity) and price
levels.

In the short run, aggregate supply responds to higher demand (and prices) by bringing more inputs into the
production process and increasing utilisation of current inputs. In the long run, however, aggregate supply
is not affected by the price level and is driven only by improvements in productivity and efficiency.

Example: Let’s say at the moment fried banana fritters (pisang goreng) sells for RM0.20 per piece. That
price is quite low, so not many people will sell pisang goreng. However, If the people are willing to pay RM5
per piece, then more people will start selling pisang goreng!

However, there is a limit to the resources available to make pisang goreng, so in the long run, there is a
limit to how much can be produced.

There are several types of multiplier effect, such as Money Multiplier and Fiscal Multiplier.

Money Multiplier

This is usually dictated through the Monetary Policy of governments and it increases a country's money
supply resulted from how much banks are allowed to lend. The size of the multiplier effect depends on the
percentage of deposits that banks are required to hold as reserves.

For example, if a bank is required to hold 10% of their money that they received from savings by
households, as reserves, then the banks will be able to lend out 90% of the money. This 90% lent out will
then be invested into creating more goods and services which in turn will also generate more
expenditure and consumption which will spur the economy. The money generated will then go back into
the banking system as savings which will in turn be lent out again. This goes on until all funds has been
exhausted.

Therefore, in theory when a bank lends out its first 90% of the money it holds, it will eventually multiply. In
other words, money is used to create more money and is calculated by dividing total bank deposits by the
reserve requirement.

The multiplier in the example given then is 1/10% = 10 times. So if the bank has $10 million deposits, it will
eventually pump a total of $100 million into the economy.

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Fiscal Multiplier

The Fiscal Multiplier has a similar effect on economic activities as the Money Multiplier where it will spur
economic activities.

This is usually done through the Fiscal Policies of the government. In times of economic downturn, the
government can encourage economic growth by pumping money into the economic system by spending
on government projects.

For example, when the government wants to build a highway, construction companies which are ‘granted’
the project will hire employees and buy raw materials…, and this will increase salaries for employees, and
income for suppliers. This will in turn boost other businesses that are related to the construction suppliers
and other businesses that employees buy from. All these will then lead to more employment.

EXAM NOTE: These multipliers don’t always work as effectively in real life due to efficiency barriers like
corruption, low lending rates by banks, diversion of funds to personal accounts, and etc.

Check understanding

Determine which of the following statements are true during a recession.

A. A rise in the rate of inflation


B. A fall in the level of national output
C. An improvement in trade balance
D. A drop in the level of unemployment

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4.1.3 Determination of National Income


1. Aggregate demand and supply equilibrium

An ideal equilibrium level of national income (Y) is where aggregate supply equals aggregate demand at
full employment. This means that in times of full employment, total consumption is met by total supply of
goods and services.

National income (Y)= Aggregate supply = Aggregate demand at full employment

It also means that aggregate demand at current price levels (P) is exactly sufficient to encourage firms to
produce the output capacity where the country’s resources are fully employed.

EXAM NOTE: Remember


that in this scenario, prices
are NOT CONTROLLED by
the suppliers, but by
consumers. So when the
above paragraph mentions
“sufficient price level”, it
means that consumer are
paying enough that
suppliers will supply a
steady, unchanged amount

2. Actual and Potential Economic Growth (Inflationary/Deflationary Gap)

Potential economic growth (Potential GDP) is the rate at which the economy would grow if all resources
(factors of production) were utilised. The growth is determined by the capacity of the economy (supply
side) instead of the actual spending (demand side). Therefore, its increase is determined by how resources
are deployed and increases in the productivity of such resources.

Actual economic growth (Actual GDP) is the annual percentage increase in the national output and it usually
fluctuates in accordance with the trade cycle. In the long run, actual economic growth is determined by
two factors, the growth in potential output (aggregate supply) and growth in aggregate demand.

Output Gap
The output gap is the difference between Potential GDP and the Actual GDP.

IF:
Potential GDP (AS) < Actual GDP (AD) = Inflationary gap

Potential GDP (AS) > Actual GDP (AD) = Deflationary gap

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Inflationary Gaps (DD > SS)

It is the situation where demand exceeds the productive capabilities of the economy at full employment.
It is when equilibrium income exceeds (>) the full employment income. It can also be defined as when the
Actual GDP, exceeds the Potential GDP.

This can be illustrated by an example where country X produces maximum output of 100 units at full
employment at $10 per unit. Therefore, the full employment income should be $1,000. However, in times
of inflationary gap, total income of the country is $1,200 (equilibrium income). This creates an excess of
$200 which will cause the prices to go up to $12 per unit as there are more money chasing after limited
goods.

This usually occurs when there is significant foreign investment, and there is insufficient growth in supply.

Check understanding

Inflationary gap happens when all resources are fully utilised. (TRUE/FALSE)

Deflationary Gap (Recessionary Gap) (SS > DD)

It is a situation where, there is unemployment of resources. The equilibrium level of income is below the
level of full employment income. Therefore, the aggregate demand will have to shift upwards to produce
full employment income.

Using the same example above, a deflationary gap happens when the equilibrium income is lower ($900)
than the full employment income ($1000). Which means prices have to drop, else there will be an excess
output of $100. Each unit has to be sold at $9 instead of $10 because there are too many goods with
insufficient demand.

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4.2 Main Determinants of the Level of Business Activity in the Economy


Learning Outcome (ACCA Study Guide Area A, Topic A4b):
Explain the main determinants of the level of business activity in the economy and how variations in the
level of business activity affect individuals, households and businesses.

4.2.1 Main Determinants of Business Activity

Diagram 4.2.1 Main Determinants of Business Activity

1. Government Policies

Governments have big influence on business, and all governments have these main 4 macroeconomic
objectives, to improve the livelihood of their citizens:

Objectives Explanations
Economic Increases in GDP usually boosts confidence levels which increases business activity.
growth This will also cause unemployment to reduce.
Full Supply of labour = demand of labour. If government policy is not effective and the
employment rate of unemployment is high, general business activities will be depressed.
Price stability If prices are unstable, and if inflation rates are high, costs of doing business will be
high and this may also reduce business activities.
Balance-of- If exports are much higher than imports, this causes a trade surplus and it may cause
payment inflation, increasing the cost of doing business. Government would try to achieve
equilibrium equilibrium as a payment deficit or surplus would have consequences.
Balance of payment deficit: Imports/payments > exports/receipts
Balance of payment surplus: Exports/Receipts > imports/payments

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Note: In business activity, every determinant is co-related, and all can be linked to the economic growth.
The effect of positive growth is that individuals and household will have reduced unemployment rate, and
an increased income, whereas levels of business activity will increase too.

2. Aggregate Demand

The higher the aggregate demand the higher the business activities in the economy of the country. The
aggregate demand can be affected when any of the elements in the equation changes (Consumption,
Investment, Government Spending, Balance of Payments).

3. Confidence

High consumer confidence would generate greater demand (and investments from other countries),
leading to an economic growth. Conversely low confidence in the economic activities may be due to factors
such as political instability, hence investments and consumer spending will decrease as firms and
individuals would prefer to be cautious and would prefer to save for the future.

4. Availability of Capital

Business activities will increase when capital is easily available to firms. Availability of capital depends on
the cost of raising it. If interest rates are low, the cost of capital is low. Therefore, if the government reduces
the interest rates it will stimulate business activities.

5. Use of Resources (latest technology/IT/INTERNET)

How resources are used will also determine the level of business activity. For example, the use of latest
technology to improve and enhance efficiency and effectiveness of resource usage would see increased
productivity and output.

6. Exchange Rate Movements

A weak currency will make a country’s export cheaper and would stimulate business activities. However, it
may also cause imports to be expensive. This will have an effect on the balance of payment, leading to the
change in aggregate demand. On the other hand, a strong exchange rate will lead to a balance of payment
deficit, where there is an outflow of funds from a country. When balance of payment is equilibrium, there
will be an increase in economic growth.

7. Employment level

This refers to the total amount of employable people being employed. High unemployment levels will affect
aggregate demand as income will drop causing demand and consumption to decrease. An increase in
employment level will lead to an increase in economic growth.

8. Price stability

This refers to the level of price stability of goods and services over time and it affects the inflation rates. If
prices are unstable, it affects the predictability of financial forecasts and it can affect the level of
consumption and costs. Stable price will increase confidence, which will also lead to an increase in
economic growth.

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4.2.2 Business Cycle

The level of business activity can be generally illustrated with a graph that shows the level of output over
time. The graph is typical of many economies as it follows a trend marked by various points:

Diagram 4.2.2 Business Cycle

 Recession: Demand for goods and services fall and firms may reduce output.
 Depression: Economy is in deep recession, policies to boost the economy.
 Expansion: Economic activity eventually picks up and business improves. Unemployment also
reduce.
 Peak: Economy expand still stagnated and levels off at the peak. Eventually demand will reduce
again and this will cause the cycle to start all over again.

Check understanding

1. Which of the following marks the beginning of a contraction in the business cycle?

A. Peak
B. Recession
C. Depression
D. Expansion

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Economic Indicators:

The performance of the government in managing the economy may be done by looking at three indicators:

Indicators Explanation Examples


Leading Indicators that happen before any real Interest rates may be a signal that economy
indicators changes happen in the economy. activity may start to pick up as demand
increases.

Coincident Indicators that happen currently of the As economic conditions improve salary and
indicators changes in the economy. wages levels also improve.

Lagging Indicators that confirm the economic Unemployment rates. Redundancies happen
indicators conditions. when economic situations are really pressing.

Check understanding

2. A period of expansion and contraction of aggregate economic activity measured by real GDP is
called:

A. A coincident indicator
B. A business cycle
C. A recession
D. An economic indicator

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4.3. Impact of Economic Issues


Learning Outcome (ACCA Study Guide Area A, Topic A4c):
Explain the impact of economic issues on the individual, the household and the business.

4.3.1. Inflation
Inflation is when prices increase and the purchasing value or PURCHASING POWER of money decreases.
The country’s Consumer Price Index (CPI) indicates inflation.

Causes of inflation

Causes Explanation
Demand-pull inflation Prices increases because supply not able to meet demand( DD > SS ).

Cost Push inflation As cost of production increases, so price increases to maintain a reasonable
margin.

Imported inflation When imported raw materials are used, prices will increase when cost of the
imported materials have increased( this is likely caused by weak currency ).

Monetary inflation This is usually caused by policies to increase the money supply in the
economy by reducing the interest rates and reducing tax rates.

Expectations effect When firms expect that Trade Unions will negotiate an increase in pay,
therefore costs are expected to increase so price will increase.

Impact of Inflation:

Who Impact
Individuals The price of goods and services individuals purchase to maintain their lifestyles will
increase. If an individual’s income does not correspondingly increase, then he will
not be able to maintain the same lifestyle.

Households Similarly, households whose incomes have not kept up pace with inflation will not
be able to afford same lifestyle going forward.

Businesses Inflation corresponds to an increase in the cost of raw materials they need to
produce their goods or services. If they are not able to pass this cost on to their
customers, then their profitability will decrease.

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Other effects of high inflation:

 Distribution of wealth becomes uneven as the poor get poorer and the rich become richer.
 It causes uncertainty, as businesses do not know how high costs will increase.
 Stifles business investments.
 Poor and fixed income earners such as pensioners, suffers.

Controlling Inflation Rates (solution):

Governments usually control inflation by increasing the interest rate, which will cause the following to
happen:

 People save more money to earn higher interest and this reduces the consumption expenditure.
 Companies find it more expensive to raise funds to generate more goods and services, and this in
turn leads to the decrease in the demand for, as well as the output of, goods and services.

Check understanding

Price increases to make goods and services available to those willing to pay the increased price. Which
type of inflation is this?
A. Imported inflation
B. Monetary inflation
C. Demand pull inflation
D. Expectation effect

4.3.2. Unemployment
Unemployment is a situation where the abled is not able to find jobs and it is measured by the rate of
unemployment.

Unemployment rates of a country would indicate the percentage of people in the country who are
employable but are not employed. It is said to exist when the supply exceeds the demand of labour.

Rate of unemployment = No. of unemployed/ Total workforce X 100%

Types of Unemployment

The six types or factors of unemployment listed below will always exist as zero per cent unemployment
rates can never be achieved.

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Table 4.3.2 Types of unemployment:

Types Description Example


Cyclical or Demand- This occurs when the supply of labour is During economy recession,
deficient greater than the demand for labour. The millions of people are unable to
unemployment aggregate demand cannot create find work because jobs are
employment opportunities for those willing simply not available.
and able to work.

Seasonal Seasonal unemployment happens in sectors The demand for fruit pickers will
unemployment of the economy that depends on seasons of be low during wintertime
the year. because is not a harvesting
season.

Frictional This refers to the period during which able Jessica quit her job and is due to
unemployment and willing individuals have left one job and start work in two weeks’ time.
are searching for another. This also occurs when fresh
graduates are in search of jobs.

Structural The nature of goods and services, which an If the skill set of an individual
unemployment industry produces, will change over the working in that industry does
course of time, which in turn changes the not change accordingly, then he
structure of the industry. During the 1980s, or she will no longer be able to
workers lose their job because of the work in that industry.
introduction of new technology to replace
manual labour.

Technological This is a form of structural unemployment. For example, jobs such as call
Unemployment When a new technology is employed, staff centres have shifted to Eastern
may be downsized and middle management Europe, India and South East
many be de-layered. Certain functions of Asia, causing unemployment in
the business can also be outsourced. this industry of developed
nations like The UK.

Real wage It occurs normally in highly unionised Jobs in the car industry have
unemployment industries. Wages are kept artificially high reduced quite significantly due
by ways of strike action and others. This to strong union demand for high
causes employers to shy away from wages.
employing many workers.

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Impact of Unemployment

Who Impact
Individuals Willing and able individuals are not utilised and there
will be increased in inequality of distribution of
income.

Households If bread winner loses job, the family will suffer.

Businesses Waste of human resources.

Check understanding

Which TWO of the following types of unemployment might be involved if the coal industry in the UK
collapses as a result of individuals and firms switching over to oil, gas and other sources of energy?

A. Demand deficient Unemployment


B. Frictional Unemployment
C. Real Wage Unemployment
D. Structural Unemployment

Reducing unemployment (solutions)

Ways and means to reduce unemployment rates include:

 Reduce the power of Trade Unions to solve issues of real wage unemployment.
 Retraining schemes to solve issues of structural and frictional unemployment.
 Improve the availability and communication of employment information for those who are looking
for jobs by setting up Job Centres and improve the communication channels, using the Internet.
 Financial Support for relocations.

4.3.3. Stagnation
Stagnation

Economic stagnation, often called simply stagnation, is a prolonged period of slow economic growth or
declining GDP. It is often described as a state of inactivity. For example, economic growth of less than 1 per
cent per year is considered to be stagnation.

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Stagflation

Theoretically in times of declining GDP, consumption and investments will decrease and this will cause
prices to go down. However, in some economies, prices do not drop and instead inflation happens.

This may be caused by market imperfections and imported inflation.

EXAM NOTE: What causes stagflation? Many variables are involved, but usually it involves a badly suffering
economy, with little foreign exchange. This leads to severe reduction in available resources, so the citizens
scramble to buy essential goods, pushing prices higher even while GDP is dropping.

Impact of Stagnation:

Who Impact
Individuals The declining output of goods and services results in reduced demand for labour by
businesses. This will typically translate into reduced job opportunities and incomes.

Household Given that the main income earner(s)( bread winner )will have either no income or
stagnant income during these periods, which when coupled with rising prices for
goods and services, will typically lead to lower expenditure on goods and services.

Businesses Stagflation is again undesirable. The declining output of an economy is normally


accompanied by declining demand for goods and services overall. In addition, inflation
will increase the price of raw materials businesses need to produce goods and
services. This typically leads to many businesses having to go into cost-cutting
exercises such as reducing the number of their employees.

Encouraging Economic Growth


To stimulate economic growth, governments use policies such as reducing the tax rate which is a fiscal
policy. This increases the disposable income in the hands of individuals and households, which in turn leads
to greater spending. The increase in spending leads to an increase in production or output from a business,
which in turn leads to growth.

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4.3.4. International Payments Disequilibrium


An international payment disequilibrium happens when there is a deficit or surplus in the balance of
payment and it usually refers to the deficit or surplus of the Current Account. The balance of payments
account is actually made up of three accounts (and when added up equals to the balance of payment
accounts.)

Account Description
1.Current account This account concerns with trade in goods and services, incomes and
transfer.

2.Capital account This account deals with public sector inflows and outflows such as loans to
or from other countries or from World bank.
3.Financial account This account handles non – governmental capital inflow and outflow as
well as government foreign currency reserves.

Balance-of-Payment Deficit

A balance-of-payment deficit or trade deficit in the economy happens where the value of imports is greater
than exports.

Means or policies to reduce the trade deficit:

Policies Methods
Expenditure-reducing  By shrinking the economy and this will reduce expenditure on
policies imported goods.
 Reducing demand of imported goods and services.
 Increasing interest rates to increase savings and reduce expenditure on
imported goods.
Expenditure-switching  Import controls such as tariffs or quotas to make it more difficult or
policies expensive to import goods.
 Boost exports by reducing export prices and giving credit to importers
of local goods.
 Lowering the exchange rate and this will cause exports to be cheaper
and imports more expensive.

Balance-of-Payment Surplus

A balance-of-payment surplus or trade surplus in the economy happens where the value of exports is
greater than imports.

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A surplus international payment has the following impacts:

Who Impact
Individuals This higher demand for the goods and services leads to greater opportunities for
individuals in both jobs and income.

Households Again, the higher income of the main wage earner typically translates into greater
expenditure on goods and services.

Businesses The greater demand for their goods and services typically translates into greater
profitability. This typically leads to business expanding or increasing the goods and
services they offer in turn leading to greater employment.

A balance-of-payment deficit will have the opposite effect of a balance-of-payment surplus.

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4.4. Main Types of Economic Policy


Learning Outcome (ACCA Study Guide Area A, Topic A4d):
Describe the main types of economic policy that may be implemented by government and supra-national
bodies to maximise economic welfare.

4.4.1 Economic Policies Implemented by Government


Governments typically have to perform a balancing act when attempting to maximise economic welfare,
as they will not be able to achieve all four macroeconomics objectives simultaneously: economic growth,
price stability, low unemployment and balance of payments.

Policy Examples( example: supermarkets, car manufacturing )


 Cost of finance for individual households and business
Overall economic Policy
 Taxation on individual income and corporate profits

 Protectionism vs Free Trade


 Grant, incentives, sponsorships
Industry Policy
 Regulations on investor protection such as the company law
 Entry barriers( for potential or new companies )

Environmental and  Distribution( different channels of distribution )


Infrastructure Policy

 Workplace regulation
Social Policy
 Labour supply, skill and education

 Trade promotion, export credits


Foreign Policy  EU and WTO obligations
 Import and Export policies

Each policy they implement will benefit some groups of society while ‘harming’ others. For example, raising
interest rates will benefit individuals and businesses that wish to save some part of their income. On the
other hand, it will harm individuals and businesses that need to borrow money.

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To maximise economic welfare, there are always trade-offs amongst the four macro – economic objectives
as explained below:

Trade – offs Description

Growth and Low As the economy grows, greater employment opportunities result in greater
Inflation incomes for individuals and households and they also tend to spend more.
This results in greater amounts of money chasing goods and services, which
in turn causes their prices to rise and demand-pull inflation happens.

Growth and Balance-of- In times of economic growth, individuals and households tend to purchase
Payment Equilibrium more goods and services, but very often, the demand for imported goods is
more than the demand for local goods. This will lead to balance of payment
deficit in the economy.

Low Unemployment An inverse relationship will always exist between these two factors.
and Low Inflation Governments typically have to accept that lowering one will result in an
increase in the other.

To reduce the unemployment rate, governments have to create more


demand for goods and services. This in turn will need businesses to produce
more, which will require additional labour. However, this will lead to more
money chasing goods and services which will in turn lead to higher prices,
thus increasing the inflation rate.

Check understanding

1. Which of the following is not an economic argument for protectionism?

A. To protect infant industries


B. To increase the level of imports
C. To protect strategic industries
D. To improve the balance of payments

2. A tariff is:

A. A tax on domestic goods and services


B. A tax on foreign goods and services
C. A limit on the number of foreign goods entering a country
D. A limit on the number of foreign goods leaving a county

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4.4.2 Supra-national Bodies


Diagram 4.4.2. Roles of Supranational Bodies

A policy setter as well as a dispute – settler for its members’ mutual benefits

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4.5. Impact of Fiscal and Monetary Policy Measures

Learning Outcome (ACCA Study Guide Area A, Topic A4d):


Recognise the impact of fiscal and monetary policy measures on the individual, the household and
businesses.

There are two methods governments use to shape the condition of their domestic economies. These tools
are Fiscal Policy and Monetary Policy.

4.5.1 Fiscal Policy


Fiscal Policy refers to the actions governments take in setting their level and type of public expenditure and
determining how this level of expenditure is to be spent.

Government has to balance between its expenditure and income.

Budget Deficit

When the government spends more than its income, it is said to be running a budget deficit. This happens
when governments want to close a deflationary gap in the economy where the government tries to
stimulate the economy by boosting aggregate demand through government spending.

This is also called an Expansionary Policy and it can be done by increasing government expenditures and
lowering taxes. Government expenditure can be financed through borrowings (PSNCR). Individuals and
firms have more money to spend and invest because they pay fewer taxes. Business will also grow as
demand increases and businesses that are doing business with the government will also benefit.

Budget Surplus

When the government’s income is higher than its expenditure, it is said to be running a budget surplus.
This usually happens during an economic boom and it may cause inflation. Therefore, the government has
to intervene to slow down growth and control increasing prices. There is usually a negative PSNCR or Public
Sector Debt Repayment (PSDR). This is called the Contractionary Policy where the government will increase
taxes and reduce government spending.

Therefore, in general or conclusion, Fiscal Policy is about how the government balances its income (taxes)
and expenditure (government spending) with the objective of ensuring the four macroeconomic objectives
are met.

For example, a country is undergoing a period of recession. The government decides to stimulate the
economy using a Fiscal Multiplier by spending on large infrastructure projects. These include building
several highways. It is believed that the spending will result in an increase in business activity, which in turn
will create additional employment, Increased employment will result in greater incomes and expenditure
amongst individuals and households leading to greater demand for goods and services.

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Taxation

Taxes are collected from individuals and businesses and it is a revenue stream for the government. Taxes
are also used to account for social costs and to help redistribute wealth in the economy.

Tax Terminologies

Tax Description

Direct taxes Levied on income and profits or wealth of individuals and businesses and
collected directly from them.

Indirect taxes Collected indirectly through intermediaries:

 Specific tax: Fixed sum per unit sold (quantity/volume)


 Ad Valorem tax: Fixed percentage of price of good. (Value added tax)(value )

Regressive taxes Takes a fixed amount, therefore it takes a higher proportion of the lower income
group ($100 of income $20,000 vs $100 of income $500)

Proportional taxes Takes a same proportion regardless of income level (20% of income $200,000 vs
20% of income $10,000 per annum)

Progressive taxes Takes a higher percentage of the higher income compared to the lower income
(20% on income $200,000 vs 1% on income $2,000)

Check understanding

1. In a regressive tax system:

A. The amount of tax paid increases with income


B. The average rate of tax decreases with less income
C. The average rate of tax falls as income increases
D. The average rate of tax is constant as income increases

2. A budget deficit is likely to:

A. Boost aggregate demand


B. Lead to less import spending
C. Lead to falling prices
D. Leads to more unemployment

EXAM NOTE: So, remember that fiscal policy has to do with taxation and government expenditure.

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4.5.2 Monetary policy


Monetary Policy involves controlling the supply of level of money in the economy by influencing interest
rates, exchange rates and availability of credit.

Interest Rates

It attempts to achieve it by influencing demand by either raising or lowering interest rates.

For example, effects when interest rates are raised:

 Individuals and Households: Save more and spend less.


 Businesses: Expensive to borrow to expand.
 Exports: Cost of exports become higher as interest rates will keep the value of the currency higher.
 Currency investors: Will attract foreign investment in currency.

Exchange Rates

Governments can influence or peg the exchange rate to a certain level.

If exchange rates fall:

 Exports become cheaper and more will buy from the country and this will increase the flow of
money into the country.
 Imports will become more expensive and this will reduce the purchase of imported goods, which
will curb the outflow of money out of the country.
 A fall in the exchange rate will therefore be good for domestic businesses as it encourages exports
and discourages imports.

Availability of Credit

Governments may enforce certain regulations to encourage spending when easy credit can be obtained.

For example, if the regulation for the application of credit cards is relaxed, credit becomes available to
more people who may not have the power to spend initially but with easy credit, they will add on to the
demand pool.

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Learning Outcomes

At the end of the chapter, you should be able to:

TLO A5a. Define the concept of demand and supply for goods and services.

TLO A5b. Explain elasticity of demand and the impact of substitute and complementary goods.

TLO A5c. Explain the economic behaviour of costs in the short and long term.

TLO A5d. Define perfect, competition, oligopoly, monopolistic competition and monopoly.

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5.1 Concept of Demand and Supply


Learning Outcome (ACCA Study Guide Area A, Topic A5a):
Define the concept of demand and supply for goods and services.

Microeconomics examines the economic behaviour of individual consumers, firms and industries.

Individual consumers and firms interact in a market where potential buyers and potential sellers of goods
and services come together for the purpose of exchange. This process is called the market mechanism
where demand and supply interact.

This interaction concludes by virtue of an agreement of a price. Therefore, price is the amount agreeable
by both buyer and seller in the exchange of the good.

EXAM NOTE: You must approach this chapter with the assumption that prices are NOT SET BY THE
PRODUCER. The prices are set by the consumer; how much she is willing to pay for a good or service.

Just because the seller sets a price, doesn’t mean people will buy it!

5.1.1. Demand
Definition of Demand

Demand is the quantity of an item that a buyer would buy, or attempt to buy, if the price of the item
were at a certain level.

The Law of Demand

Other things remaining constant, the higher the price of good, the smaller is the quantity demanded; and
vice versa.

The law of demand can be illustrated using the demand curve and the demand curve usually slopes
downwards from left to right.

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Changes to the Demand Curve


Any changes in demand are usually caused by changes in price and it is represented by movements along
the demand curve. The demand curve is stationary and does not change (shift) unless one of the following
factors affects it.

The changes in the demand curve can be illustrated as follows:

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Factors Illustration
Increase of buyers’ income If the buyers’ income increases, the price of a good may be
relatively cheaper, and this will increase the demand even if the
price did not change.
Increase in the price of Substitute goods, which are goods that can replace the existing
substitutes goods. When the prices Pepsi increases, demand of it will
decrease. Buyers will switch to Coca-Cola, its closest substitute,
increasing its demand.
Decrease in the price on Complementary goods, which are goods that are used together.
complements When the prices of a travel packages decreases, demand for it will
increases, complementary goods such as travel insurance will
increase as the products are used together.

Product becomes more When a product is deemed to be more fashionable, the demand
fashionable for the products may increase even though the price did not
change.
Price of product expected to When a product is expected to increase its price, the demand for
increase the products now may increase even though the price did not
change. This is because if the products are not purchased now it
will be more costly.
(f) Marketing activities of the When a product is priced at $100, a buyer may not buy the
organisation makes the product because the buyer may perceive the product to be
product more desirable considered undesirable. The buyer may perceive the value of the
product to be lower than $100. However, if the organisation
engages in marketing activities, such as a celebrity endorsement
of the product, the buyer may change their perception of the
value of the product and perceives the value of the product to be
worth $100 or more and therefore purchases it.

It is then expected that the demand curve would shift to the left if the reverse situations would happen
to the above factors.

Check understanding

Which best describes a demand curve?

A. The quantity consumers would like to buy in an ideal world


B. The quantity consumers are willing to sell
C. The quantity consumers are willing and able to buy at each and every income all other things
unchanged
D. The quantity consumers are willing and able to buy if the price of the item were at a certain level.

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5.1.2. Supply
Definition of Supply

Supply is the quantity of an item that existing or would-be suppliers want to produce for the market at
a given price.

The Law of Supply

Other things remaining constant, the higher the price of a good, the greater is the quantity supplied or
produced and vice versa.

The law of supply can be illustrated using the supply curve and the supply curve usually slopes upwards
from left to right.

Changes to the Supply Curve


Any changes in supply are usually caused by changes in price and movements along the supply curve
representing it. The supply curve is stationary and does not change unless one of the following factors
affects it.

The changes in the supply curve can be illustrated as follows:

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Factors Illustration
Costs of making the goods If the costs increase then there will be a disincentive to make the
product for the supplier, therefore quantity of goods produced will
reduce at a given price.

Changes in technology When there is new technology in making the products, which reduces
the costs of production, there will be an incentive to make more of the
product.

Price of related goods When price of beef increases it will be supplied more and the supply
of leather( quantity )also increases.

Expected future price If the prices are expected to increase for a particular good, the supply
or quantity of the good may decrease now, as it is better to produce in
future.

Other factors Bad weather can cause agriculture products to be produced less.

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5.1.3. Price Equilibrium


Price equilibrium is reached when the price of a good at which the quantity businesses are willing to supply
and the quantity demanded by consumers are the same.

The following chart illustrates the price equilibrium:

At the price of $10, there will be sufficient buyers to demand for 130 items (that is at Point B), but suppliers
will not be willing to supply at this low price and only 30 items (Point A) will be supplied. Equilibrium is not
reached and buyers will have to pay more, otherwise the suppliers will not want to supply. It will come to a
point where both parties will be agreeable to a price that will allow both demand and supply to meet (Point
C) for 80 items at an equilibrium price of $18.

5.1.4. Price Regulations

Governments often set maximum prices to control inflation and minimum prices to curb price wars. This
will have an effect on the price equilibrium.

If the maximum price set is higher than the equilibrium price, there will be no effect. If the maximum price
is lower than the equilibrium price, there will be more demand than supply. This may create a black market
for goods where buyers are forced to buy at a higher price.

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5.1.5. Consumer Surplus and Producer Surplus

Consumer surplus is the difference between the total amount that consumers are willing and able to pay
for a good or service and the total amount that they actually do pay.

For example, a person would pay $20 (actually paid) for an item despite the fact that he knows that the
item will go on sale tomorrow, selling at $15 (able to pay). The extra $5 he has paid is the consumer surplus.

Producer surplus is the difference between the total amount that the producer is willing to accept for the
good or service and the total amount that he actually receives.

For example, a producer would be willing to sell his products at $100 (actually received) despite the fact
that consumers are willing to pay $130 (if willing.) for the products. The $30 less that he is getting is the
producer surplus.

This can be illustrated with the following diagram:

5.1.6. Concept of Utility/satisfaction


Utility is the satisfaction or benefit derived by a person from the consumption of a good or service.

Suppliers need to understand utility, so as to make the right number of product in order to maximise utility.
When this is achieved, customer satisfaction is maximized, and they will be willing to pay a high price for
the product, maximising profit.

Total utility is the total satisfaction or benefit that a person gets from spending their income and
consuming goods or services.

Marginal utility is the satisfaction gained (or loss) from an increase (or decrease) in the consumption of
one unit of a good or service.

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The law of diminishing marginal utility refers to the fact that the first unit of consumption of a good or
service yields more utility than the second and subsequent units.

The concept of utility can be illustrated using the following graph:

Based on the graph it can be seen that the total utility will come to a point where it will peak and
subsequently it will drop. Once it starts dropping, each new consumption of an extra unit actually creates
a dissatisfaction based on the marginal utility curve.

To further illustrate the concept of utility, imagine a person eating 2 pieces of fried chicken and then eating
the 3rd piece of fried chicken. The total utility refers to the satisfaction he gains from all the 3 pieces, while
the marginal utility refers to the satisfaction he gains from eating an additional piece of chicken. It
diminishes/reduces as an individual consumes more.

Using the same example, the satisfaction, a person gets from the first piece of fried chicken will be highest,
and when he eats the second piece, the satisfaction will not be as great as the first piece. As he takes on
the 3rd piece, the level of satisfaction will even be lower than the 2nd piece.

As illustrated in the example, a person will probably not be able to eat the 5th or the 6th piece of fried
chicken. Any more will create dissatisfaction.

Check understanding

According to the law of diminishing marginal utility:

A. Utility is at a maximum with the first unit


B. Increasing units of consumption increase the marginal utility
C. Marginal product will fall as more units are consumed
D. Total utility will rise at a falling rate as more units are consumed

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Maximising Utility
A consumer in deciding which goods or services to purchase will usually choose the product which provides
the greatest utility to purchase based on his limited resources, which is money. This is true when choosing
only one product. However, if the consumer wishes to consume more than one product at the same time,
there will be a problem.

Utility maximising rule:

The consumer’s income should be allocated so that the last dollar spent on each product will yield the
same amount of extra marginal utility.

A formula can be used to determine the units to be used based on the Utility Maximising Rule.

Marginal Utility of Product A Marginal Utility of Product B


=
Price of A Price of B

To illustrate this, let’s say a person has only income of $10 and he needs to choose the number of units to
consume for two products: Product A at $1 per unit and Product B at $2 per unit. The following table
illustrates the respective marginal utility of each unit of consumption.

Product A ($1) Product B ($2)


Unit MU MU/Price Unit MU MU/Price
A1 10 10 B1 24 12
A2 8 8 B2 20 10
A3 7 7 B3 18 9
A4 6 6 B4 16 8

MU = Marginal Utility

Based on the above table the rational thing to do is to consume B1 first as it provides a marginal utility of
12 which is higher than 10 for A1, so one unit of B1 is first purchased at $2. After consuming B1 there is a
balance of $8 and this is then spent on A1 and B2 as it provides the same MU/Price of 10. Money spent on
these two products will be $3.

There is then a balance of $5 and the next priority would be B3 as it provides a MU/Price of 9. This takes
up $2. The balance of $3 is now spent on A2 and B4 which exhausts remaining money.

Therefore, the total units consumed of Product A is 2 and Product B is 4.

Marginal Utility of Product A Marginal Utility of Product B


=
Price of A Price of B

Therefore, based on the above illustration: 8/1 = 16/2,


which indicates that 2 units of A and 4 units of B.

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5.2. Elasticity of Demand


Learning Outcome (ACCA Study Guide Area A, Topic A5b):
Explain elasticity of demand and the impact of substitute and complementary goods.

Elasticity is the extent of change in demand or supply (quantity) in response to the change in price.

5.2.1. Price Elasticity of Demand


Price elasticity of demand (PED) can be measured using the following formula:

Change in quantity demanded as a percentage of original demand


PED=
Change in price as a percentage of original price

PED ignore the negative sign.

Elastic and Inelastic Demand


Demand is considered to be

Value Demand Elasticity Explanation


>1 Elastic In such situations, demand changes in greater proportion to price
changes. For example, a price sensitive consumer will react adversely
when prices increases.
<1 Inelastic This happens when demand changes in lesser proportion to price changes.
For example, a person with high disposable income may not react to
changes increases of parking fees, which is a small proportion to his/her
income.
∞ Perfectly Elastic Consumers in this situation will only buy at one price. Quantity demanded
is infinite, provided this price stays. Any increase in prices will mean
demand will drop to zero. A horizontal straight line of the demand curve
depicts this.

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0 Perfectly Inelastic Buyers will only buy the exact quantity and they will not buy any lesser or
more regardless of any changes in price.

1 Unit Elasticity Demand for goods changes in proportion to the changes in price.

Check understanding

1. If the price elasticity of demand is a unit then a fall in price:

A. Reduces revenue
B. Leaves revenue unchanged
C. Increases revenue
D. Reduces costs

The negative figure indicates the correlation between the price and quantity. A negative sign indicates a
negative correlation where an increase in one factor will cause a decrease in another.

A positive figure happens when prices increase, demand also increase. This is against the law of demand.
Two types of products that would go against the law of demand would be:

Giffen Goods These are necessities that are purchased in times of hyperinflation. In
(Inferior goods) times of hyperinflation, the prices of all products goes up and if
household income does not increase, they will have no choice but to
purchase more of goods that are cheap despite the fact that the price is
going up. They will not be able to afford other products which may be
even more expensive.
Veblen Goods These are ostentatious goods where the purchase is done for
(Superior goods) pretentious purposes. The more expensive it is the more people would
want to buy them. These are usually luxury goods.

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Factors Influencing Price Elasticity of Demand

Factors Explanation
The closeness of The closer the substitute is to a good, the more elastic is the demand.
substitutes For example, if two products A and B have little differences between
them, any increase in price of product A would cause demand to shift to
product B if price of product B did not change.

The proportion of income The bigger the proportion of income the product takes up the more
spent on the good elastic is the demand. For example, if a particular good takes up a big
proportion of a person’s income, any increases in the prices would mean
his disposable income would be affected badly.

The time elapsed since the The longer the time elapsed since the change, the more elastic is
price change demand. For example, on 1 Jan if price of product A increases; on 2 Jan,
buyers will not have time to look for substitutes or negotiate for lower
prices, therefore they have to buy the product even though the price is
higher. However, after say, 30 days on 30 Jan, buyers would have
managed to find alternatives and will demand lesser of product A.

Luxuries and necessities Luxuries tend to have elastic demand and necessities have inelastic
demand. When prices of necessities such as petrol and rice increases,
demand will not change a lot as it is needed. For luxuries, when prices
increase, buyers have a choice not to purchase.

Habit forming goods Goods that are a habit such as cigarettes and alcohol may have an
inelastic demand, as a habit may be difficult to kick. However, when the
prices reach a point where it affects the disposable income drastically
buyers may switch to cheaper alternatives or choose to kick the habit.

Cross Elasticity of Demand


Cross elasticity of demand (CED) can be measured using the following formula:

% Change in quantity demanded of product A


CED=
% Change in price of product B

Note: Price of A does not change.

CED is a measure of the responsiveness of demand for one good (A) to the changes of price of another
good (B).

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This is usually used to measure how the two goods are related.

Substitutes CED will show a positive figure as the increase in price of one good will cause
the increase of demand on another.

Perfect Substitutes CED will be infinite. The slightest change in the price of one (price increase)
good will move all demand to another good

Complements CED will show a negative figure as the increase in price of one good will cause
the decrease of demand of another

Independents CED will be zero. The change of price in one good has no effect on another.

Income Elasticity of Demand

Income Elasticity of Demand (IED) measures the responsiveness of demand to changes in income levels.

It can be measured using:

% Change in quantity demanded


IED=
% Change in income

Value Elasticity Explanation


>1 Income Elastic Which indicates that the demand for the good rises in higher proportion
to the rise in income. These are usually luxury goods as there is a
psychological effect where people are tempted to buy the luxuries even
they may not yet be able to afford them.

<1 Income Inelastic Which indicates that the demand for the good rises in lesser proportion
to the rise in income. These are usually normal good and necessities.
Regardless of changes in income, necessities are needed.

<0 Negative income Which indicates the demand for the good drops when income rises.
elastic These are usually inferior goods. When income increases, demand shifts
to higher value goods.

Check understanding

2. For an inferior good with a downward sloping demand curve:

A. The price elasticity of demand is negative; the income elasticity of demand is negative
B. The price elasticity of demand is positive; the income elasticity of demand is negative
C. The price elasticity of demand is negative; the income elasticity of demand is positive
D. The price elasticity of demand is positive; the income elasticity of demand is positive

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5.2.2. Elasticity of Supply


Price elasticity of supply (PES) is a measure of the responsiveness of supply to the change in price.

It can be measured using:

% Change in quantity supplied


PES=
% Change in price

Value Elasticity Explanation


∞ Perfectly elastic Which means that the smallest possible change in price( drop in selling
price )the supplier will stop supply.

0 Perfectly inelastic Which means the quantity supplied is exactly the same( quantity )
regardless of any changes in price.

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5.3. Economic Behaviour of Costs


Learning Outcome (ACCA Study Guide Area A, Topic A5c):
Explain the economic behaviour of costs in the short and long term.

The objective of a business is to make a profit and this is influenced by revenue and costs. The study of
demand is related to revenue generation. It is therefore important to study the behaviour of costs and
what influences it.

By determining the highest possible price to sell in response to demand and the lowest possible cost of
production, profits can be maximised.

5.3.1 Costs in the Short-Term


In the short term, labour costs can be varied and the capital costs are fixed.
 Total cost (TC) is the cost of all the factors of production used.
 Total fixed cost (TFC) is the cost of the firm’s fixed inputs.
 Total variable cost (TVC) is the cost of the firm’s variable inputs.
 TC = TFC+ TVC

TVC

 Marginal cost (MC) is the increase in the total cost that results from one-unit increase in output.
 Average total cost (ATC) is the total cost per unit.

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Based on the figures, cost curves can be drawn as follows:

ATC

The marginal cost curve and average total cost curve are U-shaped because of the law of diminishing
returns.

The law of diminishing returns states that as firms use more of a variable input, with a given quantity of
fixed inputs, the marginal product of the variable input will eventually diminish.

Short Run Supply Curve

The short run supply curve is linked to the company making losses due to rising costs in an imperfect
market.

In the short run, the company’s supply curve is its marginal cost curve (marginal revenue) above the
variable cost curve.

This is because it makes no sense for a company to supply any amount lesser than the variable cost curve
as in the short run the firm needs to cover at least its variable costs. If it operates and does not cover its
variable cost it may as well not open shop.

In the long run, these kind of losses cannot be sustained, so the company must find a way to reduce fixed
costs.

Check understanding

When internal economies of scale occur:

A. Total costs fall


B. Marginal costs must increase
C. Average costs fall
D. Revenue falls

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5.3.2 Costs in the Long-Term


In the long run, both labour cost and capital costs can be varied. Therefore, in the long term, costs are the
cost of production when all inputs, both labour and capital have been varied to their economically efficient
levels. All costs are variable in the long term.

For example, using the same example of Jusju Co., the firm now has the option of varying the number of
machines used instead of just one in the long term. The machine is considered to be its capital, as it
requires significant investment.

By varying both the labour and capital (machine) used the following table is derived:

Labour 1 Machine 2 Machines 3 4 Machines


1 4 10 Machines
13 15
2 10 15 18 20
3 13 18 22 24
4 15 20 24 26
5 16 21 25 27

Based on the table is also observed that the law of diminishing returns still applies in both marginal
product labour and marginal product of capital (machine).

To calculate the marginal product of capital, the change in total product is divided by the change in
capital when the quantity of labour is held constant. At the point where 3 workers are used, output
increased by 5 (18-13) when one extra machine is used. When the third machine is added, the increase is
only 4 (22-18) instead of 5 and only 2 units (24 – 22) increased when fourth machines were used.

With the figures, four short-term cost curves for each cost structure can be drawn as follows:

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Based on the above graphs, two observations can be made for each short-term ATC curve:

1. It is a U – shape which means the law of diminishing value is still present.


2. The more capital employed, the greater is the output at the lowest average total cost. At C4 the
output is the highest.

A long-term average cost curve can be derived from the four short – term cost curves as follows:

Therefore, it can be concluded from the graphs, that output will increase when more employed in the
long term and the law of diminishing value is applicable even in the long term.

The point where the lowest possible cost is met is the point of minimum efficient scale, where the
smallest quantity of output where the long-term average costs reaches its minimum. (Q1)

Any amount smaller than Q1 would allow the firm to achieve economies of scale, where the increase of
production will decrease long term costs.

Any amount produced beyond Q1, the firm achieves diseconomies of scale, which will lead to increase in
long-term costs as output increases.

Check understanding

Total cost increases from £500 to £600 when output increases from 20 to 30 units. Fixed costs are
£200. Which of the following is true?

A. Marginal cost is £20


B. Average cost falls
C. Variable cost rises by £100
D. Average fixed cost is £100

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5.4. Type of Markets


Learning Outcome (ACCA Study Guide Area A, Topic A5d):
Define perfect, competition, oligopoly, monopolistic competition and monopoly.

Types Explanation
Perfect Perfect competition is a situation where there are many small suppliers and buyers.
competition Individually they are not able to influence the market price. Barriers to entry or exit are
markets non-existent and businesses are free to enter or leave the market as they wish.
Production methods and cost structures are identical and suppliers produce
homogeneous (identical) products and there is no collusion between buyers or
suppliers.

Forces of demand and supply determine the price. Hence suppliers only earn 'normal'
profits and there is only one selling price which means the demand is perfectly elastic.

Imperfect A perfect competition market rarely exists in real life as there is bound to be market
Competition imperfections such as asymmetric information and goods are usually differentiated.
Markets Governments may also interfere by imposing taxes or granting subsidies, which causes
the price to change. Barriers of entry may also exist.

There are several types of imperfect competition markets and they are as follows:

Monopoly  One supplier or a dominant one.

 No close substitutes.

 Many buyers.

 Barriers to entering the industry exist.

 Suppliers are price makers and can decide on the quantity to be supplied.

 Monopolists potentially can earn 'supernormal profits'.

 Monopolies may benefit the economy through incentives to innovate; and


economies of scale and economies of scope (synergy).

Types of Monopolies:

 Pure monopoly: Only one supplier in the market.

 Actual monopoly: One supplier with a dominant market share.

 Public franchise: Government grants an exclusive right to the firm to supply a


product or service.

 Legal monopoly: The firm has a patent or a copyright of the goods sold.

 Natural monopoly: Created by high barriers of entry such as high fixed costs
and existing firms have already achieved economies of scale.

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Monopolistic  Many buyers and suppliers.


competition
 Some differentiation between products.

 Firms compete on product quality, price, branding and marketing.

 Some customer loyalty.

 Few barriers to entry and firms are free to enter and exit.

 Price increases may cause customers to shift to substitutes.

 In the long run, only normal profits are earned and not supernormal profits.

Oligopoly  A few large suppliers but many small buyers.


 Natural or legal barriers of entry for new firms.
 Product differentiation is used.
 Prices may be determined by mutual agreement amongst competing firms.
 Competitors compete on branding and NOT on price.
Duopoly  Two dominant suppliers.
 Price is controlled by the two and they are usually higher as competition is
minimal.
 There is a possibility that two firms may collude to the disadvantage of
suppliers and customers.

Check understanding

1. What kind of market structure oil and gas industry exemplify?


(e.g. Monopoly; Oligopoly; Perfect Markets)

A. monopoly
B. oligopoly
C. monopolistic competition
D. actual monopoly

2. Which of the followings show the long run in perfect competition?

A. The price equals the total revenue


B. Firms are allocatively inefficient
C. Firms are productively efficient
D. The price equals total cost

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CHAPTER 6: SOCIAL, ENVIRONMENTAL AND TECHNOLOGICAL FACTORS

Learning Outcomes
At the end of the chapter, you should be able to:

Social & Demographic Factors:


TLO A6a. Explain the medium and long-term effects of social and demographic trends on business
outcomes and the economy.

TLO A6b. Describe the impact of changes in social structure, values, attitudes and tastes on the
organization

TLO A6c. Identify and explain the measures that governments may take in response to the medium
and long-term impact of demographic change.

Technological Factors:

TLO A7a. Explain the potential effects of technological change on the organisation structure and
strategy.
i) Downsizing
ii) Delayering
iii) Outsourcing

TLO A7b. Describe the impact of information technology and information systems development on
business processes.

Environmental Factors:

TLO A8a. List ways in which the businesses can affect or be affected by its physical environment.

TLO A8b. Describe ways in which businesses can operate more efficiently and effectively to limit
damage to the environment.

TLO A8c. Identify the benefits of economic sustainability to stakeholders.

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SOCIAL AND DEMOGRAPHIC FACTORS

6.1. Medium and Long-Term Effects


Learning Outcome (ACCA Study Guide Area A, Topic A6a):
Explain the medium and long-term effects of social and demographic trends on business outcomes and
the economy.

The social environment involves the study of social and cultural elements of the environment of a nation.

One of the key reasons why social factors are studied is to allow the company to plan and manage its
marketing strategy to meet its customer demands. A company has to respond to customer needs and how
they behave.

An organisation may also be affected by social factors such as its organisation culture, which is the norms,
beliefs, assumptions, and the way things are done in the organisation. Social Environment constructs every
society and its practices. Example: An American travels to UK finds many business practices are familiar but
not when he or she visits China.

6.1.1. Factors of Social Environment

Johnson and Scholes recommended that the social environment could be examined by studying the
following factors:

 Population Demographics
The study of demography, which is an analysis of statistics such as age, gender, household structure,
lifestyle changes or ethnicity; and it illustrates the changing structure of human populations.

The population trend can be derived from demographics, and it indicates the growth or decline of
population size at the national and regional level, changes in the age distribution of the population, and
the concentration of population in certain geographical areas.

Change in the demographics also affects patterns of demand, location of demand and etc. Changes in
population, growth or decline will affect business activity; i.e. to increase output or reduce it. By ensuring
that the company procures and produces products and services that meet the demands of its customers,
at the right price that appeals to them, the company can increase sales.

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It examines the following elements of population:

Element Description

Size it refers to the total number of people living in a society or country and the
groups within it.

Composition The make-up of the population in categories such as age(the young, the youth
and the aged), ethnicity, income levels and location( where do people live and
work ).

Household Determining the number of individuals in a household, the age of the individuals
structure and whether the household has children, aged parents and etc. Different
household structures have different needs.

Location The concentration of population in a particular area may indicate the level of
demand at that particular location( high density or low density ).

Growth Rate It refers to the average annual per cent change in the population, resulting from
a surplus (or deficit) of births over deaths and the balance of migrants entering
and leaving a country( Malaysians ).
Ethnicity For example, in Malaysia, majority of the population is Malay followed by
Chinese.

 Income Distribution
Income levels and distribution of income of different groups in the population can be examined to
determine the disposable income, spending power, and the standard of living (or high cost of living).
Increase or decrease in the overall standard of living would determine the level of expectations of the
consumers. A country with a higher standard of living like New Zealand, Ireland, UK and Sweden would
usually have a higher level of expectations for quality and would have a greater demand for better service.

 Consumerism
Consumerism is the preoccupation of society with the acquisition of consumer goods. In economic terms,
the marginal propensity to consume will be higher as compared to marginal propensity to save in this
society. An organisation operating in a country with high levels of consumerism would have to have a
dynamic marketing strategy to attract customers and keep up with competition.

Example: US has the highest marginal propensity to consume than many other countries at approximately
90% to 98%.

 Levels of Education
Education levels of the target market would determine the kind of marketing strategy used. Most highly
educated consumers would have greater expectations and demand for a higher level of service or goods.

 Social Mobility
The study of social mobility examines the social classes and distribution of a population. Different social
classes would have different demands. It also examines the ease of movements between social classes. (For
example, is it relatively easy for the poor to become rich?).

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 Lifestyle Changes
Lifestyle changes indicate the social trends within a group and it refers to the change in attitudes and
opinions towards social issues. It decides the types of products required. (for example, as more young
adults prefer to stay away from family or parents, more services are demanded which include laundry, food
delivery and etc.).

Check understanding

1. For what function in an organisation would demographic information about social class
be most relevant?

A. Finance
B. Human Resources
C. Purchasing
D. Marketing

2. Demographics is the study of (qualitative / quantitative) data on the target population.

6.1.2. Medium Term and Long Term Effect on business outcomes and the economy

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6.2. Impact of Changes On the Organisation


Learning Outcome (ACCA Study Guide Area A, Topic A6b):
Describe the impact of changes in social structure, values, attitudes and tastes on the organization.

6.2.1. Social Structure


The most common social structure is class system. Societies with a class system could be put into three
main classes: upper class, middle class and working classes.

Impact of changes

Different classes have different tastes and buying patterns. Therefore, companies have to know which class
of consumers they are targeting. E.g.:

Upper class Distinctive and customized to indicate social class Ferrari

Middle class High quality products with product differential Toyota

Working class Standardized and affordable product Proton

6.2.2. Values
The collective values of a society also determine the type and level of demand it will have. For example,
market research has shown that societies these days prefer to buy goods and services from organisations
that have a strong social responsibility and an ethical code of conduct.

Impact of changes

Organization produces product and invest in technology to create environmental friendly or green products
in line with corporate social responsibilities (CSR).

6.2.3. Attitudes
Attitude is the persistent evaluations, emotions and behaviour tendencies towards specific persons,
groups, ideas, and objects. Customers’ attitudes change according to what they have learnt, their feelings
and actions. Therefore, companies have to understand consumers’ attitudes and how to change or educate
them towards the companies’ benefit.

Impact of changes

The advertisements are used to educate and raise the awareness of the consumer of the product and evoke
an emotion that will eventually encourage the consumer to action upon a purchase of the product.

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6.2.4. Tastes
Companies often change their product mix in accordance with the change in consumers’ tastes. For
example, people are more health conscious now and this increases the demand for better quality products
such as organic products.

Impact of changes

Packaging product in a correct way contribute to ‘taste’ (e.g.: tea bags), offer more ‘in’ taste (e.g.: more
flavours) and etc.

Check understanding

1. Robert is a marketer for a global consumer products company. He is working on the promotional
campaign designed to reach a target audience in a new international market. Robert is working
hard to make sure that the promotional campaign is clearly understood by the nation's consumers
and doesn't offend anyone. Which of the factors in the external environment is he being
influenced by?

A. Social culture environment


B. Competitive environment
C. Economic environment
D. Legal environment

2. Changing consumer tastes represent what type of environmental factor?

A. Political
B. Technological
C. Social
D. Economic

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6.3. Measures Taken by the Government


Learning Outcome (ACCA Study Guide Area A, Topic A6c):
Identify and explain the measures that governments may take in response to the medium and long-term
impact of demographic change.

The government has an important role in ensuring that the social infrastructure of the market is preserved
and there are many things government can implement. The following are some issues where the
government will intervene in response to medium and long term demographic changes:

6.3.1. Measures
Population Size and Growth Rate

It is the objective of the government to maintain an optimum population size, as it will ensure that the
demand for goods and services is maintained. A country with a declining population size may shrink the
economy and a population size that increases out of control and the supply of goods and services may be
insufficient to sustain the population. For example, US population growth reduces due to lower fertility
rates, population aging and lower level of immigrations.

Social Structures

The government would want to reduce or remove the disparity in distribution of wealth. A high disparity
of income in a country may cause social ills such as high crime rates. The government can reduce the
disparity by having a minimum wage rate and a tax system that redistributes income.

Education Levels

An educated workforce would help to grow the economy and increase the rate of innovative development
of products and services. Therefore, the government will ensure that its education system is able to cope
with the growth of the economy and population.

Check understanding

1. To overcome the shortage of skilled labour, the UK government has introduced effective
medium-term measures which include: (More than 1 Answer)

A. 2-year working visa


B. Foreign students graduated are encourage to do their internship in the UK
C. Encourage tourism
D. Employ illegal workers to fill the shortage

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Long term impact of demographic change in most developed nations which faces aged population with
small youth labour market is severe
2.

Which of the following are effective measures?

A. Relax the immigration policy


B. Promote service –orientated industries that will attract qualified youth
C. Promote /provide attractive living conditions& environment
D. Encourage adoption of children

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6.4. Potential Effects of Technological Change


Learning Outcome (ACCA Study Guide Area A, Topic A7a):
Explain the potential effects of technological change on the organisation structure and strategy.

Technology is the application of scientific knowledge for practical purposes.

Technology improves and speeds up the process of innovation; and it can be a catalyst of economic growth.
The technological environment influences the ‘birth’ of new products and services; improves productivity
through innovative processes; and costs can be reduced.

The resource that is usually the target of technological change is LABOUR. A large amount of technology
has been created or invented to maximise the output of employees and minimise the number of employees
required for operations. Hence, technological innovation usually leads to changes on the organisation
structure and strategy in the following scenarios:

6.4.1. Downsizing
Downsizing is when a great number of employees are no longer required for the organisation.

This is often the result of technology advancement, as improved automated processes and improved
productivity per employee caused the reduction of manual labour.

6.4.2. Delayering
Delayering causes the organisation to assume a ‘flatter’ structure, one that has relatively few managerial
levels as well as numbers of managers. It is often brought about by technological advancement in the
Information Communications Technology (ICT). As the strategic-level management is able to
communicate with the operational-levels faster and more accurately, the need for middle management
(tactical) reduces.

Example: Many banks no longer have a manager in each of their branch but preferring to appoint a
manager to oversee a number of branches.

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6.4.3. Outsourcing
Outsourcing occurs when certain activities or functions of an organisation are contracted out to a third
party or external supplier.

Outsourcing has been described as being a process of transferring an existing business function, including
the relevant physical and or human assets, to an external service provider.

Example: Apple makes iPhone in China. Most components of iPhone and iPod are assembled in China as it
saves labour and production cost.

Category of outsourcing
Type Description
Total outsourcing Large part of the organisation or the whole function (department) is
outsourced.

Partial outsourcing Only part of the function (marketing department) is outsourced.

Project management The external organisation manages a project for the company.

Ad hoc outsourcing Only when it is needed.

In-house vs outsourcing

The main reasons ways outsourcing is preferable to in – house functions:

 Cost savings (operating costs are higher compared with fixed price agreed with external suppliers).
 Allows organisation to concentrate on its core competencies (what the company does best).
 External suppliers are able to perform and deliver the functions better since they are experts in what
they do and the benefits of economies of scale that is obtained (external suppliers have expertise,
experience and volume).

Disadvantages

 Organisation may inadvertently outsource their core competence.


 Confidential information may be leaked or lost.
 The organisation maybe tied to an expensive contract with the external supplier and have
difficulties getting out of it.

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Check understanding

Outsourcing is often associated with which business processes?

A. Allowing employees to work from home


B. Sourcing data from outside the company
C. Transferring call centres to overseas service providers
D. Sending staff on foreign assignments

When an organisation reduces its number of managerial layers it is said to be:

A. Downsizing
B. Delayering
C. Rightsizing
D. Right layering

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6.5. Impact of Technological Changes on Business Processes


Learning Outcome (ACCA Study Guide Area A, Topic A7b):
Describe the impact of information technology and information systems development on business
processes.

Information is processed data and has meaning to the person who receives it.

It improves the quality of decision-making, can be interpreted for action and disseminated to stakeholders.
It is the input needed to make strategic, managerial or tactical and operational decisions.

Information Technology (IT) is any equipment used in capturing, storing, transmitting, or presentation of
information, quickly and efficiently. For example, Radio, Computer and telephone.

Information Systems (IS) are systems or applications used for processing of data into information.

Information systems use IT to capture, record, analyse, interpret, communicate and present information
to its users. IS ensures timely and reliable processing of information. Example: captured input turns to
output: Transaction Processing System (TPS) to Management Information System (MIS).

6.5.1. Impact of Technological Changes


 Facilitates exchange of information (information can be readily shared between or amongst
departments).

 More accurate and rapid information flow (latest information).

 Efficient functioning and growth of businesses (e.g.: online banking, e - learning).

 Marketing (customer orientated)


o Pricing decisions can be more accurate as the organisation is able to collect customer information
and do market research about the acceptability of the price that is going to be set, more accurately
and timely.
o Promotion activities can be more timely and relevant. Promotions can be communicated more
effectively over the right medium. (e.g. Websites/ online promotional campaign).
o Place/Distribution strategies can be improved with the use of supply chain management (SCM). For
example, with the use of the internet and the integration of its supplier chain, Dell is able to deliver
its computers to its customers faster and save cost by not holding stock, because the computers are
made on-demand. The use of IT and IS also allows any organisations to reach markets that are
untapped.
o Market Research improves with the use of customer databases as data collected of customers and
potential customers can be used to predict trends and improve on meeting customer needs.

 Products and Processes Development

o Innovation:

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With the use of IT and IS, information can be shared amongst departments and divisions of the organisation
and this facilitates better innovation of products and services as innovative ideas can be shared across all
departments and work groups. Creating a more synergistic effect.

o Sophistication:
Products and services become more sophisticated, for example computers are becoming smaller and faster
(iPad, iPhone) at an exponential rate as it develops together with technological development.

o Better Quality:
Feedback on defects and improvements becomes more relevant and timely and this allows for better
improvements to the product, which will produce better quality. For example, Apple IPhone 7 to IPhone 8
to provide better functioning and quality to customers.

6.5.2. Change of Business Models


Change of Business Model allows business to innovate on new products and services.

B2B model
B2B activities occur when organisations buy or sell goods and services between themselves over the
Internet. B2B allows organisations to deal directly with each other thereby eliminating the need for
intermediaries and reduce costs.

Example: Automobile manufacturer may buy tires, hoses, batteries, from many suppliers via online
platform which eliminates intermediary and reduces administration cost. It creates JIT, electronic data
interchange between companies, Procurement management, electronic and etc.
The B2B model offers the following features and benefits:

 Flexibility in pricing as organisations can directly negotiate with each other.


 Efficiency as integrating buyers’ and sellers’ IT systems will have the effect of making transactions more
efficient as manual processing requirements get substantially reduced.
 Versatility as an organisation’s supply chain can move from a ‘push’ to a ‘pull’ system:
o Push system: It happens when suppliers and distributors contact buyer organisations pushing the
products of seller organisations.
o Pull system: It happens when buyer organisations/Tesco directly contact seller
organisations/manufacturers and pull the goods and services they want at that particular time.

B2C Model
B2C model involves organisations directly selling their goods and services to consumers over the Internet.

B2C model advantages for organisations:


 Reduces the need for physical locations or stores size whilst extending the customer reach an
organisation can have.
 Eliminates additional costs such as rent, wages and etc. (savings) to be passed on to customers (cheaper
selling prices).
 Able to tap on market (untapped market) where traditionally inaccessible.

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6.5.3. Business Processes affected by Technological Changes


New IT and IS have more effective and efficient processes. The following are some of the systems that are
used to improve on effectiveness and efficiency of processes.

Manufacturing Resource Planning (MRP):


This system allows the organisation to procure, plan and produce resources in the most efficient way.

Enterprise Resource Planning (ERP):


This system integrates all aspects of the organisation into one computerised system. It connects the
internal and external users.

Supply Chain Management (SCM):


This system allows for the integration of the organisation’s supply chain system. The organisation’s system
integrates with the organisation’s suppliers’ systems. The system allows for the sharing of information
between the suppliers and the organisation so that supply of goods and services from the supplier can be
as efficient as possible. It is a flow of info and goods from the source to final users. For example, before a
particular raw material is exhausted, the supplier would be automatically signalled to prepare for shipment
of the raw materials to the factory.

6.5.4. Impact of Technological Changes on Society


The use of IT and IS has significant effect on society as processes improve and products and services are
more sophisticated and effective.

 Telecommuting: Employees can work at home with the use of ICT and this improves the quality of
life.
 Education: Education is no longer confined within the four walls of a classroom as people are able
to learn at home and information is rapidly available through search engines. Example: Tech like
smart whiteboard, computing mobile phones being used in the classroom to boost student’s
moral.
 Entertainment: nowadays quality of entertainment improves and made available over the
Internet.
 E – commerce: IT and IS have not only helped businesses grow and become more efficient but to
also evolve. In particular, the B2B and B2C models have significantly changed business practices
for many organisations.

Check understanding

1. B2B marketing is fundamentally different from consumer goods or services marketing because:

A. distribution channels for business products are significantly longer.


B. customer relationships for business products tend to be short-term and transactions-based.
C. organizational buyers do not consume the products or services themselves.
D. customer service plays a smaller role in the distribution of business products.

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2. Which of the following statements about the impact of technological developments is not true?

A. Technology developments have supported corporate delayering


B. Technology developments tend to adversely affect employee relations
C. Technology developments creates risk for long-range product/market planning
D. Technology developments offer significant advantages for corporate communication

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6.6. The Business and its environment


Learning Outcome (ACCA Study Guide Area A, Topic A8a & A8b):
List ways in which the businesses can affect or be affected by its physical environment.

Describe ways in which businesses can operate more efficiently and effectively to limit damage to the
environment.

The environmental factor within this context is one of the factors in the PESTEL analysis and it refers to
the physical environment or the ecological environment.

Businesses can be affected by physical environment in the following ways:

i) Sustainability issues with regards to sources of energy and conservation of natural resources.
ii) Waste management by the organisation.
iii) Pollution which may be caused by the organisation or affect the organisation.
iv) Green issues which the consumers are beginning to be very concerned with.
Already dealt with at
v) Rules, regulations and standards governing environmental issues. Chapter 3
vi) Public pressure from environmentalists.
vii) Disasters such as landslides, tsunamis and earthquakes that can affect the organisation.

6.6.1 Limiting the impact, the organisation has on the environment


An organisation in ensuring that the damage to the environment is minimised or reduced should first be
aware of ecological issues related to its operations. Management should be willing to embrace ecological
issues and realise that it is part of corporate social responsibility (CSR) that they should participate in for
the benefit of all its stakeholders.

What is CSR (3Ps)?

CSR concerns a business adopts stakeholder theory where an organisation should care about the needs of
all stakeholders.

Environmental Responsibilities
Organisations have a duty to safeguard the environment and the following are six areas of action that,
directors and managers have to consider:
Areas Illustrations
Environmental auditing Monitoring compliance, waste management and treatment, and
( find out ) carbon emissions.
Economic action Costs should be allocated to environmental impact so that managers
will account for it.
Accounting reporting Separate set of accounts to account for the environmental impact of
the organisation.
Ecological approach Certain aspects of the organisation such as products or location/
factory are selected for study to determine environmental impact.
Production Managed properly( input -> process -> output )to minimise
environmental impact.
Quality Concept of continuous improvement in environmental performance.

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Approaches to manage environmental responsibilities to limit the damages to environment:

 Compliance Paradigm
The most basic approach to environmental responsibility is the compliance paradigm. It
involves three basic steps:

1. Identify the relevant legal or best practice framework or standard with which to comply.
2. Adjust organisational activities to comply with standards.
3. Engage in internal and external auditing to ensure compliance and highlight areas of
potential improvement.

The effectiveness of any initiative depends on the commitment of strategic management.

 Environmental Management Systems


(ISO 14001 Environmental Management Standard (EMS))

It is a measurement system that allows an organisation to evaluate environmental performance


against stated policies, objectives, targets and other performance criteria. Organisations adopting
the ISO14001 have explicitly committed itself towards continuous improvement of its environmental
protection practices. With ISO14001, organisations can develop comprehensive, quantitative
measures of environmental performance as well as purely qualitative descriptions of related
company practices.

The ISO14001 allows an organisation to:

 Mitigate or reduce how their operations negatively affect the environment (pollution)
 Comply with applicable laws and regulations
 Continually improve in the above
 It has five main phases:

Phase Description
Plan Objectives and processes required need to be established or ascertained.
Do Processes are documented, communicated and implemented throughout the
organisation.

Check Performance and progress is monitored and measured. Internal audit may check to
see whether the processes have been implemented effectively.

Act Action to improve performance of EMS based on the actual results if there are
deviations from standards.

Continual Continual Improvement Process which has three dimensions:


Improvement Expansion: More departments and functions will be involved.
Enrichment: Processes are consistently improved for better results.
Upgrading: Continual upgrading of standards and processes reflecting new
developments.

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Check understanding

1. Which of the following is not a way businesses can adopt to reduce the damage they cause the
ecological environment?

A. Rebranding
B. Recycling
C. Redesigning products to use fewer scarce materials
D. Careful production planning

2. By investing in ISO14001, an enterprise will have an advantage over its rivals who have yet to
make serious commitment and investment to the accreditation. (TRUE/FALSE)

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6.7. Benefits of Economic Sustainability


Learning Outcome (ACCA Study Guide Area A, Topic A8c):
Identify the benefits of economic sustainability to stakeholders.

Sustainability has been defined as development that ‘meets the needs of the present without
compromising the ability of future generations to meet their own needs’.

(Brundtland Commission)

Sustainability development takes into consideration that an organisation should not only focus on financial
factor but also must understand that the organisation has an impact on its social and environmental
factors. It focuses on Profit, People and Planet.

Environment issues( planet )include: Social issues( people )include:


 Climate change  Health and safety of workforce
 Waste reduction  Child labour
 Use of renewable resources  Bribery and corruption
 Water use  Community relations
 Greenhouse gas emissions  Labour practices, pension payments

An organisation that focuses on sustainability development will have the best interest of all its stakeholders
in mind, protecting them in ensuring the ecology of the business environment is preserved and healthy.

Sustainability development creates a framework of control to ensure that a particular company especially
very large ones do not dominate local economies, market or monopolise it, as this will have adverse effects
on its employees, customers and suppliers. A company of great size may bully or disadvantage its
employees, customers and suppliers who are at the mercy of large companies.

It is difficult for a business, with a primary objective of making money, particularly to enrich shareholders
quickly in the short-term, to reconcile their activities with sustainability, of which there are immediate costs
to be absorbed, and the benefits of which will not be seen within the investment period of the shareholders.

One of the key factors that are affecting sustainability approaches is the advancement of information
technology. As information on business practices and their environmental effect becomes more readily
available (internet), organisations should expect and proactively pre-empt increased pressure on
businesses to be sustainable. Stakeholders may shift on their interest and power paradigm once armed
with this information, and organisations should take this into account or risk economic destruction.

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Check understanding

1. What is sustainable development?

A. The development that meets the needs of the present without compromising the ability of
future generations to meet their own needs.
B. To conserve natural resources and to develop alternate sources of power while reducing
pollution and harm to the environment.
C. It is the practice of developing land and construction projects in a manner that reduces their
impact on the environment by allowing them to create energy efficient models of self-
sufficiency.
D. All of the above

2. Which of the following is/are not an objective (s) of sustainable development?

A. Continue to implement the family planning program.


B. Maintain a dynamic balance of arable land (not less than 123 million hectares) and
implement an agricultural development strategy
C. Maintain a dynamic balance of water resources by reducing water consumption for every
unit of gross development product growth and agricultural value added
D. To bring about a gradual and sometime catastrophic transformation of environment

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CHAPTER 7: COMPETITIVE FACTORS

CHAPTER 7: COMPETITIVE FACTORS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO A9a. Identify a business’s strength, weaknesses opportunities and threats (SWOT) in a
market and the main sources of competitive advantage.

TLO A9b. Identify the main elements within Porter’s value chain and explain the meaning of a
value network.

TLO A9c. Explain the factors or forces that influence the level of competitiveness in an industry
or sector using Porter’s five forces model.

TLO A9d. Describe the activities of an organisation that affect its competitiveness:
i) Purchasing
ii) Production
iii) Marketing
iv) Service

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7.1 Porter’s Five Forces Model


Learning Outcome (ACCA Study Guide Area A, Topic A9c):
Explain the factors or forces that influence the level of competitiveness in an industry or sector using
Porter’s five forces model.

Part of the strategic analysis process is an analysis of an organisation’s external environment to determine
opportunities and threats. This is done in two concentric layers, macro environment analysis factors that
influences all industries whereas the task environment or micro environment analyses the specific industry
the organisation is in.

The five competitive forces model helps to determine the level of profit potential an industry is capable of
making. Any organisation that wishes to enter into an industry or marketplace should examine these five
competitive forces. An external analysis to determine the attractiveness of a firm to enter into a new
environment. Existing organisations, incumbents or competitors should also be aware of the changes and
shifts in those forces as the macro environmental factors (PESTEL) may shift the forces.

In the illustration below, the Porter’s five forces model are highlighted in bold.

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Threat of New Entrants

The biggest threat for organisations is the possibility that other firms will enter their industry. The more firms
that enter an industry, the more competitive the industry is likely to become and this will lower the level of
profits likely to be earned by its organisations. Example: It is more difficult for an organisation to enter a
capital-intensive industry such as oil exploration, than it is for it to enter into the field of IT consultancy.

Therefore, the higher the barriers of entry, the threat of new entrants will be lower.

Barriers to entry facing new entrants include:

1. Economies of scale
2. High capital or start-up costs
3. Product differentiation

Threat of Substitutes

The threat of substitutes depends upon the ease at which a customer can find an alternative. It depends on
the value or price performance of the substitute. The higher the value for the same price, the more likely
the customer may opt for substitute. Different forms of substitution:

 Product for product substitution: Buy Coke instead of Pepsi.


 Substitution of need: Use of mobile phones instead of house phones.
 Generic substitution: Other alternative products which consumers typically see little difference
between brands.

Bargaining Power of the Buyers

If buyers have high bargaining power, then an organisation will be restricted in the price that it can charge
for its goods or services. Buyers with high bargaining power can switch easily and can wrestle for lower
price and this causes margins to decrease.

Situations where the bargaining power of buyers (industrial buyer, middleman or consumer) will be high:

 The volumes they are purchasing are large


 The cost and/or risk of switching to an alternative supplier is low
 The buyer makes a small profit margins (Price sensitive buyers)
 Quality of goods and time of delivery is of importance

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Bargaining Power of the Suppliers

When the bargaining power of suppliers is high, firms normally end up paying a relatively high cost for the
raw materials.

Situations where the bargaining power of suppliers will be high:

 Few suppliers and a large number of buyers


 Switching costs for buyer are high or impractical
 Highly differentiated product or raw material

Intensity of Rivalry Among Existing Firms

The more competitive the rivalry that exists between firms, the lower the level of profits which typically
will be earned by firms in that industry.

Situations where there will be intense rivalry between and amongst competing organisations/competitors:

 The competitors are in balance, where the organisations are roughly the same size and
capabilities.
 Competing organisations are operating in a mature market, a market that is not growing or a
sunset market, a market that is declining; and this means the organisations have to fight for their
survival.
 High exit barriers: The organisation may not afford to exit the industry.

Check understanding

1. Porter’s five forces model identifies factors which determine the nature and strength of
competition in an industry. Which of the following is not one of the five forces identified in Porter's
model?

A. Substitute products or services


B. New entrants to the industry
C. Bargaining power of customers
D. Government regulation of the industry

2. In Porter's five forces model, which of the following would not constitute a 'barrier to entry'?

A. Scale economies available to existing competitors


B. High capital investment requirements
C. Low switching costs in the market
D. Loyalty to existing brands

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7.2 Porter’s Value Chain


Learning Outcome (ACCA Study Guide Area A, Topic A9b):
Identify the main elements within Porter’s value chain and explain the meaning of a value network.

Porter’s Value Chain model is a very useful framework for analysing an organisation’s processes. It
identifies which process adds value and which does not and this will allow organisations to determine how
best to manage them. It is also used to analyse how the activities and processes are linked and if there are
any gaps and disconnects between them. Value chain helps you recognise ways you can reduce cost,
optimize effort, eliminate waste and increase profitability which contributes customers enjoying high
quality product at lower costs.

The key objective of this analysis is to improve the processes and see how best the activities can add value
to the process of creating value for the customers, which will lead to high margins for the organisation.

Any non – value creating activities can be either improved or outsourced to save cost and any value adding
activities should be kept (in – house) and improved. By ensuring that each and every one of the activities
creates value, then the organisation is able to achieve high margins.

Based on the value chain, the organisation is divided into five Primary Activities and four Secondary
Activities.

The following diagram illustrates Porter’s Value Chain:

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7.2.1. Primary Activities


Inbound Logistics Deals with relationships with suppliers and activities used for receiving,
storing and disseminating inputs. Warehousing, transport, inventory
control etc.

Operations Converting inputs into outputs.

Outbound Logistics Collect, store, and distribute the output. Packaging, testing, sampling,
delivery, and etc.

Marketing and Sales Identifying customers, anticipating their needs and convincing them to
buy. 4Ps + 3Ps of marketing.

Services E.g.: after sales service. It involves activities required to keep the
product or service working effectively for the buyer after it is sold and
delivered. Installation, repairing, upgrading, providing spare parts, and
etc.

7.2.2. Secondary Activities


Procurement Acquisition of inputs for operations, ensuring the right: time, cost,
supplier, quantity, and quality.

Technology Development Research and development in product and process improvement and
resource maximization.

Human Resource The process of recruiting, selecting, appraisal, training, developing,


Management compensating and dismissing or laying off people.

Firm Infrastructure Ties the other components together and involves planning, finance,
quality control and assurance, accounting, legal, public affairs,
government relations, and general management.

No organisation can operate on its own. It receives inputs from other entities, and its output may be
processed by other entities before it reaches the final consumer. Other entities may also be involved that
provide some portion of the value of the final service (for example, Tesco depends on Visa to successfully
complete transactions upon checkout).

Because of this, an expanded view of the value chain is needed, especially for “head firms”, entities that
are at the end of the value network, so that the value that is created throughout the process reaches the
customer, and other entities directly involved with the customer also deliver the appropriate value. So the
value network is the network of firms that contribute to a product or service’s ultimate value to the
customer.

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Check understanding

1. Porter’s Value Chain is essentially a tool for:

A. calculating what a firm is worth


B. diagnosing and enhancing sources of competitive advantage within an organization
C. identifying the competitive forces within an industry
D. advising firms on how to price their products

2. Which of the following is a support activity in Porter's value chain model?

A. Procurement
B. Operations
C. Marketing and sales
D. Inbound logistics

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7.3 SWOT in a Market and Main Sources of Competitive Advantage


Learning Outcome (ACCA Study Guide Area A, Topic A9a):
Identify a business’s strength, weaknesses opportunities and threats (SWOT) in a market and the main
sources of competitive advantage.

A SWOT analysis is a corporate appraisal tool used by strategic management in the process of strategic
analysis before a strategic choice is made and implemented. It allows the strategic management to identify
the internal strengths and weaknesses of its capabilities and the external opportunities and threats posed
by the environment.

For example: H&M

Internal External

To exploit Strengths Opportunities

Trendy and Organic clothing

affordable strong brand Intellectual markets

To mitigate Weaknesses Threats

Following brands of luxury brand Strong competition

Production control is poor High labour cost in Asia

Internal environment

The key objective of the internal analysis is to identify the organisation’s strategic capabilities, its resources
and competencies and determine which is a threshold resource or competence and which is core
competence and unique resources.

External environment

Generally, business environments can be categorised to be either static or dynamic and the following are
the characteristic:

Dynamic Environments Static Environments


Dynamic, evolving Stable
Diverse Single
Difficult to understand, let alone predict Simple
Dangerous, high risk Safe

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The changes in the external environment (PESTEL) are caused by the following factors:

1. Globalisation
2. Liberalisation of trade, deregulation and co-operation between organisations and governments
3. Science and technology: impact on products and processes.
4. Mergers, acquisition and strategic alliances amongst industry players/competitors.

Check understanding

1. This is something that at some time in the future may destabilize and/or reduce the potential
performance of the organization:
A. Threat
B. Strength
C. Weakness
D. Opportunities

2. Which of the following is a strength for an organisation?


A. Low labour turnover
B. Small competitors in the home market
C. New market opportunities
D. Presence of non-price competition

From the SWOT analysis the organisation will be able to determine how best to achieve a competitive
advantage, which is determined by the distinctiveness of its strategic capabilities as compared to its
competitors and in the context of the competitive environment.

7.3.1. Competitive Advantage


Competitive Advantage may come from anywhere in the organisation. A good way to approach “what
makes your company competitive” is to think of:

Static advantages

What advantage has your organization already obtained? Something that in the context of the environment
is an advantage? It could be size, cash, land, production line, quality of manpower, brand, etc.

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Dynamic advantages

What advantages may your organization obtain through activities? Using static advantages in the right
activity will generate a dynamic advantage. For example, expanding a strong brand’s product line.

Timing

Most of the world’s greatest commercial success were not from new ideas, but from great ideas, executed
with excellent timing. Identify the right time, then seize the opportunity with an effective and powerful
initiative.

7.3.2. Strategic Choice


An organisation may have little control over its environment, but it can control how well it can compete in
the industry.

Strategically based on Porter’s generic competitive strategies, an organisation may choose strategies that
allow them to gain a competitive advantage over its competitors. The following paragraphs are some of
the strategies that could be adopted:

Differentiation Strategy

Products and services offered have unique attributes valued by customers. Such attributes may reduce on-
going cost for customers and hence creates value for them. Products and services may also create a unique
customer experience that increases customer satisfaction. The customers’ perception of value can also be
modified to differentiate the product. As mentioned earlier, a differentiated product or service raises the
entry barrier for new entrants and reduces the bargaining power of buyers.

Creating a product/ service that is perceived as being different by loyalty broad customers.

Cost Leadership Strategy

By using a cost leadership strategy, the organisation becomes a low-cost producer and this allows the
organisation to lower prices to a level that the competitors are not able to match. By having low costs, the
organisation also ensures that their profit margin is high even though prices are low.

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The cost leadership strategy may not necessarily mean charging the lowest price. The core of the strategy
is lowest cost not lowest price. An organisation can charge the same price as competitors but because their
cost is the lowest, means the organisation earns a larger margin as compared to its competitors.

A company that tries to beat competitors by offering a product for a lower price.

Focus Strategy

An organisation that uses a focus strategy targets a very narrow segment of the market that other
competitors may not have discovered or have neglected. The organisation can either focus on that special
niche using a cost leadership strategy or differentiation strategy.

Concentrated on limited product of a niche-market by enjoy premium pricing.

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7.4 Activities That Affect Competitiveness


Learning Outcome (ACCA Study Guide Area A, Topic A9d):
Describe the activities of an organisation that affect its competitiveness:

A business function is specialised group of employees who do specific tasks. It is important for businesses
to identify the competitive advantages they may obtain from specific functions (departments):

Purchasing/procurement

The Purchasing department buys all the resources that the organization needs for its operations.

To make things simple, purchasing may obtain competitive advantage through 2 main strategies:

 Unique Cost: Obtaining resources of equal quality as competitors but at lower cost.
 Unique Quality: Obtain resources of a quality that competitors are unable to obtain.

Production

Production takes resources and converts them into saleable products.

Competitive advantage may be obtained from the following activities:

 Economies of scale: Large scale production to achieve the lowest possible average total cost per
unit.
 Quality Control: An extremely low (or zero) number of defects are produced at all stages of
production, resulting in better throughput and less recalls than any competitor.
 Efficiency: Production process is more efficient that competitors at converting resources into
saleable goods.
 Speed: Production process can satisfy customer orders faster than any other competitors.
 Flexibility: Process’ ability to make multiple products and have a short turn- around time gives it a
specialist advantage over competitors.

Marketing

Marketing’s activities involve satisfying customer needs, or even delighting them. We will discuss more on
how that may create competitiveness in Chapter 9.

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Check understanding

1. The purpose of marketing is to satisfy customer needs. (True / False)

2. The creation of a marketing department:

A. Is essential for all businesses


B. Results in universal benefits for firms operating in competitive markets
C. Reduces a firm's costs.
D. Can result in a firm as a whole having a reduced level of marketing orientation

Service

Service is extremely important in today’s information-driven world. Even in product-focused industries,


good service is something that customers treasure and would pay more for.

It’s important to note that service happens at 2 stages: before the sale, and after the sale.

Each period will have different objective:

 Before the sale: Increase the prestige of the brand, provide good trigger for satisfaction of future
needs, identify needs that may be satisfied by service or product, provide a good feeling of security.
 After the sale: provide assurance of continued quality, build a long – term relationship, identify
future prospects, solve quickly any potential problems with product or service or warranty service
An organisation that successfully builds and upholds a service relationship will have a significant
advantage.

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CHAPTER 8 THE FORMAL AND INFORMAL BUSINESS ORGANISATION

CHAPTER 8 THE FORMAL AND INFORMAL BUSINESS ORGANISATION

Learning Outcomes

End the end of the chapter, you should be able to:

THE FORMAL AND INFORMAL BUSINESS ORGANISATION

TLO B1a. Explain the informal organisation and its relationship with the formal organisation.

TLO B1b. Describe the impact of the informal organisation on the business.

COMMITTEES IN BUSINESS ORGANISATION

TLO B4a. Explain the purposes of committees.

TLO B4b. Describe the types of committees used by business organisation.

TLO B4c. List the advantages and disadvantages of committees.

TLO B4d. Explain the roles of the Chair and Secretary of a committee.

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THE FORMAL AND INFORMAL BUSINESS ORGANISATION

8.1 Informal Organisation and its Relationship with Formal Organisation


Learning Outcome (ACCA Study Guide Area B, Topic B1a & B1b):
Explain the informal organisation and its relationship with the formal organisation.
Describe the impact of the informal organisation on the business.

8.1.1. Formal Organisation


In a formal organisation there is a proper structure and each employee knows what is expected of him or
her. Jobs are clearly defined and individuals in the organisation are expected to work as a team.

Three main activities in creating a formal organisation are:

1. Labour division: Roles and responsibilities are divided to achieve organisational objectives.
2. Labour combination: Employees are grouped under departments on basis of similar work tasks.
3. Labour coordination: Once a department is formed, policies and procedures are put together to
establish reporting channels and lines of authority.

Another feature of formal organisation is committees which will be discussed later in this chapter.

The formal organisation may be understood from an organisational chart:

8.1.2. Informal Organisation


All formal organisations would have informal organisations within itself. An informal organisation exists
because of personal relationships and communication links that naturally occur amongst employees.

Characteristics of an informal organisation:

1. It has no predetermined structure.


2. It is not planned but develops spontaneously.
3. Exists simultaneously or side by side with formal organisation.
4. Develops due to social/ personal factors.
5. It is ever changing.
6. Everybody is part of it.

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Advantages Disadvantages/limitations/dangers
1. It motivates individuals in it because people 1. It may cause inefficiency.
need social interactions. 2. It may undermine the formal organisation.
2. It improves communication amongst 3. It may cause negative informal
members in the organisation. communication, e.g.: rumours/ gossip that
3. Most managers prefer it as a means of spread false information.
speeding up processes.
4. It may complement the formal organisation.

As the informal organisation has both advantages and disadvantages, therefore a manager has to be
able to make best use of it and not let it hinder the achievement of organisation objectives.

8.1.3. Difference between Informal and Formal Organisation


Formal Organisation Informal Organisation
 Permanent Status  Relatively temporary
 Presence of formal organisation structure  Absence of organisation structure
 Established channel of communication  Informal communication prevails

However, informal organisations should complement the formal organisation. More work could be done
within the informal organisation, but it is only approved or recognised IF it flows through the formal
organisation. Smooth transition between the two structures is key to effective organisation.

The methods on how the informal organisation complements the formal organisation:

1. Be aware of the informal organisation and understand the nature of it. Whether it is
complementing or holding back the organisation.
2. If it is complementing the formal organisation, adapt the formal structure to take into account the
informal one. It is easier to change the formal structure than the informal structure.
3. Allow the informal organisation to thrive within the formal one by having a less rigid or more flexible
formal structure. However, the informal organisation has to be monitored as it may undermine the
formal structure.

In conclusion, the informal organisation requires just as much, if not more, management compared to the
formal organisation.

Check understanding

1. Informal groups tend to:


A. Be counterproductive for an organization
B. Be formed primarily outside work
C. Meet needs for social contact
D. Achieve organisational tasks

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2. A group brought into existence as part of the organisation’s structure is defined as:
A. A formal (or command) group
B. An informal group
C. A friendship group
D. An aggregate of people

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8.2 Introduction to Committees


Learning Outcome (ACCA Study Guide Area B, Topic B4a& B4c):
Explain the purposes of committees.
List the advantages and disadvantages of committees.

8.2.1 Definition of a Committee

A committee is a group of people who are committed to a particular purpose, in which the group have
been, delegated the authority to make a decision about that particular purpose.

A committee has the following distinct features:

 A committee is usually permanent with a specific purpose assigned.


 They are assigned authority where they are to make decisions on issues.
 There is a set of rule of procedures that governs the committee where its members are to prescribe
to certain ways of doing things.
 There is usually a chairperson and a secretary.

8.2.2 Purposes of a Committee

A committee has several purposes or reasons and some of them are listed as follows:

Purpose of a Committee Examples


Handle problems /challenges A MNC competitors enter the market place

Generate innovative ideas Presence of many members in the committee enable more
diverse ideas and suggestions to be sought.

Make and implement decisions Committee which is a formal team thus has the authority to
make and implement decisions.

Information gathering and This is especially true when members of the committee are
dissemination/distribute roped in from various departments.

Achieve synergy( 1 + 1 > 2 ) Synergy is the outcome of the strengths, expertise and
experience of all the rulers being pooled together.

To set policies, rules of procedures With the introduction of GST on 1/4/15, which has a direct
impact on operating cost, BOD has to set new policies and revise
those existing policies to meet the new challenge.

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Check understanding

To be successful, a committee should:

A. Have clear terms of reference, the necessary skills and experience, and a small team of less than
10.
B. Be cost-effective, frequently change its goals, and issue the agenda in advance
C. Circulate reports before a meeting, be cost-effective, and be a representative of all interests
D. Choose suitable subjects for action/have a written purpose/meet at least once a month

8.2.3 The Rules of Procedures of a Committee

The rules of procedures of a committee are designed to ensure that there is consistency and smooth
running of operations of a committee. It also ensures that there are fair dealings with no bullying and
proper recording of events and decisions.

The following are some of the rules of procedures that a typical committee would have:

 Voting rights: Each member is given a vote and in cases of a tie, the chairperson may have a vote
to break the tie.
 Proposing a motion and meetings: Members may propose a motion at a meeting or propose a
meeting to discuss a motion by serving notice.
 Rights of attendance: Only members of the committee may attend and a proxy may be assigned
with sufficient notice and authorisation.
 Agenda: Every meeting has to have an agenda before a meeting can convene.
 Quorum: The minimum number of members of the committee required to be present before the
proceedings of the meeting can be deemed valid.

8.2.4 Advantages of Committees


 Greater credibility and quality of decisions made as decisions are made by groups of experts.
 Productivity improves as synergy can be achieved with each member complementing each other.
 Responsibility is shared amongst all members.
 Greater support for new decisions made as the committee is assigned the authority, which is the
legitimate power to have the followers, submit to decisions.
 Better communication amongst members.

Check understanding

The rules of procedure are designed for a number of purposes, including helping to minimise the effect
of bullying tactics and ensuring that consistency and fair play are maintained.

Is the above statement true or false?

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8.2.5 Disadvantages of Committees


 It may take a longer time to reach a decision and it can be costly.
 In a committee, there may be conflicts of ideas. Therefore, decisions may tend to be a compromise
of the best possible solution. This is a levelling effect.
 Experienced members of the committee may dominate the committee and smother other
members.
 As committees have rules of procedures, it may slow down the process of decision making even
more and some may use the rules to delay time or buy time.

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8.3 Types of Committees


Learning Outcome (ACCA Study Guide Area B, Topic B4b):
Describe the types of committees used by business organisation.

In general, there are two broad categories of committees:

1. Standing Committees: It operates on an on – going basis and they are permanent. E.g. the Board of
Directors, Audit Committees and Remuneration Committees

2. Ad – hoc Committees: They are not permanent and they operate to respond to a particular factor,
which may have arisen due to some circumstances. The committee will be dissolved once the matter
has been handled or its initial purpose has been satisfied.

8.3.1 Types of Committees


Committee Roles
Board of Directors Assigned the authority to steward and govern the company by the
shareholders. It is made up of Executive Directors and Non-Executive Directors.

Audit Committees Made up of non-executive directors and the committee is responsible to ensure
that the organisation complies with all legal and regulatory requirements. It
also oversees the work of the organisation's internal and external auditors.

Remuneration Determine the remuneration package of the organisation’s top executives and
Committees executive directors.

Nominations Made up of mostly independent non-executive directors. This committee is


Committees responsible to evaluate the balance of skills, knowledge, independence and
experience on the board. They will then prepare a description of the role and
capabilities required for a particular appointment.

Steering Formed to steer or drive projects. Once the project has ended the committee
Committees usually dissolves.

Work Safety Examines the operations of the organisation and ensures that all Health and
Committees Safety measures are taken. The Committee will highlight any deviations from
standards, and gives recommendations to ensure a safe and healthy working
environment.

Ethics Committee Formed to ensure proper ethical standards and policies are established in the
organisation to manage issues such as fraud, conflicts of interests, customer
complaints and related parties’ transactions.

Risk Management Formed to assess the operational and financial risks of the organisation. It has
Committee to ensure that the control systems are in place review risk management of the
organisation. It complements audit committee.

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Check understanding

Standing committees operate on an on-going basis. They are put together to serve a particular function
and meet periodically.

1. Is the above statement true or false?

2. Which of the followings have similar characteristics as a remuneration committee?


A. Ad-hoc committee
B. Standing committee
C. Steering committee

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8.4 Roles of the Chair and Secretary of a Committee


Learning Outcome (ACCA Study Guide Area B, Topic B4d):
Explain the roles of the Chair and Secretary of a committee.

8.4.1 Role of the Chairperson


The chairperson is the head of the committee and he or she leads the committee to address issues and
arrive at solutions.

The chairperson is responsible for ensuring that:

 Meetings are conducted in an orderly manner without any destructive conflict.


 All rules or procedures are adhered to.
 All participants are given equal opportunities to speak.
 Discussions remain on track as per the agenda.
 The meeting proceeds with a clear understanding of the decisions made.
 The committee agrees on the action plan to move forward.

The chairperson is very important; therefore, he or she has to have the following competencies/skills:

 Sound understanding and knowledge of the rules of procedures.


 Able to communicate effectively both verbally and non – verbally.
 Assertiveness in handling conflicts and issues that may arise during the meeting.
 Ability to be decisive.
 Skills in summarising.
 Impartial/neutral and objective, viewing the problem without any personal feelings involved.

Check understanding

The responsibility to ensure that a committee addresses and arrives at a solution to the issue at
hand is given to:

A. The secretary of the committee


B. An individual committee member
C. The CEO of the organisation
D. The chair of the committee

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8.4.2 Role of the Secretary


The secretary of the committee is responsible for the administrative work of the committee and to
support the chairperson. His or her role can be categorised as before, during and after the meetings.

Responsibility of the Secretary:

Responsibility Purpose
1. Before the meeting  Confirming the time and date of the meeting with all members.
 Booking and preparing the venue of the meeting.
 Preparing relevant documents to be sent to all members.
2. During the meeting  Taking notes for the minutes of the meeting.
 Advising the chairperson on rules of procedures.

3. After the meeting  Preparation of the minutes of the meeting.


 Dealing with correspondences/letter writing.
 Follow up on actions agreed upon in the meeting.

Check understanding

In the UK, the importance of the secretary of the committee (e.g.: BOD) is deemed to be more
significant and critical than an accountant? (true/false)

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Learning Outcomes

End the end of the chapter, you should be able to:

TLO B2a. Describe Mintzberg’s components of the organisation and explain the different ways in which
formal organisations may be structured:

i) Entrepreneurial
ii) Functional
iii) Matrix
iv) Divisional: (geographical, by product, or by customer type)
v) Boundaryless: (virtual, hollow or modular)

TLO B2b. Explain basic organisational structure concept:

i) Separation of ownership and management


ii) Separation of direction and management
iii) Span of control and scalar chain
iv) Tall and flat organisations
v) Outsourcing and offshoring
vi) Shared services approach

TLO B2c. Explain the characteristics of the strategic, tactical and operational levels in the organisation
in the context of the Anthony hierarchy

TLO B2d. Explain centralisation and decentralisation and list their advantages and disadvantages

TLO B2e. Describe the roles and functions of the main departments in business organisations:

i) Research and development


ii) Purchasing
iii) Production
iv) Direct service provision
v) Marketing
vi) Administration
vii) Finance

TLO B2f. Explain the roles of marketing in an organisation:

i) Definition of marketing
ii) Marketing mix
iii) Relationship of the marketing plan to the strategic plan

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9.1 The Different Ways Organisations May Be Structured:


Learning Outcome (ACCA Study Guide Area B, Topic B2a):
Describe Mintzberg’s components of the organisation and explain the different ways in which formal
organisations may be structured:

i) Entrepreneurial
ii) Functional
iii) Matrix
iv) Divisional (geographical, by product, or by customer type)
v) Boundary-less (virtual, hollow or modular)

9.1.1 Components of Organisation


Henry Mintzberg defined organisational structure as "the sum total of the ways in which it divides its
labour into distinct tasks and then achieves coordination among them".

He suggested that an organisation is more complex than just differentiating between hierarchy types and
an organisation is made up of six parts as follows:

(1)
These building blocks can be
(6) integrated into a cohesive unit with
coordinating mechanism:

(2) i. Direct Supervision


(4) (3) ii. Standard of Work
iii. Standard of Skills
iv. Standard of Output
v. Mutual Adjustment

(5)

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1) Strategic Apex It involves the senior management of the company and this component ensures
that the organisation pursues its objectives and serves the needs of its owners
and other stakeholders. They are involved in strategic planning, resource
allocation and boundary management. (e.g. Board of Directors)

2) Middle Line It involves managers and supervisors, forming the chain of command that runs
from the strategic apex to the operating core. Their key tasks are organising,
planning and control of work, acting as an interface between senior
management and operational employees. They are also the organisation’s
liaison with external contacts. (e.g. Head of Departments/Functions)

3) Support Staff It includes the administrative and ancillary support staff who offer
administrative and ancillary support to the rest of the organisation. (e.g.
cleaning, maintenance, security, etc.) (also see: Chapter 7: Porter’s Value Chain
– support activities)

4) Technostructure It involves specialist advisers and analysts as well as technical support staff. They
offer technical support to the rest of the structure, designing and maintaining
systems to standardise work throughout the organisation. (e.g. production
engineers, IT specialists, etc.) (also see: Chapter 7: Porter’s Value Chain –
support activities)

5) Operating Core It involves staff directly in the production of the products or services. They
secure inputs and processes, and distribute them as outputs. (e.g. production
operators, salespeople, etc.) (also see: Chapter 7: Porter’s Value Chain – primary
activities)

6) Ideology It is the halo of beliefs and traditions; It is the norms, values and culture (also
see: Chapter 10) of the organisation and defines how things are believed should
be done in the organisation

As an organisation grows in complexity and volume of activities, its formal organisation structure will need
to be adapted to accommodate its operations.

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9.1.2 The Different Types of Formal Business Organisation Structures


Organisation structure is a pattern of relationships among positions and between members in organisation
for allocating tasks, delegating authority, coordinating activity, and channelling communication. It can take
various structures as follows:

i) Simple or Entrepreneurial Structure

This organisation structure is usually for small companies in their early stage of establishment and the
owner is the manager and the decision-maker (no separation of ownership and control). Minimal
specialisation is required as the organisation has few functions and not many employees. Most of the
employees do almost everything and report directly to the owner.

Entrepeneur Employees

Advantages  Fast decision-making;


 More responsive to market;
 Good control as the owner is the manager; and

Disadvantages  Lack of career structure for its employees;


 Very dependent on the capabilities of owner or manager and if he or she is
incapable, the organisation suffers; and
 Resources are limited,

ii) Functional Structure

This is the next level after the entrepreneurial structure. This type of structure is suitable for small to
medium sized companies when it is necessary to group skills and expertise together. For example,
production, marketing, human resources, and accounting and finance. It is best suited when centralisation
of efforts is needed and for companies that have few products and dispersed locations.

However, when organisations become larger, communications are limited and departments become more
autonomous. A functional structure will have to evolve to suit its needs.

The following diagram is an example of an organisation with functional divisions. (Note: only the accounting
and finance subsystems are shown):

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Advantages  It is a logical and well accepted method of organising task and activities.
 It recognises the skills and encourages depth of skill of its employees when they
specialise and specialists become more comfortable with their work;
 It is a logical means of control based on each function because people should
only be made accountable for what they are asked to specialised in;
 It maintains the identity of the respective key functions, allowing greater team
solidarity and cohesion within the functions
Disadvantages  The departments may become inward looking, insular and self-serving;
 It can cause narrow specialisation because everyone only does what they do
best;
 The respective functions lack the overview point of the organisation and this
causes sub-optimisation of efforts;
 Empire building: Some departments may start to be too territorial and defensive
of their work and this may cause conflicts among departments;
 Slow in decisions: Some functions are not sensitive to market demands as they
may become self-serving and refuse to move out of their comfort zones;
 Such organisations are not responsive to changes and diversifications; and
 The development of general managers is inhibited as managers in the
respective functions lack the overview point of the whole organisation.

Check understanding

2. What is not an advantage of a hierarchical structure?


A. Clear chain of command
B. Quick response to change
C. Discipline and stability
D. Small span of control

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iii) Matrix Structure

The matrix structure is a structure that ‘crosses’ functional and product or project organisation where staff
in different functional or regional departments are responsible to both their department manager and to
a product or project manager. It establishes a grid with a two – way flow of authority and responsibility.

Teams are set up for certain projects consisting of individuals from various functional departments. While
engaged on the project, individuals are still responsible on a day – to – day basis to the project leader but
will continue to be functionally responsible to the head of their department.

The following diagram is an example of an organisation with a matrix structure:

Advantages  Flexibility: Teams of people with the right skills can be brought together quickly
and they are more responsive to market needs;
 It retains functional economies and product co-ordination;
 It is organic with open communication and flexible goals;
 Customer orientation: It raises product, market, and customer awareness;
 It encourages the “big picture” thinking;
 Encourage teamwork and the exchange of opinions and expertise;
 It improves motivation as people are in teams; and
 Advantages of both functional and divisional structures.
Disadvantages  The cost of administration is higher;
 Dilution of functional authority
 It may slow down decision making as there are two bosses to report to;
 Time-consuming meetings; and
 An individual may be stressed, as he or she has to report to two bosses.

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iv) Divisional Structure

Divisional Structure by Product

Organisation is structured according to products lines or divisions. A manager usually heads the division
and each division is seen as a profit centre or strategic business units (SBU) for planning and control
purposes.

The product or type of service division is based on the range or product or services that an organisation
offers. It is suitable for large organisations that have a wide diversity of products or services and there is a
need to manage, control or measure the performance of individual group of products or services. This type
of divisional structure is usually a progression from the functional structure as the organisation becomes
larger.

Organisations producing fast moving consumer goods (FMCGs) such as Procter & Gamble (P&G) will find
this organisation configuration very apt.

The following diagram depicts the product divisionalisation:

Advantages  Focus of functions on one product is more effective as they have an advantage
of familiarity of their product and the market that they are serving;
 Clear responsibility for product and divisions;
 Enables growth: There is better focus on product performance and profitability
because they will not be distracted by other products and functions;
 Top level management may also focus on strategic issues instead of the day-to-
day running of the organisation; and
 It promotes utilisation of specialised equipment

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Disadvantages  Potential loss of control of product divisions by top management as division


managers are given a lot of autonomy;
 There may be a lack of goal congruence if the product divisions are not
coordinated. This causes duplication of effort and ineffectiveness;
 There is a need for central co-ordination not just within the product;
 Duplication of resources;
 Centralisation of services of non-profit departments such as human resources,
and accounting and finance becomes difficult; and
 Cost allocation of central activities such as management, HR and Accounting
may be difficult.

Divisional Structure by Geography

The geographical divisional structure is configured based on the geographical locations of the
organisation’s operations. In each region or country, the geographical areas become administrative units
by themselves. However, there are still functions that are centralised. It is suitable when social factors and
social cultures are different in the regions or there is a need to reach out to new markets. In each region,
there may be product divisions as well.

The following diagram depicts geographical divisional configuration:

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Advantages  It is more responsive to ‘local’ markets;


 It can identify opportunities better as it is closer to the market. This enables
geographical growth of the organisation;
 There is better delegation with clear authority and responsibilities;
 It is a good training ground for general managers;
 Top level management may also focus on strategic issues instead of the day-to-
day running of the organisation; and
 It benefits from the advantages of economies of local operations, local staff,
local suppliers, and better logistics.
Disadvantages  Potential loss of control of geographical divisions by top management as
division managers are given a lot of autonomy;
 There is a need for general management capabilities which may not be
immediately available;
 Communication between headquarters and localities may be a problem; and
 It may be difficult to base central operations such as human resource,
purchasing, management services etc.

Divisional Structure by Customers

A business is configured to serve its customers, and organisations are increasingly reflecting that premise
in their organisational structure. After identifying the key segments of its customers, divisions are created
to address and satisfy the needs of each customer segment.

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v) Boundary-less Organisations
Conventional organisational structures can be inflexible and to meet the competitive demand of the
environment, modern organisation have adopted the following trends to ensure flexibility.

Boundary less organisations are designed to break traditional or conventional organisational structure
to properly adapt to an ever more competitive market environment.

There are three basic types of flexible (boundary less) organisation structures:

Virtual Organisation Some organisations do not require a physical office or


presence. All the communications of the virtual
organisation will be done online. Another interpretation
of the virtual organization is the creation of an external
entity by a company in order to take advantage of a
market opportunity. An example would be a joint venture
with economic partners to develop a particular project.
Once the project is completed, the virtual entity is
disbanded or re-absorbed into its parent organisations.
This allows organisations to respond quickly to market
changes without jeopardising or changing their
incumbent or existing systems.

Hollow Organisation A hollow organisation is an entity that has outsourced the


majority of its activities, focusing primarily on their
fundamental value generating competence. The objective
is to achieve economic nirvana, “Value without assets”.
For example, a food company may maintain its branding
and its secret product formulas, but outsource everything
else. (e.g. Amazon

Modular Organisation Modular organisations outsource the production of


certain components, and assembling them in – house into
the final product. The key activity is to successfully link all
the components (or modules) together with each other to
get a tangible product.

Source: Organisational Design: Inviting the Outside in, International Institute for Management
Development, 2012

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Check understanding

2. What is a virtual organisation?

A. An organisation that uses information and communications technologies (ICT's) to coordinate


activities without physical boundaries between different functions
B. An organisation that uses internet technologies to sell products to customers
C. An organisation that manages the supply chain using digital technologies
D. An organisation that coordinates the workforce via video conferencing

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9.2 Organisational Structure Concept


Learning Outcome (ACCA Study Guide Area B, Topic B2b):
Explain basic organisational structure concepts:

(i) Separation of ownership and management


(ii) Separation of direction and management
(iii) Span of control and scalar chain
(iv) Tall and flat organisations
(v) Outsourcing and offshoring
(vi) Shared services approach

An organisation does not exist spontaneously and there are steps to establish it. The following are the steps
needed to establish an organisation:

1. Set aims and objectives of the company


2. Determine systems, policies and procedures
3. Establish functional areas through the division of labour or specialisation
4. Allocation of roles and responsibilities
5. Determine the formal relationships between functions.

9.2.1 Separation of Ownership and Management

The shareholders invest in a company and hold ownership over the organisation and its asset; and with
the exception of the sole traders and partnerships, the owners of the organisation may not control or
manage the organisation.

For example, in a limited company, owners are called the shareholders and in a public organisation, the
owners are the government or the public, but they do not manage the organisation.

The organisations are usually controlled and managed by a group of controllers who makes decisions for
the company and manages the operations of the company. In a limited company, the controllers are the
Board of Directors and managers.

The separation of ownership and control may be due to some of the following reasons:

 The original owners or shareholders of the company may not have adequate resources to provide all
the finances to run a business, therefore they have to invite outside investors to bring in more capital.
These investors may not be interested in the day – to – day running of the company and therefore has
delegated the task of management and control to the original owners or shareholders.
 The professional directors and managers have appropriate expertise and more time to manage the
organisation.
 The professional directors and managers can make decisions in the best interest of the organisation,
taking into consideration all the stakeholders and not just the owners or shareholders.
 The professional directors and managers can provide a more independent view on all matters.

The concept of “separation of ownership and control” will be further discussed in Chapter 11 of the syllabus
under Agency Theory.

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9.2.2 Separation of Direction and Management

Management means controlling the company in the daily operations (short-term)

Direction means planning, directing & strategizing to lead the company into towards competitive
advantage. (long-term)

In small sized company, the owners may both hold ownership of the
company while managing and directing the company.

In a medium sized organisation, the owners may not have the time or the
expertise to manage the company. Therefore, they bring in managers with
expertise to manage to organisation while they can focus on giving direction
to the organisation.

In a relatively large organisation, the Board of Directors decides the direction


of the company. The Board of Directors are delegated the authority to give
the company direction by the owners (for example, the shareholders) and
they are responsible for giving the company direction and strategizing for the
company. Another advantage of having a Board of Directors is that they have
the expertise and can look beyond the operations of the company.

Another reason for the separation of direction and management is because there has to be a separation of
powers. This will also create a check and balance between the people who give direction and the
management.

Check understanding

In an organization, the group of people who deal with long-range planning are the:
A. Operational managers
B. Tactical managers
C. Strategic managers
D. Non-management

9.2.3 Span of Control and Scalar Chain

Span of Control

A manager’s span of control is the number of employees or subordinates for whom he or she is directly
responsible.

The wider the span of control, more subordinates are under the care of a manager (superior) and this
eventually will cause the organisation structure to become flatter.

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Scalar Chain

It is defined as the line of authority which can be traced up or down the chain of command, and thus relates
to hierarchy, which is the number of management levels within the organisation.

9,2,4 Tall and Flat Organisations

Tall Structure

It has many managerial levels (hierarchies) and a ‘narrow’ span of control. A tall organisation is one, which,
in relation to its size, has a large number of levels of management hierarchy. This implies a narrow span of
control and tight supervision and control.

The following is an illustration of a tall organisation chart with four levels of hierarchy and each superior
has a span of control of only two subordinates:

Advantages  Opportunities for individuals to be promoted to the next level are higher as
differences in responsibilities are small between the levels.
 A superior would have more time to each subordinate, as the span of control is
smaller.
 A supervisor would have better control of fewer subordinates.
 A manager can dedicate more time to each staff, and his or her own work.

Disadvantages  It inhibits delegation, as managers would have more time to do the work
themselves.
 In tall organisations, the supervision is more rigid as the manager can spend
more time with the subordinates and this blocks initiative and flexibility.
 Increases administrative and overhead costs because there are many levels in
the hierarchy and some of the work may be duplicated.
 Work passes through too many hands and it creates inefficiency and less sense
of responsibility.

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What is a Bureaucracy?

Usually a bureaucratic organisation has a tall organisation structure. It is a system of government which
most of the important decisions are made by officials in the government rather than elected
representatives.

Bureaucracy promotes stability and predictability but is often riddled with red tape where the members of
the organisation are excessively adhering to rules and procedures, which may in turn cause inefficiency.

Advantages  It is suitable for routine and standardised work.


 It can be highly efficient as the best methods of doing work is written in
procedures and followed by all.
 It promotes fairness and adherence to laws.
 Some individuals prefer a predictable and structured environment.

Disadvantages  Slow decision-making caused by excessive adherence to a rigid chain of authority.


 Individual creativity and initiative may be suppressed.
 It is slow to change and not adaptable.
 Communication is restricted to formal channels only, ignoring the benefits of an
informal organisation.

Check understanding

Which of the following is not an example of bureaucratic functioning in organisations?

A. Paperwork and record-keeping


B. Hierarchical organizational structure
C. Advertising and marketing brochures
D. Policies, rules, and procedures

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Flat Organisations

A flat organisation is one, which, in relation to its size, has a small number of hierarchical levels. This implies
a wide span of control and a greater degree of delegation and decentralisation of authority.

To illustrate, the following is a flat organisation chart with three levels of hierarchy and superior A has a
span of control of five subordinates:

Advantages  It encourages delegation and motivation.


 It lowers management overhead costs, as there are fewer levels of managers.
 It supports flexibility and members are adaptable to change.
 Quicker decision making and communication.
 It facilitates better horizontal communication.
 Closer contact between top management and lower levels of staff.
Disadvantages  Not all tasks can be effectively delegated.
 Management sacrifices an element of control and co-ordination.
 The middle line may be necessary to communicate vision to lower levels.

9.2.5 Outsourcing and Offshoring

We have already discussed outsourcing as the contracting of certain activities to an external supplier.
Offshoring involves performing outsourcing and contracting the work outside the organisation’s country of
origin.

This is usually in pursuit of lower costs, and has contributed greatly to the term of “globalisation”, where
companies create value around the world and sell to customers around the world.

Unfortunately, this practice has led to certain ethical issues and corporate scandals.

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Check understanding

Outsourcing is often associated with which business processes?

A. Allowing employees to work from home


B. Sourcing data from outside the company
C. Transferring call centres oversees
D. Sending staff on foreign assignments

9.2.6 Shared Services Approach

Organisations may decide to outsource their non – critical administrative functions to a shared services
organisation. This organisation manages administrative functions (such as payroll or accounting) for
multiple companies.

This allows the shared service company to achieve economies of scale to reduce administrative costs, and
enabling client entities to lower cost and focus on core competences.

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9.3 Characteristics of Strategic, Tactical and Operational Levels


Learning Outcome (ACCA Study Guide Area B, Topic B2c):
Explain the characteristics of the strategic, tactical and operational levels in the organisation in the context
of the Anthony hierarchy.

There are basically three levels of management as defined by Robert Anthony.

9.3.1 Strategic Level


The strategic level is made up of Board of Directors, Chief Executive Officers and General Managers.
Decisions and plans finalised at this level are concerned with how to improve the competitiveness of the
organisation.

At this level they are involved in strategic planning and the time span of planning is usually for the long
term, usually from two to five years or even longer. Strategic planning is a systematic approach to guide
the medium to long-term future of the organisation. It is a process by which an organisation defines its
vision and develops strategies, goals, objectives, and action plans to achieve that vision.

It defines the overall company objectives, taking into consideration the internal and environmental factors
that may affect the achievement of these objectives. Usually it focuses on particular parts of the
organisation over a period of time and may be quite general but will still point towards the overall
objectives.

In strategic planning, setting of objectives is crucial and it also involves:

 Looking at the whole organisation as well as individual products and markets. (also see: Porter’s
Value Chain)
 Considering the view of all stakeholders, not just the shareholders’ perspective. (also see:
Mendelow’s Stakeholder Matrix)
 Analysing the organisation’s resources and define resources requirements.
 Ultimately, gaining a sustainable competitive advantage. (also see: Porter’s Five Forces and SWOT
Analysis)

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The strategic planning process is broken down into three steps:

Step 1:  External analysis to identify opportunities and threats.


Strategic Analysis  Internal analysis to identify strengths and weaknesses.
(where we are now?)  Identify and analyse the stakeholders’ objectives and its alignment to
organisation objectives
Step 2:  what is the basis of the organisation’s strategy, E.g. cost leadership or
Strategic Choice differentiation strategy?
(where do we want to go?)  Where does the organisation want to compete and in which market?
 How to achieve objectives, e.g. through organic growth or through
acquisitions?

Step 3:  What are the actions of each functions (e.g. Marketing function)
Strategic Implementation required to implement the strategy?
(how do we get there?)  Understanding what are the changes required and how to manage it.

For strategic planning to be effective, it has to be constantly amended if there are new developments.
Organisation has to be responsive to high level of uncertainty in the environment.

Check understanding

The strategic level of management would make a decision on


A. Site locations
B. Production scheduling
C. Employee performance appraisals
D. How to allocate marketing dollars across various media?

9.3.2 Tactical Level


The tactical level is made up of functional managers or heads of department, for example, Marketing
Manager, Accounting and Finance Manager, Human Resources Manager, and Production Manager. The
decisions and plans made by the tactical managers are concerned with how to improve the effectiveness
of the organisation.

Tactical managers are involved with tactical planning and the time span for planning is usually for a year
and below, thus it is an intermediate range planning and deals with the mechanics of how to achieve
objectives set by strategic plans. It involves the functional operations of the organisation and it decides
what needs to be done within the time period to further the strategic plan. It looks at the various functions
and specifies how to use the resources allocated by the strategic management.

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9.3.3 Operational Level


The operational level is made up of supervisors and clerical staff working under managers. The decisions
and plans made at this level concerned with how to improve the efficiency of the organisation.

Operational planning is usually for a very short term and may be for day-to-day, weekly or monthly basis.
Operational planning is specific and provide details on those tasks that have to be completed in the day –
to – day operations of an organisation. It is for the short – term and it answers the questions on very specific
area of work and methods of how things can be done. Such plans primarily concerned with control.

Check understanding

The level of management that develops short range planning devices, such as production schedules, and
directs the use of resources and performance of tasks within established budgets and schedules is
A. Operational management
B. Strategic management
C. Tactical management
D. Non-management

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9.4 Centralisation and Decentralisation


Learning Outcome (ACCA Study Guide Area B, Topic B2d):
Explain centralisation and decentralisation and list their advantages and disadvantages.

Centralisation and decentralisation looks at where decisions are made and whether it has been delegated
to the lower levels of management.

9.4.1 Centralisation
A centralised organisation would mean that the upper levels of the hierarchy retain the authority to make
the decisions

The degree of centralisation depends on (determining factors):


 Top management preference and ability;
 Ability of employees;
 Location spread of the employees and operations;
 The size of the organisation;
Advantages  Better co-ordination as decisions are made at one point;
 Senior Management gets a wider view of issues and consequences;
 Quality of decisions are better as managers are better skilled and experienced;
 Policies, procedures and documentations can be standardised organisation-wide.

Disadvantages  Slow decision making and responses as strategic apex is further away
 Overburden top managers in terms of workload and stress
 Junior managers lack motivation who are not given responsibility and authority
 Lack of awareness of local problem especially if organisation is dispersed
geographically

Check understanding

Minimum freedom for managers and maximum constraints are main features of

A. Total autonomy
B. Total centralization
C. Total decentralization
D. Total congruency

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9.4.2 Decentralisation
A decentralised organisation would allow the lower levels of the hierarchy to make decisions.

Advantages  Senior management are not overworked and they can focus on strategic areas;
 Improved motivation of personnel at tactical level;
 Greater awareness of local problems by decision makers as solutions can be
offered closer to the issues;
 Greater speed of decision making creating greater customer satisfaction and
more responsive to changes;
 Potential employees can be groomed for higher job positions;
Disadvantages  Dysfunctional decisions due to a lack of goal congruence;
 Poor decisions made by inexperienced ‘junior’ or tactical level managers;
 Training costs are higher;
 Duplication of roles within the organisation; and

Check understanding

Degree to which freedom is given to lower level managers for decision making is classified as

A. Decentralization
B. Centralization
C. Autonomy
D. Congruency

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9.5 Main Departments in a Business Organisation


Learning Outcome (ACCA Study Guide Area B, Topic B2e):
Describe the roles and functions of the main departments in a business organisation:

9.5.1. Research and Development


9.5.2. Purchasing
9.5.3. Production
9.5.4. Direct Service provision
9.5.5. Marketing
9.5.6. Administration
9.5.7. Finance

To operate efficiently and effectively, key functions must be identified and established for every
organisation.

9.5.1. Research and Development


The R&D function is responsible for developing new products and improving existing products

The R&D function works closely with the marketing and production department in experimenting,
developing and testing products and services, anticipating the needs of customers etc.

In general, there are three types of research:

Type Description
Pure research Original research to obtain new knowledge or understanding

Applied research Using existing knowledge or technology to carry out research with
commercial objectives in mind

Development This involves the use of existing knowledge to produce new or improved
products or services

There are two categories of R&D in relation to a business:

1) Product Research: Developing existing products and creating new products.


2) Process Research: Improving the way or efficiency in how products are made or services are delivered.

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9.5.2. Purchasing
The purchasing function has the responsibility of acquiring goods and services necessary for the operations
of the business. It involves ensuring the 5 Rights: Right Quality, Quantity, Cost, Time and Supplier.

It is responsible to ensure that the organisation minimises cost and gets best value for money. The function
will negotiate price and payment terms with the supplier and will have to ensure that the quality of the
products and services are up to expectations. The purchasing function will have to keep track of stock levels
and delivery schedules, making sure that the operations of the business are running smoothly.

The Purchasing Mix:

1) Quantity: There should be a set ‘optimum reorder level’ to ensure ‘economic order quantities’ when
ordering and this is done by balancing between time and cost of holding inventories.
2) Quality: The quality of input resources affects the quality of outputs and the efficiency of the
operations/production function.
3) Price: Favourable short-term trends in prices may influence the procurement decision, but other
factors such as lead time, cost of holding stock, urgency, etc. should be considered for best value over
a period of time.
4) 'Lead time': This is the time between placing and delivery of an order. It affects efficient inventory
control and production planning. Reliability of suppliers' delivery arrangements should be assessed.

9.5.3. Production
The key responsibility of the production function is to convert raw materials into finished goods. The
production function has to be concerned with the quality of the raw materials and finished goods and
ensuring that costs are minimised with minimum wastages. It has to ensure that the stock levels are
maintained at the predetermined level, and to meet production schedules.

The ways of how productions will be organised and managed depends on four V’s:

1) Volume: Unit costs reduce when volume of production increases because of economies of scale.
2) Variety: Unit costs will increase as variety of products increase as production will not gain from
specialization and the high customization of production will increase costs.
3) Variation in demand: Unit costs increase as demand becomes highly unpredictable and variable.
4) Visibility: High visibility calls for staff with good communication and interpersonal skills.

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9.5.4. Direct Service Provision


Some organisations are not production oriented and they generate revenue through the provision of
services, for example, universities provide education and hospitals provide health care related services.
Therefore, an organisation which is service oriented will have a direct service provision function.

Some product – oriented organisations may have a direct service function to complement the products
that they sell, for example, a car service or repair function that provides after sales support to car buyers.
The key concern of the direct service function is the quality of their services and also the costing of their
services.

Check understanding

James’ main job responsibility is to serve as a single point contact for his organisation's clients. Which
department is he a member of?

A. Marketing
B. Finance
C. Human resources
D. Direct service provision

Nature of Services

Attribute Description
Intangibility Services that are not physical like goodwill or sincerity

Inseparability Services that are created as they are consumed

Perishability Services that cannot be stored

Variability Quality of services that varies depending on who is delivering it or when it is delivered

Ownership Unlike products, the consumer does not own the services after purchasing it.

9.5.5. Marketing (to be discussed later)


The main responsibility of the marketing function is to identify and anticipate customers’ needs. Marketing
activities involve the management and planning of a set of variables (4Ps+3Ps) and it may be concerned
with the quality of the products and services produced, the promotional strategy, the distribution channel
strategy and the pricing strategy used by the organisation in meeting the needs of the organisation.
Ultimately the marketing function has the role of maximising revenue and gaining a competitive advantage
over its competitors.

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Check understanding

1. Developing and implementing a pricing strategy that is to be attached to a product / service is a


function of which department?
A. Finance
B. Marketing
C. Production
D. Human resources

2. The government has introduced stringent new truth in advertising laws. This could impact which
department of an organisation the most?
A. Direct service provision
B. Marketing
C. Production

9.5.6. Administration
The administration function has the responsibility to give administrative support to the organisation and
to process the day – to – day transaction of the organisation. Their main concern is to ensure that processes
are efficient and information processing is timely, accurate and relevant.

9.5.7. Finance (to be discussed in Chapter 12)


The finance function has the key responsibility of managing the organisation’s money. The key roles of
finance are: Raising of capital, Bookkeeping and preparation of the financial statements, budgeting…

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9.6 Role of Marketing in an Organisation


Learning Outcome (ACCA Study Guide Area B, Topic B2f):
Explain the role of marketing in an organisation

Definition of Marketing

The Institute of Marketing defines marketing as a management process that identifies, anticipates, supplies
customer needs efficiently, effectively and profitably.

Marketing activities are across all boundaries and it is the role of the Marketing Manager to represent the
organisation and champion the customer.

Customer Value Proposition

The customer value proposition is the sum total of benefits which a supplier promises that a customer will
receive in return for the price that the customers pay for the benefits (value).

Therefore, the value proposition is what the customer gets for the price that they pay and this is used to
evaluate the different suppliers as to which supplier will provide the highest value proposition.

This is an important concept in marketing, as suppliers need to understand how best they can add value to
their offerings to attract the customers. Naturally, the supplier that offers the highest value proposition
will gain a competitive advantage over other suppliers in the same industry.

Check understanding

Which of the following represents the most directly important reason why firms monitor their
demographic environment?

A. To explain historical trends


B. To predict political change
C. To predict the size of market segments
D. To predict business cycles

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9.6.1. Marketing Orientation


An organisation may have a different approach to marketing and the following are four most likely
orientations that an organisation may use:

Sales orientation Focus is on selling as much as possible the product or services which they
already have available.

Production The business is focused on producing as many units of their products as


orientation possible and minimal efforts are made to determine what the customers need.
This usually happens when demand exceeds supply.

Product orientation The business is preoccupied with its product and focus is on research and
development in designing the perfect product by adding in as many features as
possible. The business falls in love with its product, sees beyond the needs of
customers.

Marketing orientation The main focus is the customer and to meet the customer’s needs. Products
are produced based on what they want and not what the organisation wants.
Extensive market research is done to understand the customer and the
organisation strives to meet those needs.

9.6.2. Marketing Mix


The Marketing mix is a set of variables blended together with the objective of producing desired results
from its identified target market.

It determines the success of a marketing strategy, which has to be devised and managed effectively by the
marketing function. The four variables, which are called the 4Ps+3Ps, are:

Product Product features, design, after-sales service, and warranties

Price Price levels, discounts, payments

Place Choice of place of sales, distribution channels, types of transportation, warehouse

Promotion Advertising, publicity, sales promotion and personal selling

The first 4Ps are applicable for products marketing and the second set of 3Ps were added for businesses
engaged in service provision. Therefore, for services marketing there are 7Ps.

People The people involve in delivering the service

Processes The ‘service encounter’ ,‘moment of truth’

Physical evidence Logo, staff uniforms and store layout/design

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Check understanding

According to four Ps of marketing, the inventory and logistics services are classified as

A. Place
B. Product
C. Price
D. Promotion

9.6.3. The Relationship of Marketing Plan and the Strategic Plan


Marketing as discussed is important in ensuring that the organisation has customers. Therefore, in most
organisations, the marketing plan is core to the strategic plan. It is one of the first priorities that strategic
management has to define.

There are three steps towards strategic planning, and we shall examine how the marketing plan is
integrated into these steps.

Step 1: Marketing analysis (marketing audit) will involve the following:


Strategic analysis  Analyse the strength of the company’s brand, product quality, reputation
etc.
 Analysis of competition and how strong they are.
 Market research to determine market attractiveness.
 Desk Research: Examining secondary data, which is readily available.
 Field Research: Conducting research to collect primary data.
 Test Marketing: To test how well the product is received by a sample of
its target market.
 Detailed analysis of customers’ expectations and their bargaining power.
Step 2: Marketing decisions will include:
Strategic choice  Decisions regarding which products to sell based on the research done on
the attractiveness of product choices.
 Market segmentation, which is the division of the market into
homogeneous groups of potential customers. Market segments may be
treated similarly for marketing purposes. The bases of segmentation may
include:
o Geographic: Asia, EU, USA or Australia
o Demographic: Pre-teens, Teens, Working Adults, etc.
o Socio-economic: Income group.
o Developing strategies based on the marketing mix variables.
Step 3: Implementation of marketing strategies by:
Strategic  Setting budgets for promotion.
implementation  Setting targets: Sales revenue, market share etc.
 Feedback: Monitoring and control.

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CHAPTER 10: ORGANISATIONAL CULTURE IN BUSINESS

CHAPTER 10: ORGANISATIONAL CULTURE IN BUSINESS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO B3a. Define organisational culture.

TLO B3b. Describe the factors that shape the culture of the organisation.

TLO B3c. Explain the contribution made by writers on culture:

i) Schein – determinants of organisational culture


ii) Handy – four cultural stereotypes
iii) Hofstede – international perspectives on culture

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10.1 Organisational Culture & the Factors shaping the culture


Learning Outcome (ACCA Study Guide Area B, Topic B3a & B3b):
Define organisational culture.
Describe the factors that shape the culture of the organisation.

10.1.1. Organisation Culture


Charles Handy defined organisation culture as ‘that’s the way we do things round here’.

Organisational culture may also be defined as the complex body of shared beliefs, attitudes and values
that shape behavioural norms in an organisation.

Check understanding

Fill in the missing word in this definition of culture:

'the basic assumptions and _______which are shared by members of an organization'

A. Hopes
B. Beliefs
C. Fears
D. Views

10.1.2. Factors
There are several factors that shape the culture of an organisation:

Factor Elaboration
History Past experiences of the entity

Size The organisation size will determine the degree of formality within the organisation
and how defined are the communication processes.

Purpose An organisation that is profit oriented would be very different compared to a non-
profit organisation.

Technology The key technology employed by the organisation can be important in influencing
culture because this will determine ways of working and interacting with others.

Founder, These people are key decision makers for the organisation, thus can influence
Owners, Leader culture as their own style of doing things is often reflected in the organisation.

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Operating The overall operating environment can determine the rate of change that the
Environment organisation needs to deal with.

Location or A firm operating in different countries would have different cultures as the people
Geography in the organisation would reflect very much of their own country’s culture.

Check understanding

The competitive environment influences an organization’s culture.

Is this statement true or false?

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10.2 Contributions made by Writers on Culture


Learning Outcome (ACCA Study Guide Area B, Topic B3c):
Explain the contribution made by writers on culture:

10.2.1. Schein – Determinants of Organisational Culture

Edgar Schein argues that leaders of an organisation have a strong influence on culture. The first leaders or
founders of a company create the culture for later leaders to emulate. To lead, leaders must understand
the organisation’s culture. Schein describes three levels within an organisation’s culture:

Level Description
1. Surface or physical These are tangible expressions such as literature, architecture,
artefacts interior design, uniform, symbols and etc. of an organisation.
2. Expressed or They are the meanings of those artefacts. It means more than the
espoused values ‘observable’ features. it helps to explain why people say certain things,
why they do things in certain manner, how decisions are made and etc.
3. Basic assumptions They form the foundation as to why an organisation exist. In other words,
and values basic assumptions and values are the core ideas in the way of thinking and
behaving of the organisation. they exist at an unconscious level. People
rarely question these values and assumptions.

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10.2.2. Handy – Four Cultural Stereotypes

Roger Harrison (1972) was the first to classify the cultures into four types of organisations and later Charles
Handy gave the cultures the names of Greek gods so that it can be easily remembered. The cultures and
their characteristics can be summarised as follows:

Culture Characteristics
Power Culture  Organisation is dominated by the personality and power of one person, often the owner
(Zeus: the head  Source of power from the owner or founder.
of all gods)  Centralised decision making.
 For likeminded – people introduced by like – minded people.
 Degree of formalisation is limited.
 Relatively fewer procedures and rules.
 Use of broad guidelines or knowledge from past decisions.
 Communication is direct to subordinates.
 Quick adaptation to change.
 Suitable for small – sized organisations or newly set up company.
Role Culture  Organisation is dominated by well – established rules, procedures as well as protocols.
(Apollo: god of  Presence of excessive rules and procedures.
harmony and  Formal structure with emphasis on hierarchy and status.
order)  Formal structure determines responsibility and authority of individuals and these
boundaries are not crossed.
 Emphasises on legality, legitimacy and responsibility.
 Individual personalities are unimportant; it is the job that counts.
 Predictability of behaviour is high.
 Stability and respectability are often valued as competence.
 Efficient in stable and predictable environments.
Task Culture  The way of doing things is dominated by team – based and project – based arrangement.
(Athena:  Project organisation reflected in project teams and task forces.
warrior  No dominant project manager or clear leader and authority is based on appropriate
goddess) knowledge and competence.
 Emphasis is on flexibility and end results.
 Depend on variety to tap creativity.
 Collaboration is crucial to achieve goals.
 May be disbanded when project or task completes.
 This organisation culture prevails in consultancy firms.
Person Culture  Individuals in the organisation have the freedom to develop his or her own ideas in the
(Dionysus) way they want.
 Purpose is to serve the interests of the individuals within it.
 Individuals work independently.
 Consensus decision making is preferred.
 Roles are assigned on the basis of personal preference and the need for learning and
growth.
 Organisation depends on the talent of the individuals.
 Management (for example, CEO, CFO) and etc. is: often lower in status than the
professionals.

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10.2.3. Hofstede – International Perspectives on Culture

Hofstede (1984) conducted a study of IBM employees across 66 national offices to look for national
differences in the attempt to find cultural aspects that might influence business behaviours and came up
with the following five cultural dimensions:

Cultural Dimension Characteristics


Individualism VS Collectivism High Individualism: Emphasise on autonomy, individual
the degree of which society reinforces choice, individual initiative, responsibility, and task
individualism or collective achievement. achievement more important. (Anglo, more developed Latin
For example: working in a group or and Nordic countries)
working alone Low individualism: Emphasise on interdependence,
(How much freedom/personal trust is reciprocal obligation, social acceptability, and family
given to individual employees?) oriented. (Less developed Latin, near Eastern and less
developed Asian countries)
Uncertainty Avoidance High Uncertainty Avoidance: Respects control, rituals,
It is concerned with the level of routines, and work ethics. Avoids risks and embraces stability
uncertainty (risk) within the culture. The (Latin, near Eastern and Germanic countries and Japan)
lower the level of uncertainty avoidance,
the greater tolerance it has for risk and Low Uncertainty Avoidance: Respects variability flexibility
uncertainty. and creativity. High tolerance for risks and unpredictability
(Anglo and Nordic Countries)

Power Distance High Power Distance: Centralised organisation with taller


It refers to the equality of power in structures and closer supervision. Subordinates prefer to be
society. Society with low power distance directed. (Latin, Eastern and less developed Asian countries)
emphasises on equal opportunity and Low Power Distance: Decentralised organisation with flatter
equality. structures and subordinates prefers to be involved and
(How tall/short is the organisation participate. (Germanic, Anglo and Nordic Countries)
structure?)
Masculinity VS Femininity High Masculinity: Gender roles are clearly differentiated.
It refers to the degree that the society Values assertiveness, competition, decisiveness and prefers
reinforces the traditional masculine material success. (Japan, Germanic and Anglo countries)
work role model. A high masculinity Low Masculinity: Gender roles are minimised and feminine
ranking refers to a high level of gender values are dominant. (Nordic countries)
discrimination and differentiation.

Confucianism VS Dynamism Confucianism: Safeguard tradition is top priority. E.g. Hong


It refers to the forward-looking Kong
perspective of cultures. An organisation Dynamism: Have little regard for tradition, embracing
that is more dynamic would embrace change in the name of progress. E.g. US
change and have little regard for
tradition.

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Check understanding

1. Hofstede argues that:


A. International firms can easily transfer their ways of working from one country to another
B. Business does not need to take into account the norms and values of the countries
where they operate
C. Each country has a single culture.
D. National culture is more influential than organizational culture.

2. In the United States, people give high priority to self-development, self-actualization and
individual initiative and achievement. This is an example of which cultural characteristic?
A. Individualism versus Collectivism
B. Worldview
C. Uncertainty avoidance
D. High context versus low context communication

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Learning Outcomes

At the end of the chapter, you should be able to:

TLO B5a. Explain the agency concept in relation to corporate governance.

TLO B5b. Define corporate governance and social responsibility and explain their importance in
contemporary organisations.

TLO B5c. Explain the responsibility of organisations to maintain appropriate standards of corporate
governance and corporate social responsibility.

TLO B5d. Briefly explain the main recommendations of best practice in effective corporate
governance.

i) Executive and non-executive directors

ii) Remuneration committees

iii) Audit committees

iv) Public oversight

TLO B5e. Explain how organisations take account of their social responsibility objectives through
analysis of the needs of internal, connected and external stakeholders.

TLO B5f. Identify the social and environmental responsibilities of business organisations to internal,
connected and external stakeholders.

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11.1 Agency Concept


Learning Outcome (ACCA Study Guide Area B, Topic B5a):
Explain the agency concept in relation to corporate governance.

11.1.1. Ownership and Control


1. Agency Theory

Agents are too focused on their own interest first before their principal’s and only look after the
performance of the company if its goals are coincident of their own.

Example: The principle is the shareholders of the company, delegating to agent (the management) to
perform task the on their behalf.

2. Stewardship Theory

When shareholders delegate the authority of running the organisation to the managers of the company,
the latter is responsible in ensuring that they exercise proper stewardship of the assets of the shareholders.
The managers are accountable for their decisions and their key purpose is to safeguard the assets of the
shareholders.

Examples: Managers seeks other ends besides financial ones. i.e. Reputation, satisfaction, task completion,
max profit and good returns to the shareholders.

3. Stakeholder Theory

This is where managers will be responsible not only to the shareholders but also to other stakeholders such
as customers, suppliers, employees, government and society at large.

It makes perfect sense as the other stakeholders form a ‘business ecology’ that an organisation cannot
ignore as the organisation is in an open system that interacts with the other stakeholders in the
environment.

A duty to care for the other stakeholders would benefit the organisation and its shareholders. Happy
customers, suppliers and employees would contribute to the reduction of costs and increasing revenues,
which leads to increasing profit for the organisation. The stakeholder theory is the main thrust of why an
organisation needs to be socially responsible.

Example: IBM smart planet campaign is to help reduce crime rate (US) by developing a computer system
to analyse huge crime data. This has benefit not only customers, but police department and communities.

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Check understanding

The 'agency problem' refers to which of the following situations?

A. Shareholders acting in their own short-term interests rather than the long-term interests of the
company
B. A vocal minority of shareholders expecting the directors to act as their agents and pay substantial
dividends
C. Companies reliant upon substantial government contracts such that they are effectively agents of
the government
D. The directors acting in their own interests rather than the shareholders' interests

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11.2 Corporate Governance and Social Responsibility


Learning Outcome (ACCA Study Guide Area B, Topic B5b & B5c):
Define corporate governance and social responsibility and explain their importance in contemporary
organisations.
Explain the responsibility of organisations to maintain appropriate standards of corporate governance and
corporate social responsibility.

11.2.1. Corporate Governance

 What is Corporate Governance (CG)?

The Cadbury Report (1992) defined corporate governance as the system by which companies are directed
and controlled. It is a set of systems, policies, processes, customs, laws and people that affects how a
company is directed and controlled at board level.

It is a framework of accountability to the shareholders and other stakeholders, where the company’s
decisions taken must be in congruence with meeting the objectives of the organisation, taking into
consideration its effect on stakeholders.

It is to balance the interest of many stakeholders: management, customer, supplier, government,


community.

 Why is it important to have Corporate Governance (CG)?

It is to ensure that the directors (Directors have the fiduciary duty (FIDUCIARY: to safeguard assets/money)
to serve the interest of the shareholders) of the company are accountable and act in the best interest of the
owners of the company and not the directors themselves. As the directors are charged with the duty of
stewardship of the company, it is important to ensure that what they do is the best for the company and
the owners.

 Reporting of Corporate Governance

The corporate governance Code takes on a ‘‘comply or explain’’ approach. Under the UKLA Listing Rules,
listed companies must make a disclosure statement about the UK Corporate Governance Code:

 Reporting on how the company applies the main principles in the UK Corporate Governance Code.

 Confirming that it complies with the UK Corporate Governance Code's supporting principles and
provisions, and IF it did not comply, explaining why it does not comply.

In evaluating the explanation of non – compliance, shareholders should consider the companies’
circumstances and in particular, the size and complexity of the company and the nature of the risks and
challenges it faces. It helps investors to decide on the future investment plan.

Every listed organisation must adhere to UK code of CG and failure to comply must be explained.

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Check understanding

Corporate governance is a system employed by non-executive directors to direct and control


organisations.

A. True
B. False

11.2.2. Corporate Social Responsibility (CSR)

 What is Corporate Social Responsibility (CSR)?

CSR refers to the idea that a company adopts the stakeholder theory where an organisation should care
about the needs of all stakeholders and not just only the shareholders, in its business operations.
Stakeholders are individuals or group of individuals who are affected by an organisation’s activities, and
who in turn, affects the way an organisation operates.

Key issues that are commonly debated with regards to CSR are:

o Employee rights.
o Environmental protection.
o Supplier relations.
o Community involvement and development.
o Charitable causes.

 Why is it important to have Corporate Social Responsibility (CSR)?

With good CSR practices, an organisation is able to:


Organisation is able to meet its
o Retain employees. short term and long-term
o Attract more investors. objectives:
o Manage operational risks better. i.e.: build reputation, increase
o Monitor changing social expectations. sales, attract and retain employees.
o Identify new markets.
o Better relationships with internal and external- stakeholders.
o Improve the organisation’s reputation in line with social expectations of society.

 Reporting of CSR
On the other hand, the reporting on CSR is still at its infancy. Nevertheless, here are some techniques:

The Triple Bottom Line Reporting:

The triple bottom line technique reports the 3Ps (Profit, People and Planet).

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The Balance Scorecard Approach:

The report is based on the following perspectives and an organisation that meets all four perspectives is
said to have sustainable development and will flourish:

The Financial Perspective It reports the traditional information on profit margins, return on Capital
Employed, Gearing and etc. (e.g. Financial Statements, Management
Reports)

The Customer Perspective It reports customer’s satisfaction towards goods and services offered.

The Internal Perspective It focuses mainly on the internal efficiency of the business.

The Innovation and It reports mainly on the research and development of new product and
Learning Perspective services.

Check understanding

Corporate social responsibility refers to the idea that a company should:

A. play an active part in the social life of the local neighbourhood.


B. be sensitive to the needs of all stakeholders
C. be alert to the social needs of all employees
D. act responsibly in relation to shareholders' overall needs — not just their financial needs

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11.3 Effective Corporate Governance


Learning Outcome (ACCA Study Guide Area B, Topic B5d):
Briefly explain the main recommendations of best practice in effective corporate governance.

i) Executive and non-executive directors


ii) Remuneration committees
iii) Audit committees
iv) Public oversight

11.3.1. The UK Corporate Governance Code 2012


The objective of corporate governance is to facilitate effective, entrepreneurial and prudent management
that can deliver the long – term success of the company. (FRC, 2012)

The corporate governance Code is a progressive elaboration of the Cadbury Report (1992) and it was
designed to address governance issues such as:
Lack of Issues
Leadership  Domination by a single individual.
 Emphasis on short-term profits.

Effectiveness  Lack of adequate control function.


 Lack of supervision.
 Lack of involvement of the board.
 Lack of independent scrutiny.
Relations with Shareholders  Lack of contact with shareholders.

Accountability  Misleading accounts and information.

Remuneration  Short-termism practices.

11.3.2. The Board of Directors


Most of the recommendations for good corporate governance relate very closely to composition
of the board of directors and their functions.

The main purpose of the Board of Directors is to:

 Create a vision and objectives of the organisation, and strategies to meet those objectives.
 Give direction to the executive management in ensuring that the objectives of the organisation
are met.
 Set policies for the organisation.
 Monitors and controls the management of the company.
 Monitors risks and control systems in the company.
 Maintains and ensures that there is sufficient capital for the operations of the business as well as
the expansion of the organisation.
 Allocate resources to all the main parts of the organisation.

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Composition of the Board of Directors

The board of directors consists of:

1. Executive Directors

A full-time position in the company in addition to serving as a board member.

2. Non-Executive Directors

As the non – executive directors (NEDs) are detached from the executive management and have no
personal interest in the incentive schemes, they should be able to review the performance of the executive
management team without bias and remain objective when setting strategies for the organisation. They
should not have any personal interest in trying to disguise poor performance or present 'falsified' financial
statements, which executive directors might do in order to boost their bonuses and other rewards.

Key Roles and Responsibilities of NEDs:

Strategy: Contribute to and challenge the intended strategy.

Performance: Scrutinise performance of management in meeting objectives.

Risk: Ensure information should be accurate and financial and risk management is robust.

Directors and managers: Appointment, remuneration, removal of senior management.

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Advantages Limitations
Provide a strong independent element onto the May lack independence.
board.

Bring in external experience and knowledge. Not taken seriously by management and have
problems enforcing suggestions.

Give a wider perspective of challenges and Limited time.


solutions.

Assure external stakeholders that the


management is checked.

Check understanding

1. Which corporate governance report focused specifically on non-executive directors?

A. The Cadbury report


B. The Smith report
C. The Hample report
D. The Higgs report

3. Independence of NED

Under the provision of the CG Code, the following are conditions where a NED may be determined as being
not independent IF they:

 Has been an employee of the company or group within the last five years;
 Has close family ties with any of the company’s advisers, directors or senior employees;
 Represents a significant shareholder
 Has served on the board for more than nine years from the date of their first election.

Except for smaller companies, at least half the board, excluding the chairman, should comprise
independent non-executive directors (NEDs). A smaller company should have at least two independent
non-executive directors (NEDs).

4. Remuneration Committees

The Remuneration Committee consists of at least three, or in the case of smaller companies, two
independents non-executive directors (NEDs). The company chairman may also be a member of, but not
chair, the committee if he or she was considered independent.

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The remuneration committee has the responsibility for setting remuneration for all executive directors and
the chairman, including pension rights and any compensation payments. The committee should also
recommend and monitor the level and structure of remuneration for senior management.

They are to ensure:

 The organisation is able to attract talents;


 Pay packages are reflective of the organisation’s performance; and
 The management does not over reward themselves to a point where the other stakeholders are
disadvantaged.

Check understanding

2. Which ONE of the following statements is untrue?

A. Companies should set up a remuneration committee consisting of only independent non-


executive directors.
B. The remuneration of the non-executive directors should be determined by the executive
directors.
C. The Corporate Governance model provides that directors should not be permitted to
determine their own levels of remuneration.
D. Remuneration committees should consist of at least three independent non-executive
directors, although in smaller companies, this may be reduced to two.

5. Audit Committees

The Audit Committee is made up of at least three, or in the case of smaller companies, two independent
non – executive directors (NEDs). In smaller companies, the company chairman may be a member of, but
not chair, the committee in addition to the independent non – executive directors (NEDs), provided he or
she was considered independent. At least one member of the audit committee has recent and relevant
financial experience.

As the Audit Committee is made up of NEDs, collusion between the management and the auditors can be
avoided. The reliability of financial statements (FSs) can be improved by limiting the possibility of collusion
between the external auditors and the executive management, by keeping the auditors independent from
the company and by ensuring that the company's accounting systems and controls are reviewed regularly
by the Audit Committee.

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The following are key responsibilities of the Audit Committee:

 To monitor the integrity of the financial statements of the company and any formal announcements
relating to the company’s financial performance, reviewing significant financial reporting judgments
contained in them.
 To review the company’s internal financial controls and.
 To review the company’s internal control and risk management systems.
 To monitor and review the effectiveness of the company’s internal audit function.
 To make recommendations in relation to the appointment, re-appointment and removal of the
external auditor.
 To review and monitor the external auditor’s independence and objectivity and the effectiveness of
the audit process.
 To develop and implement policy on the engagement of the external auditor to supply non – audit
services by the external audit firm.
 To report to the board, identifying any matters where action or improvement is needed and making
recommendations as to the steps to be taken.

6. Nomination Committee

There is no recommended minimum number of Nomination Committee members, but the following
conditions should be observed:

 A majority of the Nomination Committee should comprise independent non-executive directors.


 At least ONE member of the committee should be an Executive Director.
 The Chairman of the BOD should not chair the Nomination Committee when the matter of
appointment of a successor is undertaken.

The nomination committee’s primary purpose is, establish succession plans for board positions, and The
key responsibilities of the Nomination Committee are:

 To evaluate the annual re-election of all directors.


 To lead the process for appointments to the board.
 To ensure that Board of Directors have the relevant and sufficient skills to fulfil the company’s
objectives.
 To establish a succession plan for key positions and directorships within the company.
 To report and uphold a healthy balance of diversity and competencies, to meet both internal and
external standards.

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11.3.3. Public Oversight


Public oversight is a mechanism that oversees professions such as the auditors and accountants, which will
indirectly ensure proper corporate governance of the company.

This is because professionals such as the accountants prepare the accounts and the auditors verifies and
validates them. If they have done a good job in accordance to professional practice, corporate governance
will be ensured. It is also worth noting that their key responsibility is towards the interest of the public and
their profession, above their employers and clients.

In the UK, the Professional Oversight Board (POB), a body under the Financial Reporting Council (FRC),
monitors the oversight mechanism.

In the USA, The Sarbanes – Oxley Act 2002 led to the setting up of the Public Company Accounting Oversight
Board (PCAOB) to oversee the auditors of public companies in order to protect the interests of investors.

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11.4 Taking account of Social Responsibility objectives through analysis of needs Social and
Environmental Responsibility of Business Organisations to Stakeholders
Learning Outcome (ACCA Study Guide Area B, Topic B5e and B5f):
Explain how organisations take account of their social responsibility objectives through analysis of the
needs of internal, connected and external stakeholders.
Identify the social and environmental responsibilities of business organisations to internal, connected and
external stakeholders.

11.4.1. Stakeholder Analysis


An organisation can take account of their social responsibility objectives by conducting a stakeholder
analysis. The stakeholder analysis could be conducted by using questionnaires, interviews, focus groups
and etc. From this stakeholder analysis, the organisation can evaluate how decisions and actions of the
organisation can impact the stakeholders.

A stakeholder analysis is basically a study to understand:

 Who are the stakeholders of the organisation?


 What are their interests in the organisation?
 How will they affect the organisation?

The following are potential findings of a stakeholder analysis of the stakeholders’ interests:

The shareholders or owners of the  Dividends or capital gain from their investments.
company  Their interest is preserved and not disadvantaged.

The employees of the company (internal  Organisation provides equal opportunity and
stakeholders) conducive working environment.
 They would want to stay employed.
 To be paid a fair wage or salary.
 Want a hospitable working environment.
 To be treated fairly.

Connected stakeholders such as the  Organisation follows the rules and regulations and
customers, suppliers and creditors practice higher level best practice
 Organisation should be ethical and fair in all dealings.
 Organisation does not involve in illegal practices.
 Organisation meets its financial obligations.

External stakeholders such as the general Organisation ensures that if support the environmental
public and the government cause and sustainability development.
 Improved quality of life.
 Payment of taxes.

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Check understanding

When analysing stakeholder needs, the group of stakeholders that is likely to be most financially dependent
on company's ability to make a profit would include:

A. Pressure groups
B. Customers
C. Employees
D. Tax authorities

11.4.2. Strategies for Social Responsibility


When dealing with social responsibility issues, a company may choose any of the following strategies.

 Proactive: A business is prepared to take full responsibility for its actions. An issue is mitigated
before it even materialises. (To prevent problems AFTER they happen)
 Defence: A business minimises or attempts to avoid additional obligation arising from a problem
by doing the minimum. (To solve problems WHEN they happen)
 Accommodation: A business does what it is supposed to do only when encouraged by pressure
groups or knowing if they do not do it the government will intervene. (To only act when NEEDED)
 Reactive: A business allows the situation to continue unresolved until the public or government
finds out about it (To do nothing UNLESS PENALISED)

11.4.3. Social and Environmental Responsibilities of Businesses


Organisations have a large impact on society because of their growing numbers. There is a belief that
organisations should not just profit from society but also give back to society. Organisations now
acknowledge that along with sharing an economic environment with their stakeholders, they also share a
natural environment with them; therefore, they also have responsibilities towards the natural
environment.

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CHAPTER 12: THE RELATIONSHIP BETWEEN ACCOUNTING AND OTHER BUSINESS FUNCTIONS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C1a. Explain the relationship between accounting and other key functions within the business
such as procurement, production and marketing.

TLO C1b. Explain financial considerations in production and production planning.

TLO C1c. Identify the financial issues associated with marketing.

TLO C1d. Identify the financial costs and benefits of effective service provision.

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12.1 Accounting and Other Key Functions Within the Business
Learning Outcome (ACCA Study Guide Area C, Topic C1a, C1b, C1c & C1d):
Explain the relationship between accounting and other key functions within the business such as
procurement, production and marketing.
Explain financial considerations in production and production planning.
Identify the financial issues associated with marketing.
Identify the financial costs and benefits of effective service provision.

The accounting department will coordinate with other functions in the preparation of budgets, which is a
financial plan for the short term.

12.1.1. What is a Budget?


A budget is a QUANTITATIVE statement over a pre-determined period of time which allows management
to plan, set targets, coordinate and control its activities.

Through the budgets the various functions or departments are to integrate their systems using one
common denominator, which is MONEY. This will allow these functions or departments to complement
each other with the accounting department as the coordinator.

As a budget controller, the accounting function or department will also

 Assist managers to develop budgets,


 Translate non-financial budgets (e.g. number of employees, number of shipments),
 Ensure all budgets are interrelated,
 Coordinate all budgets into one master budget; and
 Recommend changes/solutions if there are problems or deviations from plans.

12.1.2. Accounting and Procurement


The purchasing function has the responsibility of acquiring goods and services necessary for the operations
of the business. It is responsible to ensure that the organisation minimises cost and gets best value for
money.

The main roles of accounting in relation to procurement is to:

 Make payments for purchases.


 Create and maintain records and reports.
 Ensure that purchases remain within budget.

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The accounting and procurement departments need to interact and work closely together and the areas
of coordination are as follows:

Quantity Determine ‘optimum reorder level’ to minimize cost of holding inventories.


As quality of input affects the quality of outputs, set a standard of quality that
Quality is affordable.
Accounting department advise on the maximum price that should be paid to
Prices
maintain good margins.
The procurement department will approve payments and the accounting
Payments department will make the payment.
The procurement department will record order details and then passed on to the
Data storing accounting department.

Budgeting Discuss on the likely costs to be involved in future budgeting.

Check understanding

Which of the following personnel in a manufacturing organisation would not be involved in the purchases
of raw materials?

A. Credit controller
B. Store keeper
C. Accounts manager
D. Procurement manager

12.1.3. Accounting and Production


The production function is primarily concerns with the process of converting raw materials into finished
goods. In its pursuit to produce quality goods, costs are to be minimised and this is accomplished with the
assistance of the accounting department.

Together with the accounting department, the production department oversees the production of goods.
Below are the areas of examples of coordination and considerations between accounting and production:

Cost, measurement, Accounting department determines how costs are then allocated and
allocation, absorbed to calculate the production costs based on the advice given by
absorption the production department.

Budgeting The costs of producing these will be determined by the accounting and
production departments together and incorporated into the overall budget.

Cost in comparison The production and accounting departments will both reach a consensual
with quality understanding on which are the better-quality materials and justify the
extra costs and discuss how to maximise quality and profit.

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12.1.4. Accounting and Marketing
The Institute of Marketing defines marketing as: a management process that identifies, anticipates,
supplies customers’ needs efficiently, effectively and profitably. The main role of the marketing function is
to identify and anticipate customers’ needs.

Every component of the marketing mix concerns finance (7Ps):

Product Features of the Product


Determined by cost, competitors’ pricing, customer perception – related to
Price
finance

Promotion Required a promotion budget

People High calibre staff is expensive

Processes Improvements in process may save cost

Place Direct distribution may affect cost

Physical Evidence Tangible marketing will cost the organisation

The following are some examples of how the accounting department coordinates with the marketing
department:

Budgeting Discussing and producing a sales budget. The sales budget is an important
element as it predicts the revenue to be received by the organisation.
Customer To meet the needs of the customer, costs must be less than benefit. A
Profitability Analysis customer profitability analysis has to be done to understand how much the
customer can benefit the organisation as compare to the cost of satisfying
their need.

The long-term profitability of the customer is also very important. In the short
run it may be expensive to provide free services to customers who have a low
income like students, but retained and loyal customer who may have a higher
income in future will benefit the organisation.

Advertising Setting the budget, and in monitoring the cost effectiveness of its
advertising campaign.

Pricing The accounting department will advise on the price that is to be charged and
marketed in order to recover cost.

Market share The accounting department can provide the marketing department with
information on sales volumes for each product to help them to determine
market share.

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12.1.5. Effective Service Provision
Some organisations are not production oriented or service sector or manufacturing and they generate
revenue through the provision of services. Some product-oriented organisations may also have a direct
service function to complement the products that they sell, for example, a car service or repair function
that provides after sales support to car buyers.

The key concern of the direct service function is the quality of their services and also the costing of their
service.

The following are several issues about which the service department may need input of the accounting
department:

The accounting department has to work closely with the service providers
Charge out Rates
to determine the rates charged.

If the services take longer to provide than expected, the company may
Estimating Costs
not be able to pass on the costs to the customers.

Problems The company may question whether it is worth carrying out the service.
The problem is that the benefits are intangible and not easy to measure.
Measuring Benefits
(E.g.: Happy customer and their loyalty to the company)

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CHAPTER 13: ACCOUNTING AND FINANCE FUNCTIONS WITHIN BUSINESS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C2a. Explain the contribution of the accounting function to the formulation, implementation,
and control of the organisation’s policies, procedures, and performance.

TLO C2b. Identify and describe the main financial accounting functions in business:

i) Recording financial information


ii) Codifying and processing financial information
iii) Preparing financial statements

TLO C2c. Identify and describe the main management accounting and performance management
functions in business:

i) Recording and analysing costs and revenues


ii) Providing management accounting information for decision-making
iii) Planning and preparing budgets and exercising budgetary control

TLO C2d. Identify and describe the main finance and treasury functions:

i) Calculating and mitigating business tax liabilities


ii) Evaluating and obtaining finance
iii) Managing working capital
iv) Treasury and risk management

TLO C2e. Identify and describe the main audit and assurance roles in business.

i) Internal audit
ii) External audit

TLO C2f. Explain the main functions of the internal auditor and the external auditor and how they
differ.

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13.1 Contribution of the Accounting Function


Learning Outcome (ACCA Study Guide Area C, Topic C2a & C2b):
Explain the contribution of the accounting function to the formulation, implementation, and control of
the organisation’s policies, procedures, and performance.
Identify and describe the main financial accounting functions in business:
i) Recording financial information
ii) Codifying and processing financial information
iii) Preparing financial statements

The accounting function has the key responsibility of identifying, recording, interpreting and reporting of
financial information to allow stakeholders to make decisions

Identify & Interpret & Useful


Transactions
Record Report information

i) Identification: The information that is needed or deemed to be useful are identified (e.g. Purchase
order)
ii) Recording: The information is captured and recorded either electronically or manually (e.g.
Purchase Ledger)
iii) Analysing: Processing and interpretation of information (e.g. Monthly/Quarterly/Annual
Purchases)
iv) Reporting: Communication and presentation of the information to internal and external users of
the information for decision-making. (e.g. Financial Statements)

Check understanding

The purpose of accounting function is to:


(1) control the organisation.
(2) provide information for decision making and informed judgments.
(3) provide planning and monitoring information.
(4) safeguard the assets of the organisation.
(5) prepare the financial statements.
(6) comply with the relevant legislation.

A. 1 and 5
B. 2 and 3
C. 2, 3, 5 and 6
D. 1, 2, 3, 4, 5, and 6

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13.1.1. Accounting Function and the Organisation’s Policies, Procedures and Performance
 Assess the performance of their departments and as a basis from which to make future decisions.
 Assist in development of strategic, tactical and operational plans.
 Setting budgets and the implementation of budgetary controls, which allows for the control of
performance and the coordination between departments. The budgets are used as a basis of
financial performance measurement.

13.1.2. Recording Financial Information


The process of recording transactions is to ensure that the organisation records its revenue, expenses,
assets, liabilities and capital accurately. It ensures that the organisation’s resources are properly controlled,
as the records will reflect the proper stewardship of the organisation’s resources.

Record in Prepare
Transaction Record in
ledger Finantial
occurs day book
accounts Statements

All activities throughout the organisation that have been classified as being either transactions or events,
and it have to be recorded by the accounting department along with their monetary effects.

Check understanding

Which of the following is not under the Financial Accounting function?

A. Sales Ledgers
B. Purchases Ledgers
C. Budgets
D. Inventory

13.1.3. Codifying and Processing Financial Information


Codifying and processing transactions and events call for similar transactions and events to be placed under
a common category when being recorded.

The coding process allows data such as transactions, accounts, and customer and supplier records to be
coded for ease of storage, analysis, reference, and retrieval for management information and financial

13.1.4. Preparing Financial Statements


‘Financial statements’ is the name given to accounting reports that require the information contained to
be put into a predetermined standard format.

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Having a standard format makes the information contained in these reports easier to read and understand
for its users (for example: executive directors, managers and shareholders of an organisation).

It is also a regulatory requirement for an organisation to have proper financial statements prepared in
accordance to Companies Act and Accounting Standards.

There are two main types of financial statements:

Statement of Financial Position

Statement of Financial Position will list out all the assets, liabilities and equity of an organisation at a
particular date.

Assets What an organisation owns (e.g.: cars, properties, cash)

Liabilities What an organisation owes (e.g.: loans, trade payables)

Equity Initial investments made by the owners and past profits that have not been paid out.
(retained earnings and ordinary share capital)

Statement of Profit and Loss

Statement of Profit and Loss consists of two components: revenues and expenses.

Revenues Sales of goods or services over a particular period

Expenses Costs the organisation has incurred in the same period, related to those goods and
services.

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13.2 Main Management Accounting and Performance Management Functions in Business


Learning Outcome (ACCA Study Guide Area C, Topic C2c):
Identify and describe the main management accounting and performance management functions in
business:

Role of Management Accounting

Organisations often require more detailed or specific sets of financial information that cannot be found in
the financial statements to make operational and/or investment decisions. Providing this type of
information will be the main role of management accounting function.

Management accounting therefore refers to the process of providing management with the necessary
information and data that will enable them to make decisions about the ways in which an organisation’s
resources are or should be allocated.

Management account produces financial forecast that guide planning for managers which is not found in
financial statements.

Although financial and management accounting provides similar information, there are significant
differences that exist between the two as shown below:

Financial Accounting Management Accounting


Provides information that is used by external users. Provides information that is used by internal
managers.
(Example: shareholders)

Portrays the financial condition of the organisation as Deals with individual component (e.g. Sales,
a whole. Marketing, Product) or details.
Various legal and regulatory bodies set the format Can follow any format.
and procedure of financial accounting.
Deals with only past events of an organisation. Deals with past, present and future events.

Produces one report per year. Produces more than one report per year.

Check understanding

The role of management accounting does not normally include the function of

A. Product costing
B. Planning and control
C. Cash management

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Performance Management

The process where an organisation monitors and evaluates whether the performance of its employees and
departments is meeting the predetermined standards set for them in the organisation’s plan and budget.

The management aspect comes into play when organisations take corrective action to help or assist
employees and departments who are not achieving their targets.

The reports produced by management accounting play an integral part in helping organisations to evaluate
whether employees and departments are performing as expected or in other words according to plan.

The three main components to management accounting and performance management are:

i) Recording and analysing costs and revenues. It is a continuous activity


ii) Planning and preparing budgets and exercising budgetary control. of monitoring employees
iii) Providing management accounting information for decision and departments achieve
making. its organisation objectives

13.2.1. Recording and Analysing Costs and Revenues

Management accounting provides both revenue and cost of information which are not only reported but
also classified into various categories to make it easier for an organisation to identify and work out ways to
reduce its overall costs. The categories include:

 Direct and indirect costs


 Fixed and variable costs.

Revenues are also reported from different perspectives. For instance, an organisation selling multiple
products would segment the revenue it earns along product lines.

13.2.2. Providing Management Accounting Information for Decision-Making

This process of recording and analysing costs and revenues provides the executives and management of
an organisation a basis from which to make operational and/or investment decisions.

Types of decisions that can be made with the recording and analysis of costs and revenue include:

Product Mix decision Which combination of production will give the highest benefit

Rent or Buy decision It reflects organisation’s availability of cash flow

Discontinuation decision Which management is conducted badly to be withdrew

Pricing decision How to stay competitive by not affecting overall sales

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13.2.3. Planning and Preparing Budgets and Exercising Budgetary Control

Planning involves setting the level of activity an organisation’s department wants to achieve.

For instance, the plan of a production department would be to set the amount of goods to be produced
for a given period. Production department’s plan should also contain the following:

 Targets that are clear cut and measurable;


 An outline of the activities that will be undertaken to achieve the plan;
 A list of resources needed to meet the set targets, and
 The duration of the plan (plans are normally in durations of three, six or twelve months).

Budgets

A budget will reflect the resources that are allocated to departments or functions by the strategic
management to achieve intended plan (i.e. money, time, employees, equipment and etc.). It will also take
into account what the overall cost of the plan will be to the organisation and what revenues the
organisation expects to bring in.

Budgets are normally first set on an annual basis. They are then subdivided along shorter time period lines
into monthly, quarterly and half yearly budgets. During the course of the year, the actual results for a
particular period (shown in accounting reports) can be compared with what was budgeted.

Budgetary Control

During the year, the results for a particular period shown in accounting reports can be compared against
with what was budgeted. This allows management to be aware of variances as well as the opportunity to
take corrective action. Furthermore, it also allows the organisation to determine whether its objectives are
on track to be met or whether they need to be amended.
It can be reflected in the variance
after completion of a particular
task to indicate ineffectiveness or
inefficiency

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13.3 Main Finance and Treasury Function


Learning Outcome (ACCA Study Guide Area C, Topic C2d):
Identify and describe the main finance and treasury functions:

The finance and treasury functions of an organisation are responsible for managing and controlling its
money supply. As cash is the lifeline of every business. All organisations need cash or funds to conduct their
operations. These cash or funds can either come from the organisation itself such as past profits, or be
borrowed from another source.

Organisation can fund business using Retain profit, issue of shares, borrowings etc.

The finance department, through the functions of financial and management accounting, is responsible
for:

Treasury Function

Treasury is responsible for managing the funds of the organisation. In the case of an organisation that
requires finances to fund its operations, treasury will be responsible for obtaining the needed monies.
Alternatively, in organisations that have excess funds, treasury is responsible for safely investing these
surplus funds. Together, these functions will deal with the inflows and outflows of money that occur whilst
the organisation conducts its operations.

Main Functions of Finance and Treasury

1. Calculating and mitigating business tax liabilities


2. Evaluating and obtaining finance
3. Managing working capital (currents assets – current liabilities)
4. Treasury and risk management

Check understanding

1. Senior managers have a duty to handle affairs in organisations regardless of what the objectives
are. They have a _________towards the organisations and their owners.
A. Financial obligation.
B. Finite authority.
C. Fiduciary responsibility.

2. Stewardship of the organisation's financial resources is part of which of its finance function's
tasks?
A. Financial Reporting
B. Recording financial transactions
C. Treasury management
D. Finance Management

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3. The role of financial management does not usually include responsibility for

A. Compliance with accounting standards


B. Risk management
C. Corporate finance

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13.4 Main Audit and Assurance Roles in Business


Learning Outcome (ACCA Study Guide Area C, Topic C2e & C2f):
Identify and describe the main audit and assurance roles in business
Explain the main functions of the internal auditor and the external auditor and how they differ.

Auditing can be described as the function of having assurance given on presented data and information by
an independent party in regard to its reliability. Internal and external audit are both components of the
function of auditing.

13.4.1. Internal Audit

Internal auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organisation’s operations. It helps an organisation to accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management control
and governance processes.

Internal auditors are usually employees. They perform internal audit as a service to the organisation. Their
roles depend on management requirements, and their skills and experience. The scope of their roles is not
fixed, and it may be reduced or extended.

Although the internal auditor is an employee of the organisation and are to report to management, they
are expected to be independent from the other employees and departments he/she is auditing. This is
assured by having the internal audit department report to the audit committee, who are usually
independent personnel safeguarding the company.

Internal auditing involves a thorough examination of the operations and records of an organisation. It
includes testing the effectiveness and efficiency of an organisation’s internal accounting and reporting
systems.

Functions of an Internal Auditor:

1. Tests the effectiveness and efficiency of internal account and reporting systems
2. Review systems and Controls
3. Ensuring corporate governance
4. Manage risks

Check understanding

An internal audit of an organisation is carried out periodically by members of the same organisation. (True/
False)

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13.4.2. External Audit


It is a requirement of the Companies Act that the accounts of limited companies are to be audited. The
audit has to be performed by competent, independent and objective person or persons, known as external
auditors, who then issue an auditor's report on the results of the audit.

External auditing involves an examination of the financial reports and records of an organisation. Its main
purpose is to assure shareholders of the accuracy of this information that will go on to be published in the
financial statements of the organisation.

Functions of an External Auditor:

The following are the main functions or duties of external auditor:

1. Express opinion on organisation’s financial statements (Are FSs true and fair?)
2. Review internal control systems
3. Detect fraud and errors

Differences Between Internal and External Audit:

Differences Internal Audit External Audit


Function To advise management on internal To give an opinion to the shareholders
control systems and recommend on whether the financial statements
improvements if needed. show a true and fair view.

Appointment Internal auditors are employees of the Shareholders through the


organisation. recommendations of the audit
committee appoint external
auditors.
Responsibility The internal auditor is responsible to External auditor is responsible to
the management. the shareholders.

Scope of work It covers the overall organisation and Decided by the auditor in order to
is decided by the management. carry out his statutory duty. It is
mostly financial focused.

Legal requirement It is not a legal requirement, but it is It is a legal requirement for big
recommended in the Combined Code companies, public listed companies
of Corporate Governance to have one. and many public bodies.

Internal Control The internal auditors have a role to The external auditors do not
ensure that the internal control design the internal control
systems are effective, and they may system.
also contribute in the design of the
internal control systems.

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Check understanding

Auditors appointed by board of directors ensure that all internal operations comply with laws and
standards set carry out an external audit. (True/False)

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CHAPTER 14: PRINCIPLES OF LAW AND REGULATION GOVERNING ACCOUNTING AND
AUDIT
CHAPTER 14: PRINCIPLES OF LAW AND REGULATION GOVERNING ACCOUNTING AND AUDIT

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C3a. Explain basic legal requirement in relation to retaining and submitting proper records and
preparing and auditing financial reports.

TLO C3b. Explain the broad consequences of failing to comply with the legal requirement for
maintaining and filing accounting records.

TLO C3c. Explain how the international accountancy profession regulates itself through the
establishment of reporting standards and their monitoring.

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CHAPTER 14: PRINCIPLES OF LAW AND REGULATION GOVERNING ACCOUNTING AND
AUDIT
14.1 Basic Legal Requirement of Keeping Records
Learning Outcome (ACCA Study Guide Area C, Topic C3a, C3b & C3c):
Explain basic legal requirement in relation to retaining and submitting proper records and preparing and
auditing financial reports.
Explain the broad consequences of failing to comply with the legal requirement for maintaining and filing
accounting records.
Explain how the international accountancy profession regulates itself through the establishment of
reporting standards and their monitoring.

14.1.1. Legal Requirement of Keeping Records


The law requires organisations to maintain proper records and financial accounts

In addition to maintaining proper records and financial accounts, the law also requires organisations to file
an annual return. An annual return is a statement from the organisation, which denotes the following:

 The financial condition of the organisation (Statement of Financial Position)


 The level of profits earned by the business (Statement of Profit or Loss)
 The corresponding tax liability (Tax Assessments)
 Name of the company and registration number (Annual Return)

Retention Period of Records

It should be noted that in most countries, these records should be kept for a minimum period of three
years by a private company, and a minimum of six years by a public company. Failure to keep such
accounting records will result in a criminal offence, unless the company officers can show justifiable reason
for not doing so.

Preparation for Auditing Purposes

In the UK, the Companies Act requires that financial statements (FSs) to be prepared in accordance to a
“true and fair view’. The words true and fair is generally considered to mean ‘reasonably accurate and free
from bias or distortion’. The auditor in reviewing these financial statements gives an opinion on the truth
and fairness of them.

14.1.2. The Legislation


For limited companies, legislations that would affect such companies include the following:

 Company Law
 Tax Regulations
 Stock Exchange Regulations

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14.1.3. Accounting Standards
One of the main problems facing investors and other users of financial information is that these accounting
standards vary from country to country. Sometimes the differences between them can be significant. To
manage this problem, bodies such as the International Accounting Standards Board (IASB) attempt to
coordinate the development of uniform accounting standards on an international level.

With a set of standards, stakeholders such as investors can compare the financial statements of companies
within the country as well as of different countries.

The International Accounting Standards Committee Foundation

The (IASCF) was formed as a not-for-profit organisation in April 1701 with the key objective to supervise
the development of high quality, enforceable and understandable international accounting standards; and
to promote its use.

The IASCF is managed by a Board of Trustees and is the parent entity of The International Accounting
Standards Board (IASB), Standards Advisory Council (SAC), and International Financial Reporting
Interpretations committee (IFRIC). Its structure:

The International Accounting Standards Board (IASB)


The IASB is the successor of the International Accounting Standards Committee (IASC) founded in June
1673. It is responsible for developing the International Financial Reporting Standards (IFRS) (new name for
the International Accounting Standards (IAS) issued after 1701) and promotes the use and application of
these standards. About 100 countries adopt these standards or amend them to be incorporated into their
national standards.

Standards Advisory Council (SAC)


The SAC provides a platform of discussion for participation by organisations and individuals, with an
interest in international financial reporting, and have diverse geographical and functional backgrounds.
They may be from the accounting profession, companies, governments, stock exchange regulators and
national accounting setting bodies. They advise the IASB on areas of the standards that need to be reviewed
or if there is a need to develop new standards, taking into consideration the views of the organisations and
individuals in the Committee.

International Financial Reporting Interpretations committee (IFRIC)

The IFRIC interprets the application of the accounting standards and provide guidance on financial
reporting issues not specifically addressed in IASs and IFRSs. They are also required to undertake other
tasks at the request of the IASB.

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Besides adopting international standards, most countries do incorporate them into their domestic
standards and regulations. For example, in Malaysia the Malaysian Accounting Standards Board (MASB) is
the authority of the accounting standards. Together with the Financial Reporting Foundation (FRF), they
establish the framework for financial reporting in Malaysia: The Financial Reporting Standards legislated
under the Financial Reporting Act 1697.

Check understanding

1. The key aim of the IASB (formerly the IASC) is to:


A. Improve the standards of financial reporting worldwide
B. Develop worldwide auditing standards
C. Harmonise accounting practice throughout the world
D. Represent the interests effectively in financial reporting matters

2. Which of the following factors have not influenced financial accounting?


A. National legislation
B. Economic factors
C. Accounting standards
D. GAAP

3. What is the role of IFRIC?


A. Produce international accounting standards
B. Supervise the development of international standards and guidance and help to raise money
C. Advise the IASB as to which areas require new or amended standards
D. Give guidance on (often topical) issues not covered in an accounting standard or where guidance
is conflicting

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CHAPTER 15: INTERNAL AND EXTERNAL FINANCIAL INFORMATION

CHAPTER 15: INTERNAL AND EXTERNAL FINANCIAL INFORMATION

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C4a. Explain the various business purposes for which the following financial information is:

i) The statement of profit or loss


ii) The statement of financial position
iii) The statement of cash flows
iv) Sustainability and integrated report

TLO C4b . Describe the main purposes of the following types of management accounting reports:

i) Cost schedules
ii) Budgets
iii) Variance reports

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15.1 Purposes of Financial Information


Learning Outcome (ACCA Study Guide Area C, Topic C4a):
Explain the various business purposes for which the following financial information is required.

i) The Statement of Profit or Loss


ii) The Statement of Financial Position
iii) The Statement of Cash Flows
iv) Sustainability and Integrated Report

The Statement of Profit or Loss

The Statement of Profit or Loss or the 'statement of comprehensive income' in IAS 1 contains information
on business’ profitability, and its variability in profits over time including identifying the following:

 The business' capability to generate cash flows from its existing resources
 How effectively the business is able to use additional resources
 Potential changes in the economic resources the business is likely to control in the future

Check understanding

1. The financial statement that shows the revenues earned and corresponding expenses incurred for
a particular period is called a(n):

A. SOFP
B. SOPL
C. Statement of cash flows
D. Statement of retained earnings

The Statement of Financial Position

An important document which state the current position on an organization in term of assets owned and
liabilities owed.

The Statement of Financial Position (formerly known as the balance sheet) indicates the following:

 Economic resources it controls It has 5 elements:


 Business financial structure  Non-current assets
 Current assets
 Business liquidity
 Non-current liabilities
 Business solvency  Current liabilities
 Business adaptability  Equity

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Check understanding

2. Which of the following financial statements could be used to calculate the debt to equity ratio of
an organization?

A. Statement of financial position (SOFP)


B. Statement of comprehensive income (SOCI)
C. Income statement (IS)
D. Statement of cash flows (SOCF)

The Statement of Cash Flows

According to IAS 7 The Statement of Cash, it is historical changes in cash and cash equivalents of an entity
by means of a statement of cash flows, which classifies cash flows during the period according to operating,
investing, and financing activities.

Thus, the user will be able to assess:

 The ability of the business in generating cash


 The ability of the business in using cash that it has generated.

Sustainability and Integrated Report

Stakeholders of any corporations are increasingly concerned about the long – term sustainability of the
corporation’s business model, as well as its impact on society and the environment.

Hence corporations are increasingly more committed to producing integrated reports (IR) for its users,
based on models such and Triple Bottom Line Reporting (3p) or Balanced Scorecard (4 perspectives).

Integrated reports may answer the following questions in addition to traditional or conventional financial
statements (FSs):

 Is the business model sustainable financially?


 Is the business taking care of customers?
 Is the business innovating and improving?
 Is the business damaging or protecting the environment?
 Is the business contributing to society?
 Is the business creating long-term shareholder value?

It should be noted that most integrated reporting (IR) is voluntary, and that there are different approaches
to such reporting. Some organisations merely report to “dress” their traditional or conventional financial
reports, while other companies make sustainability and CSR part of their strategic non-financial objectives.

It emphasises on financial and non-financial as well as environmental sustainability to protect environment


damage.

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15.2 Main Purposes of Management Accounting Reports


Learning Outcome (ACCA Study Guide Area C, Topic C4b):
Describe the main purposes of the following types of management accounting reports:
i) Cost schedules
ii) Budgets
iii) Variance reports

In this topic the following management accounting reports will be discussed in context of their purposes:

1. Cost Schedules
2. Budgets
3. Variance reports

Check understanding

A management accountant in an organisation carries out which TWO of the following activities?

(1) Budgeting
(2) Investing funds
(3) Measuring costs
(4) Currency dealing

A. 1 and 2
B. 1 and 3
C. 3 and 4
D. 2 and 3

15.2.1. Cost Schedules


In management accounting (chapter 13), one of the most important role is to measure and categorise costs
for the purpose of decision-making. Any decision that involves the use of resources will involve costs and
as the main objective of a business is to make a profit, it is important to make decisions that will minimise
costs.

The categorising of costs into a schedule is important because it allows a proper evaluation of how costs
will behave as the different types of costs will behave differently.

The following are some of the types of cost categorisation:

Cost Description
Direct costs Related to the activity
Indirect costs Not-related to the activity
Fixed costs Cost that remains unchanged regardless of output
Variable costs Costs that varies corresponding to the change in output

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Future costs Costs that are not incurred yet


Sunk costs Already incurred and will not change
Avoidable costs Can be saved by avoiding the action
Unavoidable costs Cannot be saved regardless whether an action is taken or not
Incremental/ Differential costs Difference in the total costs between new and existing levels of
activity
Marginal costs Cost of one extra unit of output
Opportunity costs Value of the best option that has been forgone
Non-relevant costs Costs that remain unchanged regardless of what decisions that
have been made

15.2.2. Budgets
A budget is a plan expressed in financial or numerical terms and summarised in money value covering he
next financial year. Previously explained in chapter 12.

Purpose of Budgets
Forecast Planning
 Guiding managers on how to achieve objectives Control
 Compels planning
Decision making
 Sets targets and defines responsibility
 Help coordinate activities Evaluate Performance
 Communicate plans
 Enable control
 Motivate employees
 Basis of performance evaluation

Types of Budgets

Budget Description
Master budget Incorporates all budgets of various departments into one master

Zero-based budget Starts from scratch each year as previous budget becomes obsolete.

Incremental budget Budgets are set based on previous results Example, increase by10% each year.

Rolling Budget As time progresses future budgets are revised in consideration of what is
happening now. It is done quarterly to reflect the efficiency of previous budget.

Flexed budget Flexible budget figures are to be compared with actual results via variance
analysis. This is to identify how different is the actual performance compared
to the budget set initially

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Limitations of Budgets

 Employees may be demotivated by over ambitious budgets.


 Slack may be built in to make budgets more achievable.
 Focuses on the short-term results rather than long term.
 Unrealistic budgets may cause managers to make decisions that are detrimental to the company.

15.2.3. Variance Reporting


Variance reports contain variance analysis of actual and planned performance standards, identifying the
differences and investigating the reasons for the variances.

Variance analysis starts with defining standards. Standards are targets of performance that provided the
basis to variance analysis and they are usually set during the budgeting process.

When investigating variances, it is important to note the following:

 Significant adverse variances should be investigated.


 Significant favourable variances should be investigated but of low priority (standards may be set
too low).
 Insignificant variance should be kept under review.

The following table illustrates the types of variances and the possible reasons for them

Variance Reason Purpose


Sales volume  Poor performance by sales staff.  Reduction in customer’s
variance  Deterioration of market conditions. preference
 Poor sales
Sales price  Market conditions deteriorated.  Adjustment in sales price
variance  A more optimistic price was set.

Direct material  Poor performance of production staff.  Inefficiency in production


usage variance  Usage of sub-standards raw material. process.
 Faulty machinery.

Direct material  Higher quality raw material used than  Inefficiency in purchasing
price variance planned. department
 Change in market conditions causing prices  Wrong choice of raw
to go up. material used
Direct labour  Poor supervision.  Inefficiency in labour
efficiency  Incompetent workers or employees. utilization
variance  Dislocation of raw material supply slowing
processes.
Direct labour  Poor performance by HR personnel.  External environment
rate variance  Using higher grade or rate employees than effect
planned.  Poor selection of
 Change in labour market. employers

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Limitations of Variances
 Standards can become out of date.
 Variances may be caused by factors out of the control of the manager.
 Standards set may not give incentives to improve.
 May encourage undesirable behaviour like fraud.

Check understanding

Volume variance arises when

A. There is rise in overhead rate per hour


B. There is decline in overhead rate per hour
C. There is decrease or increase in actual output compared to the budgeted output
D. None of the above

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CHAPTER 16: FINANCIAL SYSTEMS, PROCEDURES AND RELATED IT APPLICATIONS

CHAPTER 16: FINANCIAL SYSTEMS, PROCEDURES AND RELATED IT APPLICATIONS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C5a. Identify an organisation’s system requirements in relation to the objectives and policies
of the organisation.

TLO C5b. Describe the main financial systems used within an organisation:

i) Purchases and sales invoicing


ii) Payroll
iii) Credit control
iv) Cash and working capital management

TLO C5c. Explain why it is important to adhere to policies and procedures for handling clients’
money.

TLO C5d. Identify weaknesses, potential for error and inefficiencies in accounting systems.

TLO C5e. Recommend improvements to accounting systems to prevent error and fraud and to
improve overall efficiency.

TLO C5f. Explain why appropriate controls are necessary in relation to business and IT systems and
procedures.

TLO C5g. Identify business uses of computers and IT software applications.

i) Spreadsheet applications
ii) Database systems
iii) Accounting packages

TLO C5h. Describe and compare the relative benefits and limitations of manual and automated
financial systems that may be used in an organisation.

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16.1 Organisation’s System Requirements


Learning Outcome (ACCA Study Guide Area C, Topic C5a):
Identify an organisation’s system requirements in relation to the objectives and policies of the
organisation.

16.1.1. Main Purposes of Business and Financial Systems


 To help determine the optimum use and allocation across departments of the organisation’s
resources such as money, time, employees, equipment, etc.
 To maintain accounts and reports that shows the financial impact of the organisation’s policies
and activities of each department.
 To ensure that the various departments implement the formulated policies of the organisation.
 To detect and prevent fraud and errors.

Check understanding

Followings are the main purposes of business and financial system, except

A. To implement policies
B. To increase market share
C. To maintain accounts and reports
D. To optimize allocation of resources

16.1.2. Requirements to Achieving Objectives and Policies


To establish the organisation’s systems for purpose of achieving objectives and policies of the organisation,
the following requirements need to fulfil:

 Division of labour
The organisation will group the employees according to similar tasks or activities under a single
department. Division of labour allows for specialisation of skills and expert knowledge can be
developed further.

 Designing and implementing Business and Financial Systems, Policies and Procedures
The second step is to design and implement business and financial systems that will help an
organisation to carry out its policies and achieve its stated objectives through defined procedures.

 Setting of plans and budgets

 Monitoring and follow-up


A system has to be in place to capture and record information about the implementation of the
plan and its progress. This is normally done through generating detailed reports that provide
details on what the department’s activities have cost the organisation and what revenue they have
brought in for the organisation.

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 Finding reasons for deviations


This step looks at and tries to determine the reasons for any variations between the actual results
achieved and the results that were to be achieved. A detailed analysis is done to diagnose the
problem areas and how it could be rectified.

 Taking corrective actions


Once the reasons for deviations are found, the organisation must decide to rectify the deviations
by taking corrective actions or change the plan completely. Management must be ready to make
changes and need to be flexible

Check understanding

A multidiscipline approach to business process and policies can help organization to achieve its objectives.
(True/False)

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16.2 Main Types of Financial Systems Used Within an Organisation


Learning Outcome (ACCA Study Guide Area C, Topic C5b, C5c & C5d):
Describe the main types of financial systems used within an organisation:
i) Purchases and sales invoicing
ii) Payroll
iii) Credit control
iv) Cash and working capital management

Explain why it is important to adhere to policies and procedures for handling clients’ money.
Identify weaknesses, potential for error and inefficiencies in accounting systems.

16.2.1. Accountability Towards Clients’ Money

It is important to adhere to policies and procedures in handling client’s money because accountants have
to be accountable to their client’s money and they have to adhere to regulations that are set by regulators
and their professional bodies. Any misconduct may cause the accountant to be removed as a professional.
The concept of professional conduct and ethical behaviour is explored further in Area F of the syllabus.

In an organisation, to safeguard the assets of the owners, a system is set with policies and procedures
within it.

System

A system is a set of predetermined principles and procedures for doing something. The system has
standard, predictable and dependable methods to help people work together towards a common purpose
and timetable.

For example, in a business, the accounting system will ensure that all bookkeeping and related tasks are
carried out accurately and in a timely fashion. It ensures all day-to-day transactions are accurately
recorded.

16.2.2. Types of Financial System

Purchases System

The purpose of a purchasing system is to increase the efficiency of payments made for the purchases.
Logically, the most efficient purchasing system would be one where payments are initiated at the time
purchases are made.

Main stages of the Purchase System:

Stage 1: Order Placed with suppliers for the purchase of goods or services.
Stage 2: Goods Received from suppliers.
Stage 3: Invoice Received from suppliers.
Stage 4: Transactions Recorded in the Books.
Stage 5: Cash Payment to supplier.

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Sales System

The purpose of sales invoicing system is to process sales orders for the goods and services an organisation
executed.

Main stages of the Sales System:

Stage 1 : Order Received from customers.


Stage 2 : Good Despatched to customers.
Stage 3 : Invoice Raised and sent to customers.
Stage 4 : Transactions recorded in books.
Stage 5 : Cash Receipts from customer.

Payroll System

The most regular payment an organisation has to make is salary or wages payment to its employees. Most
organisations have a policy of making this payment on a fixed date every month.

The main purpose of a payroll system is to produce a cheque (or electronically credit an employee’s
account) along with a supporting ‘payslip’.

Main stages of the payroll system:

Stage 1 : Clock cards or time sheets submitted and input.


Stage 2 : Gross pay, deductions and net pay calculated.
Stage 3 : Other amendments input.
Stage 4 : Final payroll calculated, and payslips produced.
Stage 5 : Payments to employees and Tax authorities and Pension Funds.
Stage 6 : Payroll costs and payments recorded in books.

Check understanding

1. The following is a list of processes of the payroll system in random order.


a. Gross pay, deductions and net pay calculated
b. Payroll calculated and payslips produce
c. Payroll costs and payments recorded in books
d. Clock cards submitted and input
e. Payment to employees and third parties
f. Other amendments input

Reorganise them in the right order that reflects the payroll system:

A. a, d, f, e, b, c
B. d, a, f, b, e, c
C. d, a, b, f, c, e
D. a, d, b, c, f, e

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2. Three of the following are outputs of a payroll system, and one is an input to the system. Which is
the input?
A. Credit transfer forms
B. Time sheets
C. Payroll analysis
D. Pay slips

Credit Control System

The aim of credit control is to help determine the credit terms that can be granted to a customer.

Credit terms usually set a specific date by which payment must be made (For example: one month after
delivery). In turn, it is almost standard business practice for most organisations to also give credit terms to
their customers.

If an organisation does not offer credit terms, it risks losing business from customers. On the other hand,
if its credit terms are too lenient, then the organisation risks suffering losses from none or overdue
payments.

Cash and Working Capital Management System

Working capital is the amount of money an organisation needs to finance its day-to-day activities.

To ensure that optimum use is made of an organisation’s cash resource, cash and working capital
management systems attempt to maintain an optimum level of working capital.

An organisation should always maintain a sufficient level of working capital to meet the cost of its operating
requirements until the time it receives payments from its customers. For example, bank deposits that
would generate higher interest for the organisation.

16.2.3. Consequences of Ineffective Accounting Systems

If the accounting system is not functioning well and has errors and inefficiencies, issues such as arguments
on roles and responsibilities will occur and documentations will go missing. A poorly designed accounting
system may also give rise to opportunity to fraud.

The following are some potential issues that may arise within an accounting system:

Sales Department  Sales orders not received and communicated to the sales department.
 Sales orders are not checked with the inventory department before
approved.
 Invoices issued to customers contain errors or misappropriated.
 Receipts are not issued and/or some receipts are duplicated.
 Goods not delivered to customers.

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Purchasing Department  Purchase orders are not approved.


 Purchase orders not recorded.
 Goods received not checked and missing.
 Goods returned not recorded and suppliers invoice does not reflect the
amounts.

Cash System  Cash received not recorded and misappropriated.


 Suppliers are not paid on time or not paid at all.
 Double paying suppliers.

Payroll System  Double paying staff.


 Employees cheat on their time sheets.
 Fictitious employees are paid.
 Untimely payments.

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16.3 Improvements to Accounting Systems


Learning Outcome (ACCA Study Guide Area C, Topic C5e & C5f):
Recommend improvements to accounting systems to prevent error and fraud and to improve overall
efficiency.
Explain why appropriate controls are necessary in relation to business and IT systems and procedures.

Controls on Business and IT Systems

Despite the benefits of automation, organisations still need to ensure that a system of checks and controls
is implemented and maintained to ensure the organisation continues to operate effectively and efficiently.

Purpose of Controls

 To help ensure that individuals and departments do not over step the authority level or limits
granted to them by the organisation. Each of the systems discussed before will have some types
of authority controls built in it.
 To safeguard organisation’s assets.
 To ensure effective and efficient operation.
 To prevent fraud and errors.

16.3.1. Purchases System Control Procedures


Objectives of purchase system controls:

 Proper authorisation and procedures for purchases.


 Order from suitable suppliers only.
 Goods effectively inspected when received.
 Only valid transactions are recorded in the books.

Control Procedures for the Purchases System are as follows:


1. Orders  Requisition forms for purchases must be authorised by the responsible
official;
 Orders of major items should be by senior management or even the Board
of Directors;
 Copies of purchase orders must be retained to follow up on late deliveries

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2. Goods Received  All goods must be checked for the correct quantity and quality before
signing the Goods Received Note (GRN);
 The GRN must be checked against purchase orders and to notify supplier of
under or over-deliveries; and
 GRNs should be sequentially numbered and checked periodically for
completeness.

3. Invoices Received  Purchase invoices received;


and Goods Return  Invoices received should be:
- Stamped with a unique serial number and dated;
- Checked against the purchase order and GRN;
- Signed as approved for payment after it is verified by responsible official;
- Sequentially numbered and checked against purchase day book

4. Recording into  Payable ledger control account should be maintained and regularly checked
Books against balances in the ledger by an independent official;
 Segregation of duties applied to the following tasks:
- Recording payable ledger records
- Invoice authorisation
- Payment routines

Check understanding

Which of the following is an aim of the control system relating to accounts payable and purchases?

A. To ensure that all credit notes received are recorded in the general and payables ledger
B. To ensure that goods and services are only supplied to customers with good credit ratings
C. To ensure that all credit notes that have been issued are recorded in the general and receivables
ledgers
D. To ensure that potentially doubtful debts are identified

16.3.2. Sales System Control Procedures


Objectives of sales system controls:

 Orders are authorised, controlled and recorded.


 Revenues recorded in the books.
 Goods returned from customers are checked and controlled.
 Sales invoices paid accordingly.

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Check understanding

The receivables ledger is the accounts section associated with:

A. Purchases department.
B. Sales department.
C. Senior management.
D. Inventory controllers.

Control Procedures for the Sales System are as follows:


1. Orders Received  Check orders against customer’s account and credit worthiness;
 Sales order documents should be pre-numbered; and
 The sales orders must be authorised before any goods are despatched
to the customer
2. Goods Despatched  No goods may be despatched without a despatch note;
 The despatch notes should be pre-numbered and a register kept of
them to relate to the sales order and invoice; and
 Goods despatch notes should be authorised before sending to
customers.
3. Issuing of Invoices  The invoices should be authorised by responsible official and
and Credit Notes referenced to original authorised order and despatch notes;
 All invoices and credit notes must be entered into sales day book
records;
 Sales invoices and credit notes should be checked on a regular interval;
 The invoices and credit notes should be serially pre-numbered and
regular sequence checks conducted;
4. Return of Goods  All goods returns must be checked for damage as claimed;
 A document should be issued to verify the damage by responsible
official; and
 Credit notes issued if the damage is verified.
5. Recording in Books  Sales ledger control account prepared regularly and checked to
individual sales ledger balances by an independent official;
 Sales ledger personnel should be independent of despatch and cash
receipt functions;
 Statements sent regularly to customers so that there will be checks by
them as well; and
 Formal procedures exist to follow up on debts.
6. Irrecoverable Debts  Authority to write off debts must be given in writing and adjustments
made to sales ledger accordingly; and
 Person authorising the bad debt must be independent of the cash
receipt function as a segregation of duty.

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16.3.3. Cash System Control Procedures


Objectives of the cash and capital system controls:

 All sums received and accounted for.


 All payments made correctly.
 All transactions are recorded promptly and accurately.

Control Procedures for the cash system are as follows:

1. Cash Sales  Recorded when sales are made using a cash till or cash sales invoice;
 A copy of the cash sales invoice must be retained (for example, carbon
copy);
 Cash received should be reconciled daily with the till roll or invoice totals
by someone independent of those receiving the cash and recording the
sales;

2. Banking Controls  Receipts should be banked intact daily;


 Each day’s receipts recorded promptly in the cash book;
 Sales ledger personnel should not have access to cash or preparation of
pay slip; and
 Periodical comparisons should be made between the split of cash and
cheques received and banked.

3. Cheque Payments  There should be segregation of duties for the following tasks:
o Preparing cheques,
o Preparing purchase and sales ledger,
o Authorising payments, and
o Signing cheques.
 For signatories:
o It should be limited to a practical number, and
o There should be at least two signatories.
 Unused cheques should be kept securely; and

4.Bank Reconciliation  Prepared at least once a month;


 Independent person assigned to check the bank reconciliation; and
 Bank statements should be obtained directly from the bank.

5. Petty Cash  The Imprest System should be used;


 A maximum amount of petty cash must be set;
 The level and location of the cash float must be laid down officially;
 Cash should be securely held;
 All expenditure must be supported by a voucher;
 The petty cash book must be reconciled by an independent person

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Check understanding

Which of the following is not part of Cash System Control Procedures?

A. Use of the Imprest System for the Petty Cash


B. Receipts should be banked intact daily
C. The amount of cash float should be flexible and changed based on demand
D. Bank statements should be obtained directly from bank

16.3.4. Payroll System Control Procedures


Objectives of the payroll system controls:

 Payroll is only computed for valid employees at authorised rates of pay for the work performed.
 Payrolls calculated accurately without any errors.
 Salary and wages only paid to rightful employees.
 All liabilities to third parties are paid.

Control procedures for the payroll system specifically for the administration of wages are as follows:

1. Approval  Authorisation should be obtained:


and control of o To employ or dismiss employees,
documents o Make changes in wage rates,
o For overtime worked, and
o For advances of pay.
 An independent officer should be assigned to check payroll and sign it;
 There should be supervision of the clocking of cards so that staff will not cheat
on the number of hours they have worked;
 Personnel records should be kept for each employee;
2. Arithmetical  Payroll should be prepared from accurate clock cards, time sheets and regular
Accuracy sample checks to be conducted for accuracy against current rates of pay; and
 Payroll details should provide accurate calculations of deductions.

3. Control  Control accounts should be maintained for deductions showing amounts paid;
Accounts  Overall checks against budgets, changes in amounts paid over a period of time;
and
 Management should exercise overall control.
4.  Personal records should be kept;
Administration  When employing or dismissing an employee, there should be a written approval
of salary from the official who has been authorised to employ or dismiss employee;
 Any overtime worked by staff must be authorised and validated before a claim
can be submitted;
 Check on deductions and changes in salary due to claims, promotions, loans from
company etc.;

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16.4 Business Uses of Computers and IT Software Applications


Learning Outcome (ACCA Study Guide Area C, Topic C5g & C5h):
Identify business uses of computers and IT software applications:
i) Spreadsheet applications
ii) Database systems
iii) Accounting packages

Describe and compare the relative benefits and limitations of manual and automated financial systems
that may be used in an organisation.

Common terminology

Data Facts represented by numbers, letters, symbols, events, and transactions,


which are collected and recorded but yet to be processed into information
for decision-making.

Information Processed data and has meaning to the person who receives it. It improves
the quality of decision-making, can be interpreted for action and
disseminated to stakeholders.

Information Technology Any equipment used in capturing, storing, transmitting, or presentation of


(IT) information, quickly and efficiently.

Information Systems (IS) Systems used for processing of data into.

16.4.1. IT Software Application

Spreadsheet Applications (e.g. Microsoft Excel, Google Sheets)

A spreadsheet is a computerised grid of information. It is a worksheet that contains rows and columns
called ‘cells’. Spreadsheets offer the advantage of being able to process and perform calculations on vast
amounts of information extremely quickly. In addition, given the ease at which data can be inputted or
amended. They also allow users to run various “What if” scenarios.

Database Systems

A database system refers to the way a certain set of related information is stored and accessed by a
computer. Information is segregated into a set of fields. As this information is stored in such a structured
manner, retrieving specific sets of or even cross-referencing data is greatly simplified and expedited.

A database is a collection of records and files stored in a computer in a systematic way, so that a computer
system can access it to answer queries.

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The underlying concept behind a database system is that it is an interrelated collection of records. Given
the interconnectivity of information, users can run queries, and the computer will scan through all records
to locate the data that is being looked for.

Accounting packages/applications

Accounting packages does the same function as the manual accounting where it replicates the process of
double entry and the person doing the entries onto the computer does not need to record it into separate
books. The books will be updated automatically and the data is stored in one place.

Different levels of staff in the hierarchy will have different levels of access and the method of presentation.

Check understanding

All the following are disadvantages of using a database system, except:

A. Data protection features, which are relevant to prevent unauthorised access, are not easy to
design and implement.
B. The database system avoids storage of many sets of the same data and information.
C. Initial development costs can be very high, and can be expected to increase if user organisation
wants to improvise on the database’s capability.
D. The database system controls are best functional with administrative security procedures that can
be costly and time-consuming to develop.

16.4.2. Manual vs Automated Accounting


Manual accounting system and computerised accounting systems have exactly the same accounting
principles. However, there are differences in how the accounts are prepared and the medium that the
information is collected, recorded, analysed and communicated.

Comparison between Manual and Automated Systems

Manual Systems Automated Systems


Processing Manual processing Electronic processing
Storage form Stored paper form Electronic form of storage

Implementation Easier and cheaper to implement Time-consuming and expensive to


implement
Speed Slow Faster

Scalability Low High


Security Less expensive and easier to maintain Expensive and difficult to maintain

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Weaknesses of Manual Accounting Systems

 Productivity is relatively lower.


 The system is relatively slower.
 There is a risk of errors, as manual work would cause more human error.
 Less accessible as the system will not allow multiple users to access it at the same time.
 Alterations are difficult to make.
 Quality of reports is not consistent.
 They are bulky.

Advantages and Disadvantages of Using the Computerised Accounting Systems

Advantages Disadvantages
 Larger amounts of data can be processed very  Time consuming, and high costs involved in
quickly the initial installation of the system.
 Able to perform complicated calculations  Training of staff
without any errors.  The need for greater security to ensure no
 As data is stored in one location, this data can unauthorised personnel gains access to data
be easily analysed to present useful files.
information for managers.  Data may be lost if computer is stolen, data
 Information can be presented in charts, corrupted by malware or destroyed by
tables and pictures physical damage to hardware.

Check understanding

Computerised accounting systems certainly have many advantages over manual systems. They are
more flexible, and the processing is faster. Manual systems are __________and usually allow only one
user to view and update them at one time.

A. Less accessible.
B. Always up-to-date.
C. Real time systems.

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CHAPTER 17: APPLICATION OF INTERNAL CONTROLS

CHAPTER 17: APPLICATION OF INTERNAL CONTROLS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C6a. Explain internal control and internal check.

TLO C6b. Explain the importance of internal financial controls in an organisation.

TLO C6c. Describe the responsibilities of management for internal financial control.

TLO C6d. Describe the features of effective internal financial control procedures in an organisation
including authorisation.

TLO C6e. Identify and describe the types of information technology and information systems used
by the business organisation for internal control.

TLO C6f. Identify and describe features for protecting the security of IT systems and software
within business.

TLO C6g. Describe general and application systems controls in business.

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17.1 Internal Controls and Internal Check


Learning Outcome (ACCA Study Guide Area C, Topic C6a):
Explain internal control and internal check.

Definition of Internal Control

Turnbull Report Internal control system encompasses the policies, processes, tasks, behaviours and
1699 other aspects of a company that, taken together facilitate its effective and efficient
operation by enabling it to respond appropriately to significant business,
operational, financial, compliance and other risks to achieving the company’s
objectives.

In other words, any process that can PREVENT, DETECT or CORRECT a risk in
business.

Why do we need
internal controls? The separation of ownership and management organisations.

Executive directors delegate much of their responsibility to their


subordinates (e.g. Heads of department)

17.1.1. Internal Control Systems (COSO Framework)


Control 1. Overall management (BOD/CEO) attitude towards:
Environment  internal controls
 the importance they place on it
2. May involve the management’s commitment and general attitude towards
internal control
3. It is to monitor the behaviour of management towards adhering to best practices

Entity’s risk 1. Identification of risks that may be present


assessment 2. How the organisations react to these identified risks
procedures

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Information 1. The information systems of internal controls include related business process
system related to:
 Financial reporting
 Communication
2. Ensures:
 proper accountability of assets, liabilities and equity balances
 the integrity of the transactions and processes are preserved

Control 1. Policies and the procedures that ensure that management direction is
activities: effectively carried out to ensure that organisational objectives are met
2. There are 8 types of control activities (SPAMSOAP), refer as below.

Monitoring of The internal control processes have to be monitored and to ensure that it is effective
controls and relevant. Monitoring of the controls is important otherwise it will not serve its
purpose

Check understanding

The fact that managers are not aware of problems a company is facing, such as not knowing that a major incident
of fraud has recently taken place, would weaken which of the following components of internal
controls?

A. Control environment
B. Risk assessment process
C. Control activities
D. Monitoring of controls

17.1.2. Control Activities (SPAMSOAP)


Control Activity Description Risks It Attempts To Mitigate
Segregation of duties A number of employees perform  Minimises human errors as one
different stages of a transaction employee checks the work done
by another employee.
 Reduces the opportunity of fraud.
Physical custody Presence of physical restrictions to  Prevents theft.
protect valuables (safes, cabinets,  Allows other control measures to
locks, security personnel etc.) be implemented more efficiently.
Authorisation and  Permission or approval must be  Reduces the risks of
approval gained from personnel who has unauthorised transactions or
the authority to give approval actions.
before any transaction or action.  Places responsibility or
 Authority delegated to those accountability on the person who
personnel must have a cap/max. authorises.

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Management Checks and controls employed by  Reduces misconduct, indiscipline


controls superior (e.g. managers to monitor or mediocre performance of
subordinate) subordinates.
Supervisory Controls One employee (e.g. supervisor) is  Minimises mistakes and delay in
made to oversee the work of a small work completion.
group of employees  Deters fraud.
Organisational Establish clear line of authority and  Prevents misunderstanding of
controls reporting. work responsibility.
 Provides clear reference as to
who is in charge.
Accounting and Controls embedded in the accounting  Prevents computation errors.
controls system (E.g. Double entry accounting)  Prevents inputs that do not
adhere to accounting policy from
being wrongly input.
Personnel controls Make sure the ‘right’ employees are  Prevents fraudsters
hired

Check understanding

A requirement that no one person should have the ability to make payments to creditors and write up
the purchase ledger is an example of the important general principle known as:

A. Dual control
B. Controlled record
C. Supervisory control
D. Segregation of duties

17.1.3. Types of Internal Controls


Accounting Controls (safeguarding of assets and the reliability of financial records)
Safeguarding of assets Inventory is regularly physically verified and compared with the
book balance to ensure none is stolen or become obsolete.

Prevention and detection of fraud Payments to workers are physically made by their supervisor,
and error thereby eliminating the possibility of payments going to
fictitious or ghost workers.
Completeness and accuracy of books having an internal auditor regularly verifying these books to
of accounts ensure all transactions exist and are recorded properly.

Timely preparation of reliable having an internal auditor regularly monitoring the work of the
financial information accounting department to ensure that the financial statements
will be ready by the agreed date.

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Administrative controls (operational efficiency and adherence to management policies)


Quality Control To minimising the defects.

Work Standards To ensures that production is efficient and if not, corrective steps
can be taken.
Policy Appraisals To ensure that they remain relevant to the organisation meeting
its objectives.
Periodic reporting on non-  To timely identify any issues so that corrective action such as
accounting matters more training can be taken

Check understanding

Which of the following actions is most likely to prevent damage to goods during handling?

A. Putting them into transparent plastic boxes


B. Training staff on handling procedures
C. Only storing goods that are durable
D. Outsourcing inventory handling to an external supplier

17.1.4 Internal Checks


Internal checks are a component of an internal control system. They represent a system of checks that are
conducted continuously throughout the day – to – day operations of an organisation

They are designed to ensure:

 policies and procedures are being properly carried out


 malpractices such as fraud or theft do not occur

Ensures independent checks by individuals in the course of their duties. As individuals become aware that
another person will check their work, the likelihood of error and fraud can be reduced.

Internal check involves the segregation of duties in ensuring that no one person performs a task from start
to finish. The ideal system is one where the following aspects of a transaction are entrusted to different
persons:

 Authorisation of a transaction
 Execution of a transaction
 Physical custody of the related asset, if required
 Maintenance of records and documents

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Check understanding

One of the main components to internal control is to have a(n):

A. System of checks and balances


B. Effective recruitment and selection policy
C. Automated payroll process
D. Sufficient numbers of uniformed security guards

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17.2 Features of Effective Internal Financial Control Procedures & Their Importance
Learning Outcome (ACCA Study Guide Area C, Topic C6b & C6d):
Explain the importance & describe the features of effective internal financial control procedures in an
organisation including authorisation.

Recommendations of the Turnbull Report (1699) suggested that internal control should:

 Be embedded in the operations of the company and form part of its culture;
 Be capable of responding quickly to evolving risks to the business arising from factors within the
company and to changes in the business environment; and
 Include procedures for reporting immediately to appropriate levels of management any significant
control failings or weaknesses that are identified together with details of corrective actions

1. A system of internal checks


Help management to design and implement an effective internal financial control system

Well Laid-Out Documentation On Internal Controls and Procedures


Makes it easier for the concerned persons to understand and follow the system being
prescrib

Authorisation
Everyone is given a responsibility to monitor the work of another to ensure that
Features of effective internal

transactions are performed accordingly with proper authorisation


control systems

Clear Directives On the Roles, Responsibilities and Authority Levels of All Employees
Makes it easier for employees to understand and follow the system.

The Ability to Record Transactions Promptly


Helps ensure that the information recorded is timely and accurate, so that deviations
from standards are immediately corrected

The Ability to Safeguard and Verify Assets


The system should ensure that assets are safeguarded from unauthorised access, use or
disposition

Cost Effective
The costs of running such a system should not be so high that they will outweigh the
benefits of detecting and correcting errors

Current and relevant


The system should be regularly reviewed in light of the changing circumstances

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Check understanding

Internal control is designed to provide reasonable assurance regarding the achievement of objectives
in the following categories except one. Which of the following?

A. Adherence to core values and mission


B. Reliability of financial statements
C. Compliance to regulations
D. Operational efficiency and effectiveness

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17.3 Responsibilities of Management for Internal Financial Control


Learning Outcome (ACCA Study Guide Area C, Topic C6c):
Describe the responsibilities of management for internal financial control.

The Board of Directors is responsible for the company’s system of internal control and should maintain a
sound system to safeguard the shareholders’ investment and the company’s assets. The Board should set
appropriate policies on internal control and ensure that it is functioning effectively.

Check understanding

Who is responsible for the company's system of internal control?

A. The finance director


B. The internal auditors
C. The board of directors
D. The external auditors

17.3.1. Responsibilities
Design of the Internal Control System

The following are main steps involved in designing an internal control system:

 Studying the flow of transactions and authorisations that occur during the operations of the
organisation along with existing procedures.
 Critical evaluation of the procedure.
 Designing an internal control system.

Implementation of the Internal Control System

For example, Sales Order System

Step 1: A position of a sales dispatch supervisor is created

Step 2: The individual filling this position is made responsible for ensuring
that all sales orders are dispatched in a timely manner whilst complying
with the organisation’s policies

Step 3: This requires that the supervisor coordinate with both the
inventory and credit control managers

Step 4: The inventory manager to ensure that sufficient quantities of the


goods ordered is in stock.

Step 5: The credit control manager to ensure that the customer is within
assigned credit limits.

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Monitoring of the Internal Control System

An internal auditor will verify whether the above system is actually operating in practice. Periodically, he
will review if any changes need to be made to the internal control system.

Example of such a control would be


If orders are now to be accepted over
ensuring that a follow-up phone call is
the Internet, additional controls will be
made to the customer the next day to
needed.
confirm the details of the order.

It is the responsibility of management to:

The amount of time that management has to spend on internal control depends on the management’s
decision and may vary based on:

 The size of organisation and type of organisation


 The element of trust between management and those under management; and
 Ensuring that the benefits of internal control exceed the cost of implementing it

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17.4 Types of IT and IS used


Learning Outcome (ACCA Study Guide Area C, Topic C6e):
Identify and describe the types of information technology and information systems used by the business
organisation for internal control

IT and IS was previously explained in chapter 16 inside Business Uses of Computers and IT Software
Applications

17.4.1. Different Types of Information Systems


Transaction Processing Systems (TPS)

Features
 The primary goal of TPS is to provide all the information needed to keep the business running
properly and efficiently.
 It keeps records of all business activities and exchanges that occur between an organisation and
external parties.
 It is the lowest and most basic level of information systems.
 It records historic information and it is a simple automation of manual systems, handling routine
capturing and processing of data.
 It serves as a data source for other systems and it is the most basic building block of the other
higher-level systems.

Functions
 Collects, corrects/edits, and stores data.
 Processes/manipulates data into information.
 Monitors data.
 Produces documents and reports to present information.
 Disseminates information.

Management Information Systems (MIS)

Features
 It is a set of formalised procedures designed to provide managers at all levels, with appropriate
information from all relevant sources.
 The system enables managers to make timely and effective decisions for the planning and control
of the activities they are responsible for.
 It processes information for monitoring and control purposes and it extracts, processes and
summarises data from lower level systems such as Transaction Processing Systems, and provides
reports used for making strategic/ managerial decisions.

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Decision Support Systems (DSS)

Features
 It is a computer-based system that enables users to construct complicated scenarios and to assist
users in finding suitable solutions.
 It assists and supports the manager in solving semi-structured problems, but it does not replace
the manager.
 It has intelligent features that can contribute to decision effectiveness, rather than efficiency.

Executive Information Systems (EIS)

Features
 It gives the executive easy access to key internal and external data.
 It is linked to the other systems, which will allow the executive to do Data Mining or call up
summary data.
 It can also Drill Down to access detailed information if required.

Check understanding

Which information system monitors both the internal and external environment of the company and gives access
to information at the tactical and strategic levels?

A. Decision support system


B. Executive information system
C. Expert system
D. Management information system

Expert Systems (ES)

Features
 It holds expert knowledge and it tries to replicate the decision making process of a human expert
in areas such as Law, Taxation, Banking, and Medicine.
 At a simple level it can give factual answers to technical questions and at a more complex level it
recommends a course of action to its users.
 All levels of management can use it but usually it is reserved for the use of higher level
management because of the cost of ES is high.
 It is reliable as information comes from a pool of experts.

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Knowledge Work Systems (KWS)


KWS are software that facilitates the creation and integration of new knowledge.

Office automation system (OAS)


OAS is a combination of software, hardware and networks that helps its users to increase productivity. Its
main function is to increase efficiency and productivity of employees usually used as a back-office support
system.

Spreadsheets
They are used to analyse data and sort list items. They include graphing functions to allow for quick
reporting and analysis for data and it also can be used for presentation of reports.

Databases Management Systems (DBMS)

Database stores large amount of raw data and are suitable for information sharing for two or more persons.
It is a collection of data that has been structured in a manner than can be manipulated for convenient
access.

Features
 It builds, manages and provides access to the database collected.
 It provides a systematic approach to storage and retrieval of information

The following diagram illustrates the interaction between the systems and the arrows show the
information flows:

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17.4.2. Types of Networks

The Internet
The Internet is a global network of networks, which connects billions of computers. Computers that are
connected to this network will be able to send and receive information.

On the Internet there are hosts of information contained on the World Wide Web. It is a place where
anyone could place information on websites and can be searched and viewed by anyone. It has also
enabled emails, peer to peer sharing of information and social networking.

The Intranet
The Intranet is a smaller version of the Internet where the network of computers is restricted to a number
of predefined users. It may be confined to the members of an organisation and the Intranet is a very useful
tool for information sharing within an organisation.

Check understanding

An intranet site could be accessed by certain authorised third parties, such as suppliers, to check what policies an
organisation has with regards to ordering its materials.

1. Is this statement true or false?

The Extranet
The extranet is an intranet, which allows certain external users to access the network. The external users
may be suppliers or customers of an organisation. The system may also restrict access based on the level
of seniority or need, where only certain parts of the extranet may be viewed. The external users will require
a username or password to gain access.

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17.5 Features of Protecting the Security of IT Systems and Software


Learning Outcome (ACCA Study Guide Area C, Topic C6f):
Identify and describe features for protecting the security of IT systems and software within business.

Importance of IT Systems and Software within Business


Given that an organisation relies heavily on information to perform its operations, protecting its IT systems
and software is a key priority for almost all organisations.

Ways in which the security of the above components is safeguarded include:

Diagram 17.5 (i) Security of Data

Diagram 17.5 (ii) Security for Systems & Software

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Diagram 17.5 (iii) Security of Hardware

Check understanding

1. Security in the design of information system is used to


A. Inspect the system and check that it is built as per the specifications
B. Protect data and programs from accidental or intentional loss
C. Ensure that the system processes data as it was designed to and that the results are reliable
D. Ensure privacy of data processed by it

2. It is necessary to protect information system from the following


(i) Natural disasters like fire, floods etc.
(ii) Disgruntled employees
(iii) Poorly trained employees
(iv) Hackers
(v) Industrial spies
(vi) Data entry operators

A. ii, iii, iv, v


B. i, iii, iv, v, vi
C. i, ii, iii, iv, v, vi

3. Which of the following is not a data security issue?


A. Theft of business data
B. Corruption of data due to virus infection
C. Unauthorised use of data
D. Destruction of data by fire or flood

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17.6 General and Application System Controls


Learning Outcome (ACCA Study Guide Area C, Topic C6g):
Describe general and application systems controls in business.

17.6.1. General Controls


General control systems are systems that are designed to protect the physical safety of an organisation’s
IT system and software. These include protecting them from the elements and natural disasters.

Types of risks and corresponding controls include:

Physical Controls

1. Fire
Known to be one of the major causes of physical damage to IT systems, controls against this risk can be:

 Fire resistant or fore proof materials in the building construction and electrical installations.
 Smoke detectors and fire extinguishers.

2. Water

Floods, cyclones, and so forth, or even a water-based fire extinguishing system may cause damage to an
organisation’s IT systems and software. Measures to control this type of risk include:

 Waterproofing of ceilings, walls and floors.


 Alarm systems.

3. Power Fluctuations

Though power fluctuations or blackouts are relatively rare in most countries, organisations should still have
a contingency plan for such an occurrence. Measures to control this type of risk include:

 Maintaining alternative power supplies such as back-up generators.


 Maintaining voltage stabilisers.

4. Accidental Damage

The risk of human error is the greatest risk an organisation could face. In order to manage human error,
the organisation has to increase the level of consciousness of employees at work in terms of error
prevention. Measures such as training, supervisory controls and internal checks should be implemented.

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5. Physical Access Controls

These controls are used to prevent intruders from getting close to the source of data and system. Measures
such as the following may be used:

 Having a first line of defence such as receptionists and security guards


 Physical locks such as door locks, key card systems and biometric systems.
 Alarm systems that may deter, detect and delay the intruder.

17.6.2. Application Systems Controls


Application systems controls are designed and implemented to protect the way an organisation’s systems
and software are used. Examples of mitigation of these control risks:

1. Unauthorised systems intrusion


Unauthorised intrusion can be either physical or electronic. Physical intrusion can be prevented by the
measures such as keeping all IT equipment in a secure area

Electronic control measures can include items such as “firewalls” and other software security systems
designed to prevent the organisation’s IT system from being “hacked” by outsiders.

2. Integrity Controls

Integrity controls are used to ensure that the data is not corrupted focusing both on the data and system.
Data integrity can use the following measures

 Input Controls
 Check digits
 Control totals (Ensures total derived at the end is correct figure)
 Hash totals (Ensures each stages are followed to generate the information)
 Range checks (Ensure figures are within stipulated range)
 Limit checks (To set highest level and to ensure it doesn’t exceed)
o Processing controls.
o Output controls.
o Backup controls.

Systems Integrity can be managed using the following:

 Control on the access to the Computer


 Controls on who can access and monitoring of the Local Area Network (LAN) (company system
limited by physical location)
 Controls on who can access and monitoring of the Wide Area Network (WAN)

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3. Improper Usage of IT Systems and Software

To reduce this type of risk many organisations implement an “audit trail” feature in their IT systems.

An audit trail keeps an exact record of when each computer was used and by which employee. In addition,
this feature also tracks the programmes and applications that were used by the employee.

17.6.3. Contingency Controls


Contingency controls are used when a company is faced with an unexpected disaster that needs
recovery. It uses a Disaster Recovery Plan (A backup plan to ensure dangers can be reduced and
information can be secured at all times), which will have the following features:

 Standby procedures that allows the system to run on parallel with the systems that has a problem.
 Recovery procedures to correct the system.

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CHAPTER 18: FRAUD AND FRAUDULENT BEHAVIOUR AND THEIR PREVENTION IN BUSINESS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO C7a. Explain the circumstances under which fraud is likely to arise.

TLO C7b. Identify different types of fraud in the organisation.

TLO C7c. Explain the implications of fraud for the organisation.

TLO C7d. Explain the role and duties of individual managers in the fraud detection and prevention
process.

TLO C7e. Define the term money laundering.

TLO C7f. Give examples of recognised offences under typical money laundering regulations.

TLO C7g. Identify methods for detecting and preventing money laundering.

TLO C7h. Explain how suspicions of money laundering should be reported to the appropriate
authorities.

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18.1 Circumstances of Arising of Fraud
Learning Outcome (ACCA Study Guide Area C, Topic C7a):
Explain the circumstances under which fraud is likely to arise.

What is Fraud?

Fraud may be generally defined as deprivation by deceit for personal or financial gain.

Fraud may also be defined as the use of deception with the intention of obtaining an advantage, avoiding
an obligation or causing loss to another party.

Fraud in accounting and business is said to occur when an organisation intentionally misstates its financial
performance and position. This may occur either because of fraudulent financial records and reporting or
because the assets of an organisation have been misappropriated (misused or stolen).

Check understanding

1. Examples of payroll fraud do not include:


A. Employees falsifying data on timesheets.
B. Payroll employees deliberately miscalculate salary of certain staff.
C. Creating fictitious customers and suppliers.
D. Creating fictitious employees.

Circumstances under which fraud is likely to arise

There are several circumstances that will increase the possibility of fraud taking place. These include:

 poorly thought out or implemented internal control system (Example: an organisation does not
have a proper system of recording and reporting the cash it receives).
 Understaffed or inexperienced accounting and finance departments (this increases the possibility
that frauds will go undetected).
 Failure on the part of management to correct weaknesses in the internal controls even when such
corrections are easily possible (this demonstrates a lack of conviction on detecting and removing
acts of fraud or even the possibility that management may itself be involved).
 Periods of sustained financial losses (this may cause an organisation to restate their financial
reports so as to receive needed financing).
 The existence of a reward system for management that is based on the share price and/or
financial performance of the organisation.

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Circumstances Indicating the Possibility Fraud Has Taken or is Taking Place

Here are several circumstances that serve as indicators that fraud has possibly taken place is taking place.
These include:

Frequent changes in accountants and auditors

 Existence of an unnecessarily complex corporate transaction


 Unusual transactions (Example: excessive payments for services to lawyers)
 A sudden unexplainable increase in the income.
 Inability or unwillingness of management to provide auditors with reports, supporting
documentation.

Check understanding

4. Secretive behaviour and expensive lifestyles of low income workers are crucial clues of fraud. (True
/ False)

The Three Prerequisites of Fraud

For fraud to happen or to be committed there are three prerequisites and all three has to be present before
fraud can be committed. The prerequisites are dishonesty, motivation and opportunity. Should the
opportunity arise in the organisation, the person has to be willing to act dishonestly and a motivation to
do so. Otherwise the fraudulent activity would not occur.

Prerequisite Description
Dishonesty Dishonesty usually stems from personal factors:
Dishonesty is the  Personality factors: a high need for achievement, status or security, a
deceitfulness shown in competitive desire to gain advantage over others, or low respect for
one’s behaviour. It is a authority.
subjective quality,  Cultural factors: national or family values, which may be more ‘flexible’
interpreted differently in the organisation.
according to different
ethical cultural and legal
norms.

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Motivation  The potential benefit of the action: the satisfaction of some need, or the
Motivation is the reason fulfilment of some goal, and
for doing something and  The potential sanctions or negative consequences of an action, or the
it is an incentive to deprivations required carrying it through.
commit fraud where the Personal reasons why someone would act against the interest of a company
perceived benefits are and commit fraud:
greater than the costs  The fraudster has a low temptation threshold,
(sanctions and negative  The fraudster was denied of financial benefits by the company,
consequences) of
 Excessive pressure to meet budgets, targets or forecast earnings,
committing fraud.
Opportunity The following are organisational reasons which creates the opportunity for
Even if a person is willing the fraudster to commit fraud:
to act dishonestly, and  Inadequate internal reporting on management accounting,
has a motivation for  Lack of effective internal control such as segregation of duties,
doing so, he must still  Failure to correct major weaknesses in internal control,
find an opportunity or  Lack of common – sense controls such as changing passwords regularly,
opening to do so. two signatories on cheques and restricted areas.

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18.2 Types of Fraud and Its Implication on Organisations
Learning Outcome (ACCA Study Guide Area C, Topic C7b & C7c):
Identify different types of fraud in the organisation.
Explain the implications of fraud for the organisation.

18.2.1. Types of Fraud


1. Misappropriation (stealing)

Cash Fraud Cash is typically the easiest asset of an organisation to misappropriate. Ways in which
this can happen include the following:
 Overstating a payment
 Understating cash received
 Teeming and lading
 Skimming
Asset Fraud Like cash, other assets of an organisation can also be misappropriated. Instances of
how this can happen include:
 Materials or goods can be obtained and used for unofficial purposes.
 Assets can be stolen or used for personal purposes by employees.
 Over recording materials that have been used in operations/ manufacturing.

2. Manipulation of Financial Statements


 Goods sent on consignment are recorded as sales
 Misapplication of accounting standards
 Window Dressing
 Off-balance sheet accounting

Check understanding

1. Teeming and lading refers to:


A. Theft of raw materials and finished inventory.
B. Intentional misreporting of pay-related details.
C. Theft of cash and cheque payments.
D. Stealing the excess of target sales amounts.

2. An individual may overstate profits and net assets in order to:


A. Force the share price down to allow family and relatives to buy the shares.
B. Produce a healthy statement of financial position to secure a bank loan.
C. Facilitate a private purchase of an asset from the business at a value that is less than market
value.
D. Defraud taxation authorities by reducing taxable profits.

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3. Collusion (root word: COLLUDE)

Collusion is the illegal or secret cooperation between individuals to cheat or deceive others.

Individuals may pool their resources to achieve their deceitful aims and it may be between any of the
stakeholders, e.g. customers, employees, managers, auditors or directors.

Examples of collusion include:


 The price, quantity or goods sold can be manipulated;
 Bad debts could be written off;
 Issuing credit notes in exchange for something;
 Fictitious supply of goods or services; and
 Corruption and bribery.

18.2.2. Implications of Fraud on Organisations


i. Monetary losses

Regardless of their size or type, all fraud will end up costing the organisation money. This naturally will
negatively affect its profitability.

ii. Indicates ineffective internal control systems

The occurrence of fraud should alert the management of an organisation that their internal control systems
need to be reviewed and amended

iii. Alarms the external auditors of the organisation

This will result in a more thorough audit, which in turn would make the whole audit process costlier for the
organisation.

iv. Results in a loss of credibility for the organisation

This could make it more difficult for the organisation to raise funds or recruit employees in the future (as
people generally do not want to lend money to or work for an organisation with a fraudulent reputation).
In addition, in the case of publicly listed organisations it could result in a decrease of its share price.

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18.3 Roles and Duties of Individual Managers in Fraud Detection and Prevention
Learning Outcome (ACCA Study Guide Area C, Topic C7d):
Explain the role and duties of individual managers in the fraud detection and prevention process.

18.3.1. Management Roles and Responsibilities in Fraud Detection


The roles and duties that individual managers must play in the fraud detection and prevention process can
be categorised as follows:

Leadership
All managers must lead by example. They should not engage in any sort
fraudulent practices. Their behaviour should represent the ideal that all
subordinates should be motivated to follow
Systems
Managers should know all about the organisation's internal control systems and
internal checks, as well as ensure that they are consistently implemented and
monitored..
Management roles and

Education
responsibilities

Subordinates' awareness of the importance of not engaging in any fraudulent


practices should be ensured through awareness and training programmes.
Reporting
Adequate steps must be taken to ensure that subordinates will be comfortable
approaching them to report incidents of fraud.
Action
Managers need to immediately investigate any reported incidents of fraud and
then take the necessary corrective action
Coordination
Managers need to work with both internal and external auditors in ensuring that
a sufficient system of controls exists for their departments that will reduce if not
eliminate the possibility of frauds taking place

Strategic-level Management has the responsibility to establish:


 A system of communicating the policies of the organisation including the policies on fraud. It
ensures clear understanding of ethical guidelines at all levels and promote policies such as zero
tolerance to fraud.
 A human resource function with policy and procedures, which takes into consideration how best
to negate the three prerequisites of fraud; through recruitment, training, performance
management, ethics, compliance, grievance procedures and disciplinary actions.
 Trainings on ethical corporate behaviour such as improving its social corporate responsibility
commitments.
 A commitment to foster staff loyalty to the company through honest, fair and transparent actions.
It will encourage staff to act as its guardians from fraudsters.
 Measures such as the “whistle blowing’ function and ensuring that it is effectively implemented.
 A Fraud Policy Statement, which is a written commitment of the organisation towards fraud
prevention.

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Check understanding

1. When there are effective controls integrated within a computerised system, the risk of fraud is
reduced. (True / False)

2. Which of the following types of internal control methods would most likely prevent the problem
of dishonesty?
A. Physical Controls
B. Segregation of Duties
C. Personnel Control
D. Authorisation and Approval Controls

3. Alice was working in a multinational corporation until she lost her job recently. This was because
she exposed unethical and unlawful activities within the organisation to the top management and
also to the government authorities. This involved disclosure of unethical employees at the higher
level of management. She was a/an:

A. Whistle-blower.
B. Betrayer.
C. Auditor.
D. Liar

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18.4 Money Laundering
Learning Outcome (ACCA Study Guide Area C, Topic C7e):
Define the term money laundering.

Money laundering is the practice of concealing the origins of illegally obtained money. It hides the proceeds
of crime making it look legitimate.

Sources of such funds can be from:

 Accounting fraud
 Tax evasions
 Corruption
 Criminal activities such as drug dealing
 Terrorist funding

Money laundering usually happens in three steps:

1. Placement: Money is introduced into the financial system;


2. Layering: Complex financial transactions are carried to conceal the illegal source, and
3. Integration: Acquiring profit created from the transactions in layering.

Money laundering in the UK is governed by three Statutes or legislations:

 Proceeds of Crime Act 1702 (POCA)


 Money Laundering Regulations 1707 (Regulations 1707)
 Terrorism Act 1700, 1706

The POCA contains the main UK anti-money laundering legislation, including provisions requiring
businesses within the 'regulated sector' (banking, investment, money transmission, certain professions,
etc.) to report to the authorities on suspicions of money laundering by customers or others.

The CCAB (the Consultative Committee of Accountancy Bodies) has also issued an Anti-Money Laundering
Guidance for the accountancy sector for those providing audit, accountancy, tax advisory, insolvency or
related services in the United Kingdom, on the prevention of money laundering and the countering of
terrorist financing.

Check understanding

1. A risk-based approach to money laundering prevention involves dedicating more resources and
checks to transactions that pose a higher risk of money laundering. (True / False)
2. The layering activity in money laundering involves the creation of legal profit from transactions
involving illegal funds. (True / False)
3. The placement activity in money laundering involves the placement of illegal funds within a legal
commercial system to mask its origins from illegal activity. (True / False)
4. Money laundering is the process by which the proceeds of criminal activity are introduced into
legitimate mainstream of financial commerce (True/ False)

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18.5 Recognised Offences Under Money Laundering Regulations
Learning Outcome (ACCA Study Guide Area C, Topic C7f):
Give examples of recognised offences under typical money laundering regulations.

Categories of Criminal Offence

Laundering Acquisition, possession or use of the proceeds of criminal conduct, or


assisting another to retain the proceeds of criminal conduct, disguising,
converting, transferring or removing criminal property.

Failure to report by an Upon discovering activities of money laundering, if the accountant failed to
individual report to relevant authorities, it would be considered a criminal offence.

Tipping off Disclosing information to any person if disclosure may prejudice an


investigation into, drug trafficking, drug money laundering, terrorist related
activities, or laundering the proceeds of criminal conduct.

Check understanding

Failure to report suspicious activities can result in penalties or legal action against you and your
company. (True / false)

Penalties
The law sets out the following penalties in relation to money laundering:

Knowing or assisting in laundering of criminal funds 14 years’ imprisonment and/or fine

Failure to report knowledge or suspicion of money laundering 5 years’ imprisonment and/ or a fine

‘Tipping off’ a suspected launderer 2 years imprisonment

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Examples of Money Laundering Activities
Here are some examples of money laundering:

Casinos If the casino is owned by organised crime, a money launderer working on behalf of the
casino may purposely lose all the money to the casino and the casino claims the
winnings as revenue from normal operations.

Structuring This is a method used to break down a substantial amount of money into smaller
denominations so that it is not suspected as money laundering. Money is banked in
separately in many different denominations

Cash Money is physically smuggled into another country where the jurisdiction is different
smuggling and less stringent on money laundering.

Cash A business that operates with high amounts of transactions in cash may deposit its
intensive revenue together with the illegitimate cash, claiming that all money banked in is legal.
business

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18.6 Methods for Detecting, Preventing and Reporting of Money Laundering
Learning Outcome (ACCA Study Guide Area C, Topic C7g & C7h):
Identify methods for detecting and preventing money laundering.
Explain how suspicions of money laundering should be reported to the appropriate authorities.

Methods for Detecting and Preventing Money Laundering

In general, there is a legal requirement for organisations to take the following actions.

1. To set up policies and procedures such as Risk Sensitivities Policies and establish accountabilities
for senior individuals to take action to prevent money laundering.
2. To educate staff and employees about the potential problems of money laundering.
3. To obtain satisfactory evidence of identity where a transaction is more than GBP10,000, so a
customer due diligence has to be conducted.
4. To report suspicious circumstances.
5. Not to alert persons who are or might be investigated for money laundering.
6. To keep records of all transactions for five years.

http://graduate.accaglobal.com/content/dam/ACCA_Global/Technical/law/money-laundering-guide-
1710.pdf

Check understanding

1. The followings are methods of preventing and reporting fraud, except


A. To report suspicious circumstance
B. To educate staff
C. To set up policies and procedures on risk management
D. To provide alert warning to relevant party

Appointment of Money Laundering Reporting Officer (MLRO)

The MLRO is responsible for receiving and evaluating reports from employees of activities and transactions
giving rise to knowledge or suspicion of money laundering or terrorist financing

Check understanding

2. When a person who suspects fraud or is involved in it, and successfully reports this to the MLRO,
he is indemnified of any wrongdoing, and may proceed with the act. (True / False)

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Reporting Authorities of Money Laundering:

Suspicious activity reports submitted by the regulated sector are an important source of information used
by Serious Organised Crime Agency (SOCA) in meeting its harm reduction agenda, and by law enforcement
more generally.

1. The Role of Financial Services Authority (FSA)

This is applicable to investment firms which are required to have:

 Control systems in place to monitor money laundering


 A Money Laundering Reporting Officer (MLRO) to be responsible for the oversight of the anti-
money laundering activities.
 Training for staff to be able to identify suspicious transactions, understand reporting procedures
and be able to notify the MLRO of any person who is suspected of in engaging in money laundering
activities.
 Adequate records for example:

2. Financial Action Task Force (FATF)

FATF is an inter – governmental body set up for the purpose of development and promotion of policies,
both at national and international levels, to combat money laundering and terrorist financing. It has over
30-member countries.

3. International Monetary Fund (IMF)

The IMF issued ‘The IMF and the Fight Against Money Laundering and the Financing of Terrorism’ in which
it highlighted the threat to economic and financial stability. It endorses the need for strong anti-money
laundering and counter terrorist financing regimes and recommends the FATF standards.

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CHAPTER 19: LEADERSHIP AND MANAGING INDIVIDUALS AND TEAMS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO D1a. Define leadership, management and supervision and explain the distinction between
these terms.

TLO D1b. Explain the nature of management:

i. Scientific/classical theories of management Fayol, Taylor


ii. The human relation school – Mayo
iii. The functions of a manager – Mintzberg, Drucker

TLO D1c. Explain the areas of managerial authority and responsibility.

TLO D1d. Explain the situational, functional and contingency approaches to leadership with
reference to the theories of Adair, Fiedler, Bennis, Kotter and Heifetz.

TLO D1e. Describe leadership styles and contexts: using the models of Ashridge, and Blake and
Mouton.

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19.1 Definition and Distinction of the Terms


Learning Outcome (ACCA Study Guide Area D, Topic D1a):
Define leadership, management and supervision and explain the distinction between these terms.

19.1.1. Leadership
‘Leadership is an interpersonal influence directed toward the achievement of a goal or goals’.

Leadership occurs when an individual convinces others to follow a course of direction he or she has set
through factors other than just formal authority. It is a social process of leading a group of people or
organisation.

Leaderships is beyond just setting a framework and direction for the organisation, it involves a people-
oriented process of creating a vision, communicating the vision and obtaining support for and dedication
in achieving that vision.

The Leader

A leader is someone who holds a dominant or superior position who can exercise a high level of power,
control or influence over the behaviour of others. A leader may exist anywhere in the organisation or
outside of the organisation, and it may not be a based on delegated authority or an official position they
hold.

A leader would have the following characteristics and this list is non-exhaustive:

They are respected because of their pre-existing traits: management capabilities, presence, assertiveness,
confidence, and ability to drive forward new ideas.
 Takes people with them and inspires confidence
 Thinks outside the box and are visionaries
 Motivates others by just setting an example

Check understanding

Which of the following statements about leadership is false?

A. When people operate as leaders their role is always clearly established and defined.
B. Leadership does not necessarily take place within a hierarchical structure of an organization
C. Not every leader is a manager
D. All the above

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19.1.2. Management
Management is defined as the coordination and organisation of activities and resources in an organisation
towards achieving clearly defined objectives, in congruence with set policies. In brief, management is getting
things done through people and processes.

The term management is also used to refer to the collection of individuals in an organisation responsible
for a specific function or department of that organisation.

The Manager
Each manager is responsible for carrying out the following activities for his department or function:

 Planning and budgeting.


 Organising and staffing.
 Monitoring and controlling.

19.1.3. Supervision
Supervision is the process where one individual directly oversees the work and activities of other
individuals on a very regular basis.

The Supervisor

A supervisor is type of manager selected by middle management to ensure that specific tasks are performed
correctly and efficiently. Their job is largely reactive dealing with situations as they arise, allocating and
reporting back to higher management.

The following are the characteristics or features of supervisors:

 They are the first line of management at the lowest level of the organisation.
 They are responsible for managing a small team of individuals.
 They ensure that things remain as they are by standard practise and regulation.
 They are instrument communication between managerial and non- managerial staff.
 They monitor and control work by means of day – to – day, frequent and detailed information.

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Check understanding

Which of the following situations arises when a supervisor is involved in competing roles or has competing
interests that could affect the supervisor’s ability to faithfully exercise sound professional judgment and
skill?

A. Conflict of interest
B. Duty to protect
C. Incompetency
D. Informed consent

19.1.4. Distinction between Leadership, Management and Supervision


Leadership, management and supervision all involve directing people. Some organisations may use the
terms, leadership, management and supervision interchangeably, but there are distinct differences in the
three. The main difference is the level of direct involvement or interaction each require with people.

Leadership Management Supervision


 Setting a clear direction for  Setting tasks and assigning  Involves directly overseeing
people to follow. the resources for people to and assisting people when
 Leaders are required to carry out those tasks. they are performing their
influence, persuade and/or  Monitor people to ensure assigned tasks.
empower people to take the that they effectively carry  Highest level of direct
direction that they have set. out the tasks assigned to involvement and interaction
 Lowest level of direct them.
involvement or interaction  Higher level of direct
with people involvement and interaction
than leadership

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19.2 Nature of Management


Learning Outcome (ACCA Study Guide Area D, Topic D1b):
Explain the nature of management:
i. Scientific/Classical Theories of Management – Fayol & Taylor
ii. The Human Relation School – Mayo
iii. The Functions of a Manager – Mintzberg, Drucker

19.2.1 Classical / Scientific Theories of Management – Fayol & Taylor


Henri Fayol: Administrative Approach to Management
Based on Fayol’s Administrative Management Theory, the organisation should be structured as a whole
instead of focusing on the individual. Fayol advocated 14 principles of management and it covers how
management should organise large groups of employees into the overall structure of the company so that
the efficiency and output of each group increases.

Principles Description
Division of Labour Dividing work rationally into specialised tasks enabling specialisation and
departmentalisation of organisations.
Scalar Chain There should then be a chain of authority from top to bottom to establish a chain
of command and direction.
Authority with An individual with responsibility for performing an action should be given clear
Corresponding authority to do it and made clearly accountable for the outcome. This gives the
Responsibility individuals their roles and scope of work. (↑ authority, ↑ responsibility)
Appropriate Decisions should be taken at the top of the organisation where appropriate.
Centralisation
Unity of Command Instructions should only be received from one superior and each subordinate is
answerable to only one superior. This creates order for the organisation.
Unity of Direction There should be only one set of hierarchy of aims and objectives, from the
mission to the operational plans so that effort can be coordinated for unity of
action, strength and effort.
Initiative Initiative should be encouraged within the boundaries of authority and
discipline.
Subordination of The general good of the organisation prevails over individual interests.
Individual Interest
Discipline Members of the organisation should behave in agreed ways.

Order Presence of order in work and order among workers.


Stability Adequate time for settling into the job position and should not change all the
time.
Equity There should be equity and fairness in the dealings between staff and manager.
Fair Remuneration Remuneration should be fair to both the employee and employer.
Esprit de corps Harmony and teamwork should be encouraged.

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Fayol’s Functions or Duties of Management


Fayol has also suggested that there are generally five management duties or functions:
Planning it involves the setting of the general direction of the organisation and how it can
achieve the objectives through procedures set.

Organising Subordinates with necessary resources and skills will be delegated the authority
to execute the tasks and are responsible for each element of work.

Commanding Instructions are given to subordinates to carry the work.

Co-ordinating Duty to ensure goal congruence by coordinating all efforts towards a common
goal. (ensure everyone shares the same goals/objectives)

Control Actual results compared with targets & corrective actions will be taken if there is
deviation from targets.

Frederick Taylor: Scientific Theory of Management


Frederick Taylor is widely referred to as the “father of scientific management”. He developed the 'scientific
management' model back in 1915.

According to Taylor, the one best method of getting an activity or job accomplished can be scientifically
designed and a prescriptive method of working can be defined. Managers must therefore scientifically
study all jobs and processes and develop a standardised method for performing each one. These methods
of working should be set as standards for workers to follow.

Taylor believed that individuals should submit to authority and individual interests are not of prime
importance. Individuals or workers will do what is required when they are remunerated fairly for their
efforts.

Taylor also made another assumption that most workers work at a productivity rate that is well below their
potential.

Check understanding

1. Frederick Winslow Taylor is best known for the introduction of which approach to job design?
A. Behavioural approach
B. Division of labour
C. Scientific management
D. Ergonomics

2. What is the guiding principle of scientific management?


A. Experimentation
B. Fluid working relationships
C. Freedom of association
D. One best way to do a job

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The five principles of the scientific management are:

Science of work Work to be scientifically studied in detail and one best method or way
of doing a particular task to be defined and reduced to law.

Scientific selection of workers The best person to do the job is selected on the basis of his/her
mental and physical capabilities

Scientific progressive Workers are trained to follow the set procedure very precisely.
development of workers

Scientific management Management is given full responsibility to plan and organise work to
the manager, not to the worker.

Fair remuneration Each worker should be paid in accordance with his output (or
percentage of job completed) rather than by hours spent at work.

Taylor’s assumptions about human behaviour at work:

1. People or workers respond as individuals, not groups.


2. People or workers are rational economic animals focused on maximising their economic gain.
3. People or workers are like machines and can be treated in a standardised fashion.

Taylor's conclusions:

1. High wages is the main motivator.


2. Manager's job is to tell workers what to do.
3. Workers' jobs are to do what they are told and get paid.

Criticisms of the Scientific Theory of Management:

1. In real life situation, there is no one best method, technique or way of getting a job or activity
executed.
2. Employees should not be treated as machinery operating based on scientific methods; because
they are social beings and the social interaction between employees are complex and
unpredictable.
3. Employees may not necessarily be motivated to work based on piece-rate pay system as
4. The work itself can be motivating and money may not be the key motivator of why employees
work.

19.2.2 The Human Relation School – Mayo


Between 1927 and 1937, Prof. Elton Mayo conducted a series of experiments known as the Hawthorne
Experiments. Several groups of employees were segregated and observed to see the effect on output and
morale when various changes in the methods of working and incentives were introduced in working
conditions. The change in working conditions should change the output, but almost without exception,
output increased regardless of the changes introduced; the experimenters reverted to the original working
conditions with no changes and yet output was the highest ever recorded.

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It was therefore concluded that the changes in physical work conditions could not account for the increase
in output, as the increase was actually due to the enhanced work satisfaction that the employees enjoyed,
the development of personal friendships and a new social atmosphere, which brought a significant change
in their attitude towards work.

Therefore, findings from the Human Relations School were that social dynamics and group interactions can
directly affect the productivity and efficiency of employees. This school of thought therefore contends that
an organisation is a complex social system and employees are an integral part of this system.

Factors such as leadership, group cohesion and job satisfaction are important considerations in an
organisation and management has to take into account the personalities of their employees both as
individuals and as members of a group.

The Human Relations School theory is based upon three main principles:

1. Individuals or employees want more than just a salary from the organisation for which they work.
2. Individuals or employees perform better when empowered.
3. Individual behaviour is shaped and influenced by the work group or department they belong to.

Therefore, management:

1. Not to neglect the needs of employees and confine their attention to the mechanics of work.
2. Understand that individuals gain greater satisfaction from relationships in groups.
3. Use group incentives instead of individual incentives to motivate employees.
4. Focus on developing human relations and play the role of facilitator rather than just allocating
and controlling work. Be a manager of not just processes and systems, instead be a manager of
people as well.

19.2.3 The Functions of a Manager – Mintzberg & Drucker


Henry Mintzberg
 A manager is not always reflective, systematic planner, and they have routine work as well.
 Management is a matter of judgement and intuition, gained from experience and cannot be
reduced to a science or a profession.
 Management work is disjointed and discontinuous.

He has identified ten basic managerial roles or functions under three categories:
Category Role Description
Figurehead Representing the company at dinners,
conferences, and so on.
Interpersonal
Leader Inspire and motivate employees.
Social or personal aspects of
a manager’s job. Liaison Make contact inside and outside manager’s
jurisdictional areas. (e.g. Managers act as the
bridge between directors & employees)

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Informational Monitor Resourceful in sourcing for information from


outside and inside the organisation.
Receiving, handling,
processing and reporting of Disseminator Distribute information to relevant parties or users.
data that flows in and out of
Spokesperson Represent the organisation in speaking and
a manager’s department and
communicating to external parties.
is associated with his
function. I.e. the press.

Entrepreneur Identify new opportunities and pursue them.

Disturbance Handle and/or resolve conflicts within the


Handler organisation.
Decision-making
Resource Manager makes budgeting decisions relating to
Taking decisions on behalf of
Allocator the mobilisation and distribution of limited
the department.
resources to achieve objectives.

Negotiator Represent the organisation in negotiations (E.g.


Good prices from supplier)

Peter Drucker’s 5 Functions of Management


Drucker grouped the functions or duties of management into five categories:

Setting Objectives Decide what the objectives of the organisation should be and quantify the targets
for each objective.

Organising the Work The work to be done in the organisation must be divided into manageable
activities and manageable jobs.

Motivating Motivating employees and communicating information to them.

Job of Measurement Setting objectives of performance, analyse actual performance against the
objectives set and communicating the results to employees.

Developing People Developing people so workers can be made effective and knowledgeable.

The focus of modern organisations is not limited to the functions as described above as the functions of
marketing and innovation have become increasingly important.

Drucker also suggested that the vision, dedication, and integrity of managers determine whether there is
management or mismanagement.

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Lastly, Drucker advises that managers need to “avoid the activity trap”. This occurs when managers get too
involved or “hands – on” with the day - to – day activities of their function or department and end up
becoming more like employees.

Drucker’s SMART Objectives:


Specific Objective must be clear and not vague and without a purpose.

Measurable Objectives must be quantified to determine whether it has been met or not.

Attainable Achievable objectives

The objective has to be related to what the organisation is supposed to achieve;


Relevant
otherwise it will be a waste of time.

Set a deadline. Without a deadline, tasks and objective will never be


Time-bounded
accomplished.

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19.3 Managerial Authority and Responsibility


Learning Outcome (ACCA Study Guide Area D, Topic D1c):
Explain the areas of managerial authority and responsibility.

Power
Power is the capacity or ability to direct or influence the behaviour of others or the course of events.

Check understanding

1. In situations where true _______ takes place, employees gain confidence in their ability to perform
their jobs and influence the organization's performance.
A. Responsibility
B. Centralization
C. Empowerment
D. Authority

Power has been classified into six types or sources as proposed by French and Raven (1959) as follows:

Source Description
Legitimate This power is associated with a particular job position (E.g.: CEO) in the
(Position power) hierarchy. It is also known as authority.
Coercive This is the power of physical force or punishment. Someone who is able to
(Negative power) mediate punishments exercises coercive power.
Reward Someone who is able to mediate rewards to individuals and groups exercises
(Resource power) reward power.
Expert power A person may be powerful if his or her experience, qualifications or expertise
are unique or being recognised.
Referent A person may be powerful simply due to his or her personality, such as
(Charisma power) charisma and excellent interpersonal skills
Information power This is the power to control and disseminate information to his or her follower.
The person is well informed and up-to-date with, persuasive information.

Check understanding

2. What is the term for power derived from status or position in an organisation?

A. Referent
B. Expert
C. Reward
D. Legitimate

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Authority

Authority (Legitimate power) is the power or rights an individual has to give orders, make decisions and
enforce obedience. Authority is thus another word for position power or legitimate power, which is vested
upon the person by higher authority.

Types of manager in a business can be classified according to the types of authority they hold:

Authority Description
Line authority Line authority enables a superior to both finalise and implement the
decision he/she has made.
For example, all Heads of department will have this authority.
Staff authority The individual who has staff authority only have advisory capacity but no right
of enforcement.
Functional authority Functional authority is a hybrid of line authority and staff authority. A
manager is delegated this authority in some circumstances to direct,
design or resolve issues.

Responsibility

Responsibility is the formal obligation to do something. Responsibility is owned and cannot be delegated
to someone else. Usually the more authority the person is given, the more the responsibility he or she has.

Accountability

Accountability is a person’s liability to be called to account or answerable for the fulfilment of tasks they
have been given. It is also the state of being answerable or liable for actions or conduct, of being
responsible for actions or omissions.

Delegation

Delegation of authority is the process by which a superior gives a subordinate the authority to carry out an
aspect of the superior’s job

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To illustrate the relationship of authority, responsibility and accountability, we look at the process of
delegation:

 The Board of Directors is given the authority and responsibility to steward the company by the
shareholders. The Board of Directors would then delegate the authority of management of the
organisation to the Chief Executive Officer (CEO).
 The CEO will have the responsibility of executing the directions given by the Board of Directors
effectively. The CEO would then delegate the authority of setting operational and functional strategies
to the functional managers, namely the Marketing Manager, Accounting and Finance Manager,
Production Manager, and Human Resource Manager.
 The functional managers have the responsibility to ensure that they execute the strategies finalised
by the Board and the CEO effectively.

It is important to note that the ultimate responsibility of running the company rests with the Board of
Directors and cannot be abdicated. The Board of Directors are ultimately accountable to the shareholders

Authority without responsibility may be abused and is not effective; and responsibility without authority is
powerless. Without delegation, a formal organisation could not exist.

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19.4 Situational, Functional and Contingency Approaches to Leadership


Learning Outcome (ACCA Study Guide Area D, Topic D1d):
Explain the situational, functional and contingency approaches to leadership with reference to the theories
of Adair, Fiedler, Bennis, Kotter and Heifetz.

19.4.1. John Adair: Action-Centred Leadership Theory


According to John Adair’s Action-centred Leadership Theory (1990), a leader must constantly strive to
achieve and meet these three major needs:

1. The need to achieve the common task.


2. The need to be held together as a group.
3. The individual needs of various individual group members.

Given how interconnected these three needs are, Adair formulated his three-circle model.

To meet these three needs a manager is required to take on certain responsibilities as listed below:

Task Needs: It refers to objective setting, tasks planning, responsibilities allocation and performance
standards setting.

Responsibilities:

 Define the activity of the task by identifying objectives for the group/team.
 Create the plan with strategy, tactics, expected results, performance standards, and
timescales.
 Monitor and maintain overall performance against objectives and standards.
 Review and adjust plan, methods and targets as necessary.

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Individual Needs: It refers to coaching, counselling, developing and motivating.

Responsibilities:

 Understand individuals with their differing personality, skills, strengths, needs, aims and fears.
 Reward individuals with extra responsibility, advancement and status where appropriate.
 Identify, develop and utilise each individual's capabilities and strengths.

Group Needs: It refers to communication, team building, motivation and discipline.

Responsibilities:

 Establish, agree and communicate standards of performance and behaviour.


 Anticipate and resolve group conflict.
 Develop team working, cooperation, morale, and team spirit.
 Motivate the group/team and provide a collective sense of purpose towards objectives and aims.

19.4.2. Fiedler: Contingency Theory


Fred E. Fiedler developed the contingency model of leadership. This theory states that a leader’s
effectiveness depends upon the match between his personality and the situation or organisation. Fiedler
states that there are two basic traits that individuals can have in terms of leadership:

Psychologically Distant Managers (PDM): Task Motivated

Leaders who are PDMs will be more effective in situations that are very favourable or unfavourable and in
organisation with a formalised hierarchical structure (“tall organisation”).

Psychologically Close Managers (PCM): Relationship Motivated

Leaders who are PCMs will be more effective in moderately favourable situations and in an informal, less
rigid, “flat’ organisation.

The following graph illustrates the relationships as mentioned above:

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There are three main factors that determine how favourable a situation is to the leader:

Leader-member relations he most favourable situation is one where there is a high level of mutual
respect, confidence and trust for the leader.

Task structure The more routine, standardised and easy to monitor the tasks are, the
more favourable the situation for the leader.

Leader-position power The more power inherent with a position, the more favourable the
situation to the leader.

Check understanding

Contingency leadership theories are based on the view that leadership is an interpersonal process,
emphasising the functions of leaders. Which of the following theorists directly relate to contingency
theory?

A. Ashridge, Adair, Bennis


B. Fiedler, Adair, Heifetz
C. Blake, Mouton, Kotter
D. Kolb, Belbin, Tuckman

19.4.3. Warren Bennis


Warren Bennis states that there are distinct differences between management and leadership.

A manager’s role is to ensure that an organisation’s policies are implemented by focusing on systems and
control. It is a function that takes a short – term view.

Leadership on the other hand requires a long-term perspective. It focuses on innovation, development of
the organisation as well as inspiring and motivating employees.

Check understanding

According to Warren Bennis, what is the difference between managers and leaders?

A. Managers do things right; leaders do the right things.


B. Managers manage, leaders lead
C. Managers maintain distance from their subordinates, leaders are people centred
D. Managers tell, leaders consult

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Bennis goes on to outline four common abilities that leaders share:

Management of attention Bennis defines leadership as “the capacity to create compelling vision and
translate it into action and sustain it”.

Management of meaning Leaders should be effective communicators and get others to follow their
vision.

Management of trust Leaders must have the trust of their followers if they are to be successful.

Management of self Leaders should always be learning. Not only from themselves (and their
mistakes) but also from their employees.

19.4.4. Heifetz: Dispersed Leadership


Heifetz (1994) made a distinction between leadership and having authority. Individuals regardless of
position can exert leadership influence and leadership may not necessarily have authority but they have
power. Therefore, anyone in the organisation or even outside the organisation can be a leader even though
there is no formal authority. This is such, because leadership is an interpersonal process where one follows
another based on his or her power and power may not only be legitimate power (referent, expert and
information power).

He also believes that leaders need to distance themselves from the day-to-day activities of the
organisation. Instead, they need to take a broader and more macro perspective of the challenges and
opportunities facing the organisation. They then need to set a framework and direction for the organisation
so that it can meet these challenges and capitalise on opportunities. Leaders should mobilise individuals
and teams to make changes and help people to face the realities of work and to resolve conflicts.

19.4.5. John Kotter


Kotter also made distinguishes between leadership and management.
Leadership Management
 people – orientated  task-orientated
 Creating a vision for the organisation  Planning and budgeting
 Communicating the vision to the organisation  Organising and allocating human and non-
 Obtaining support for and dedication to the human resources
vision.  Monitoring, controlling and problem solving
for activities.

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19.5 Ashridge and Blake and Mouton Models


Learning Outcome (ACCA Study Guide Area D, Topic AD1e):
Describe leadership styles and contexts: using the models of Ashridge, and Blake and Mouton.

The Styles Theories describe the behavioural aspect of leadership. It is based on the view that leadership
is an interpersonal process and different leadership styles have different effects on people that they lead.
As such, different styles can be adopted to influence different individuals or employees.

19.5.1. Ashridge Management College


The Ashridge Management School also developed the Styles Theories and they suggested four different
leadership styles, namely:

Style Description Advantage Disadvantage


1.Tells style Manager is the decision Quick decision making and One – way
maker and all instructions very efficient for highly communication and does
(Autocratic)
must be followed without programmed work. not encourage initiative
any question. and commitment from
subordinates.

2.Sells style Manager is still the Team members will be Communication will still
decision maker but more committed, will be one – way, team
(Persuasive) believes that subordinates have mutual members will not
have to be motivated to understanding on necessarily be motivated
accept the decision so decisions and also will be and commitment might
that they can carry them able to function more still be low.
out properly. effectively.

3.Consults The manager discusses Motivation is encouraged, It may take a longer time
with the team and takes consensus may be to reach a decision and
style
their views into account, reached that might lead to input of team members
although manager still better quality of decision might not be useful.
retains the final decision. and encourages upward
communication.

4.Joins style The leader and team High motivation and Decision – making will
members make decision commitment from team take a longer time and
(Democratic)
together based on members and empowers the power of a manager
consensus. team members to take may be undermined.
initiative.

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Check understanding

The Ashridge Management College model identified four management styles – tell, sell, consult and
join. Consult style is where:

A. The leader consults his or her subordinates but makes all the decisions which must be accepted
without questions.
B. The leader talks to his or her subordinates before making a decision.
C. The leader makes all the decisions and persuades the subordinates to accept them without
questions.
D. The leader consults all his or her subordinates and makes decisions together, which makes the
decision-making process lengthy.

19.5.2. Blake and Mouton: The Managerial Grid


Robert Blake and Jane Mouton observed two basic dimensions of leadership:

 Concern for production and


 Concern for people

The following is the Blake and Mouton’s Managerial Grid

Employees are asked to rate their managers based on the two dimensions at any point on a continuum
from very low concern to a very high concern. The manager’s position on the grid is then compared to the
five points on the grid, which indicates five styles of management as follows:

1. Management impoverished (1,1)


This manager only makes minimum effort in either area and will make smallest possible effort required
getting the job done.

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2. ‘Country Club’ management (1,9)


This manager is thoughtful and attentive to the needs of people, which leads to a comfortable friendly
environment, but very little work is actually achieved.

3. ‘Middle of the road management’ (Dampened Pendulum) (5,5)


This manager is able to balance the task in hand and motivate the people to achieve these tasks.

4. Task management (9,1)


This manager is only concerned with production and arranges work in such a way that people interference
is minimised.

5. Team management (9,9)


This manager integrates the two areas to foster the team to work together and high production to produce
true team leadership.

Check understanding

Adam believes that his job as a senior manager is to achieve the assignment, regardless of the feelings
or needs of his team. Whatever decision he makes; he expects his subordinates to follow his
instructions without question. Which of the following combination of the Blake and Mouton
dimensions and the Ashridge Management College behaviours best describes Adam’s management
style?

A. 1,9 and tells


B. 9,9 and sells
C. 9,1 and tells
D. 5,5 and sells

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CHAPTER 20: RECRUITMENT AND SELECTION OF EMPLOYEES

CHAPTER 20: RECRUITMENT AND SELECTION OF EMPLOYEES

Learning Outcomes

At the end of the chapter, you should be able to:

TLO D2a. Explain the importance of effective recruitment and selection to the organisation.

TLO D2b. Describe the recruitment and selection process and explain the stages in this process.

TLO D2c. Describe the roles of those involved in the recruitment and selection processes.

TLO D2d. Describe the methods through which organisations seek to meet their recruitment needs.

TLO D2e. Explain the advantages and disadvantages of different recruitment and selection
methods.
TLO D2f. Explain the purposes and benefits of diversity and equal opportunities policies within the
human resources plan.

TLO D2g. Explain the practical steps that an organisation may take to ensure the effectiveness of its
diversity and equal opportunities policy.

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20.1 Importance of Effective Recruitment and Selection


Learning Outcome (ACCA Study Guide Area D, Topic D2a):
Explain the importance of effective recruitment and selection to the organisation.

The Human Resource Function

As organisations are made up of individuals with different needs, it is important to ensure that all these
needs are managed in congruence with the organisations’ objectives. Therefore, the management of
human resources is a function that cannot be neglected.

The main purpose of the Human Resources (HR) department is to implement policies and procedures that
will attract, motivate, develop and retain quality employees so that the organisation will be able to meet
its long-term objectives.

Check understanding

1. The human resource management functions aim at


A. Ensuring that the human resources possess adequate capital, tool, equipment and material to
perform the job successfully
B. Helping the organization deal with its employees in different stages of employment
C. Improving an organization’s creditworthiness among financial institutions
D. None of the above

2. Human Resource Management' is the process of


A. Acquiring Employees
B. Training Employees
C. Appraising and Compensating Employees
D. All of above

In assessing the effectiveness of the HR function, Beer (1984) developed the Harvard model, the Four Cs of
HR management. The four Cs are:

Commitment Staff are committed to the organisation.

Congruence Staff goals are congruent with the organisation goals.

Competence Staff are competence exhibiting skills and knowledge in doing what they are
supposed to do.

Cost Effectiveness The benefits derived from the HR function should be higher than the cost of
implementation. (Benefit > cost)

To help ensure that this objective is met, most HR departments put a plan into place.

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The Human Resource Planning (HRP)

Human Resource Planning is a strategy for the acquisition, utilisation, improvement, and preservation of
an enterprise’s human resources.

The main components of a HR plan are:

• Determining the present capabilities and capacities of the organisation’s workforce.


• Determining the organisation’s current and upcoming human resources needs.
• Determining how to best utilise and retain existing employees.
• Determining how to effectively find and hire qualified new employees and ensuring that the
organisation has a well-functioning and effective workforce in place.

Recruitment and Selection

Recruitment is the process of generating a supply of suitable candidates for a position in the organisation.

Check understanding

3. What is the main objective of the recruitment and selection process?


A. Recruit the right candidates
B. Meet the high labour turnover
C. To reduce the costs of recruiting
D. None of the above

It is a process of contacting the labour market both internally and externally to attract suitable candidates
to apply for the position. (E.g. advertising for job vacancies, job fairs, job hunt portals, head-hunters)

Selection is a process after recruitment that selects the best-suited candidate to meet the requirements of
the position offered.

The overall purpose of recruitment and selection is to locate sources of labour for an organisation that will
meet its present and future work requirements. These two activities must be carried out by all
organisations regardless of their size.

What makes effective recruitment and selection crucial to an organisation is that employees are the most
important assets of a business. Ultimately the success of an organisation hinges on whether it has the right
people to implement its strategies and plans. In order to ensure that it has the right people (i.e. people
with the necessary knowledge, expertise and skill sets) an organisation must have the right recruitment
and selection strategy in place.

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20.2 Stages of Recruitment and Selection Process


Learning Outcome (ACCA Study Guide Area D, Topic D2b):
Describe the recruitment and selection process and explain the stages in this process.

20.2.1. Step 1: Personnel Planning and Forecasting


Personnel planning and forecasting is the first stage of this whole process. The organisation will audit the
environment and forecast internally the number of staff required in response to the environmental
demands. The organisation must decide how many additional people it is going to need in the near future.
It involves understanding the reasons for recruiting, identifying the nature of the job and obtaining
authority to recruit.

Generally, the reasons for the need of employing new employees are for two main reasons:

• A certain number of existing employees will leave the organisation. Reasons may be because the
organisation has asked them to leave (for poor performance) or the employees leave on their
own accord (Example: he has found another job).
• The organisation is growing and this means that the workload of the organisation will increase
and the existing number of employees may not able to cope.

Organisations need to look at factors such as these:

• The labour turnover ratio (that is the percentage of employees that leave the organisation each
year).
• Performance factors of the organisation such as sales volumes, number of new products/ services
that could lead to a need to increase employee numbers.

At the end of this stage, an organisation will have identified all the vacancies or job positions it needs to
have filled. This then leads to the recruiting stage.

Check understanding

A major internal factor that can determine the success of the recruiting programme is whether or not
the company engages in ______.

A. HRP
B. Selection
C. Induction
D. None of the above

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20.2.2. Step 2: Recruiting


The recruitment process begins with a detail job analysis, which looks into the job scope and the nature of
the job. It is important to establish what is the requirement of the job that has to be filled before moving
on to the next stage. This process will involve the drafting of two documents: The Job Description and the
Person Specification.

Job Description  Describes the job in detail.


 It also has information on:
The purpose and objective of the job.
o The job title.
o The position of job in relation to others, which will identify that, is
the superior and the subordinates of this position.
o Principal or key duties and responsibilities.
o Working conditions including the key difficulties in the job.
o Wage/Salary.

Person Description  Specifies the characteristics and the quality of the candidate
 Roger 7-point Person Specification Framework:
1. Physical make-up: Appearance, health, strength
2. Attainments: Qualifications, career achievements
3. General intelligence: Average, above average
4. Special aptitude: Mental sharpness
5. Interests: People-oriented
6. Disposition: Calm, independent
7. Circumstances: Location, own a car.

Sources of Recruitment

Once both the Job Description and the Person Specification have been documented, we then know who to
look for and the next step will be to determine where can we look for this person to fill the position. Most
organisations will have two choices, either to recruit from external sources or to promote from internal
sources. (Further explained in sub-chapter 20.4)

Methods of Recruitment

Methods organisations use to recruit from external sources include:

• Advertising their vacant positions in various mediums such as in-house newsletters, noticeboards.
Professional and specialist periodicals, national newspaper, Job centres, School and university
career offices, the Internet (e-recruitment)
• Visiting colleges and universities.
• Asking for referrals from employees, customers, and suppliers.

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The communication of the vacancy should be (for example, advertise in the newspaper):

Concise

Relevant and
Attractive
appropriate

Positive and
honest Comprehensive

20.2.3. Step 3: Selecting


If recruitment is carried out effectively, an organisation should have more candidates than jobs. This leads
the organisation into the selection stage.

A systematic approach or procedure to selection:

1. Deal with responses to advertising: Sending application forms to applicants.


2. Assess each application against key criteria in the job description and person specification.
3. Sort applications into suitable and unsuitable.
4. Invite candidates for selection interview.
5. Send standard letters to unsuitable candidates to inform them that are not successful

Methods of Selection

• Selection interview: Individual (one-to-one), panel, and selection boards.


• Selection tests: Intelligence, Aptitude, Personality, Proficiency, and Medical.
• Reference Checking: Job references, character references.
• Group selection methods: Assessment centres.
• Work sampling: Portfolios, trial periods or exercises. Relatively this is the most valid method of
confirming the competences of an individual in performing the work.

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Selection Interview

The selection process is incomplete without an interview, as an interview will assess an individual’s
suitability on a “face – to – face” basis. This is the most popular method used by companies. There are
several options of selection interview:

• One-to-one interview:
• Group interview: Several candidates are interviewed together. Each candidate takes turn to
answer questions.
• Panel interview: A panel of several interviewers conduct the interview.
• Two-to-one interview:
• Succession of interviews: The interview is first conducted by junior managers and by higher– level
managers later.

Types of questions used during interviews:

• Probing questions: Aims to find out the deeper significance of the candidates answers and are
usually used when the initial answers are dubious or unclear.
• Closed questions: Invites ‘yes’ and ‘no’ answers. This may be used to pin point on an answer and
when candidates give non-committal answers.
• Problem solving questions: Candidates are given a situation or problem and asked to present a
solution to the problem.
• Leading questions: This encourages the candidates to give a certain answer.

Selection Tests

This process involves giving the candidates a particular test and only the ones who score above a certain
mark will progress to the next level. It acts as a way to filter or narrow down the number of candidates. It
may also be used after a selection interview.

Effective tests should be:

• Sensitive
• Standardised
• Reliable
• Valid

There are two main broad categories of tests used by organisations:

• Proficiency tests (attainment or competency tests)


• Psychometric tests (aptitude, intelligence, personality)

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Types of Tests:

• Competence Tests

Assesses the level of current knowledge and expertise a candidate has and their ability to perform the job.
They also attempt to assess the candidate’s ability to apply that knowledge in various situations. Work
sampling can be used.

• Intelligence Tests

Assesses the intellectual abilities of an individual. They are used to measure a range of abilities such as a
candidate’s English and Mathematical skills.

• Aptitude Testing

These tests are job related and are used to measure a candidate’s aptitude for a particular job to predict
an individual’s potential for performing a job or learning a skill. It includes abilities such as reasoning,
spatial-visual ability, perceptual speed and accuracy, and physical abilities.

Check understanding

David is currently interviewing for a position with an organisation. He has the necessary academic
qualifications however the organisation would like to determine if he also has the right ability to
perform the task at greater quality. Which one of the below types of testing should it administer?

A. Intelligence
B. Personality
C. Competence
D. Aptitude

Assessment Centres

In an assessment centre, candidates are put through a series of different forms of selection methods.
Usually used as the final stage of a selection process as an in-depth appraisal of candidates. Trained
assessors observe and evaluate individuals through a selection or pre- programmed exercises or trials.

Assessment centres are able to assess competencies, which cannot be assessed by other methods such as
teamwork, initiative, leadership, social skills and many more. Candidates will be involved in group role-play
exercises or asked to solve case studies as a team.

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Reference Checking/Employment Reference

Reference checking involves written and telephone references to gain further information about
candidates. A referee may be a previous employer or colleague who are able to give an assessment of the
candidates’ competence at work. References should be focused on factual information such as information
about previous employment history, pay and circumstances of leaving. Opinions may be asked but most
opinions lack criticism and may be biased.

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20.3 Roles Involved in Recruitment and Selections of Employees


Learning Outcome (ACCA Study Guide Area D, Topic D2c):
Describe the roles of those involved in the recruitment and selection processes

There are four groups of individuals that are involved in the recruitment and selection process in the
organisation. They are:

Group of Individuals Explanation


Senior Managers/Directors Responsible in clarifying how human resources are to be managed
and used in achieving corporate objectives

Establish organisation structure with a system of Human Resource


planning (HRP).

Human Resources Manager Carry out a thorough job analysis of the vacant position in the
organisation to determine the skill levels/technical abilities that the
job will require.

Assess potential candidates and determine whether they have the


necessary skills/technical abilities that the job they are applying for
will require.

Try to determine if a candidate has the right personality and


character to fit into the culture of the organisation.

Line Managers Defines the Job Description and Person Specification with the help
of the HR Manager.

Has a final say on the selection process

Recruitment Consultants/Agents Not all organisations would have a complete HR department,


recruitment consultants or agents may be used as they have better
access to potential candidates. The following are typically their
responsibilities:

 Analysing the demands of the job


 Advising on job analysis
 Designing job advertisements
 Screening applicants
 Short listing or first round of interviews

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Check understanding

1. The duties of 'HR' manager and staff functions consist of


A. Assisting line manager
B. Implementing the policies
C. Directing the tasks of people
D. All of above

2. One who assists other managers in HR functions of management process is


A. Line manager
B. First line supervisor
C. Human resource manager
D. All of above

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20.4 Methods to Meet Recruitment Needs


Learning Outcome (ACCA Study Guide Area D, Topic D2d& D2e):
Describe the methods through which organisations seek to meet their recruitment needs.
Explain the advantages and disadvantages of different recruitment and selection methods.

There are two main methods available to an organisation when it comes to recruiting:

Internal Method:

Reactive approach The organisation internally advertises a job vacancy inviting existing employees
to apply.

Proactive approach The organisation determines the knowledge, expertise and skill set a job requires
and then assesses which of its current employees possess these.

External Method:

J. Dunn and E. Stephens identified three categories of external recruitment:

Direct methods When representatives of an organisation directly contact candidates who the
organisation is interested in hiring.

Indirect methods The main indirect method of recruiting is advertising. Mediums include
newspapers, magazines, trade journals and/or the Internet.

Third party This type of method involves organisations using recruiting agencies and referral
sources.

Check understanding

The greatest advantage of hiring from within is that it helps maintain employee morale.
(True / False)

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Each of these methods has its advantages and disadvantages.


Method Advantages Disadvantages
Direct The organisation knows in advance that Candidates know they are in demand and
the candidates will have at least the so will expect a competitive salary from
minimum knowledge, expertise and skill the organisation at the very least. (Direct
sets it is looking for. recruitment is a sign that the organisation
is very interested in your talents.)
Indirect This method enables an organisation to It then becomes time consuming and
gather a large number of applications expensive for an organisation to separate
very quickly. the suitable from the unsuitable
candidates.
Agency Efficient way of screening out unsuitable Using an outside agency can be expensive
candidates for an organisation as all the as these firms charge for their services
work is done by an outside agency. (usually a percentage of the salary offered
to any chosen candidate).
Referral Referrals can be a very effective way of A limited set of candidates and referrals
recruiting (especially when the referral may be biased as the person making the
comes from an existing employee), as the referral may have inflated the
referring party knows both the candidate competencies of the candidate.
and the organisation.

Selection by Interviews
Advantages Disadvantages
Highly interactive. Can be ineffective if the interviewer has existing
biases (Example: has a preconceived notion of
Opportunities for use of non-verbal
what a person filling a position should look like).
communication to confirm or undermine spoken
answers. Candidates may put up a show.

Opportunity to assess candidates’ appearance,


interpersonal and communication skills.

Selection by Testing
Advantages Disadvantages
Tests provide an effective way for an organisation These tests (especially personality tests) are not an
to filter out candidates when they have a large exact science. They may cause an organisation to
number of applicants (Example: only candidates unnecessarily disqualify a suitable candidate.
who score above a certain mark will be called for
Correlation between ability and tests and ability of
an interview).
tests may not always be consistent.
It makes it easier for organisations to compare and
Tests need to be revised on a regular basis.
contrast different candidates.

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20.5 Purposes and Benefits of Diversity in The Human Resource Plan


Learning Outcome (ACCA Study Guide Area D, Topic D2f & D2g):
Explain the purposes and benefits of diversity and equal opportunities policies within the human
resources plan.
Explain the practical steps that an organisation may take to ensure the effectiveness of its diversity and
equal opportunities policy.

20.5.1. Diversity Policy


A diversity policy recognises that having people coming from different cultural and national backgrounds
There are two parts to ensuring that diversity exists in an organisation:

• The first part involves organisations examining how diverse their current workforce is.
Organisations need to look at how diverse the society they operate in is and then to see if their
workforce is equally diverse.
• Second part, the organisation should ensure that all employees are treated equally. Employees
should only be judged and evaluated on their work and integrity. The organisation should also
have clear policies and procedures to report any discrimination and follow up procedures to
prevent future incidents.

Reasons to embrace diversity policy

• It is a good HR practice that it attracts and retains employees regardless of differences.


• People should be valued for their differences and variety, as the organisation will benefit from a
diverse workforce. A diverse workforce is a good pool of resources and it is a representative
workforce reflective of the market it serves.
• Improves motivation and performance amongst the workforce thereby improving overall
efficiency and productivity.

20.5.2. Equal Opportunity


Organisations, who practice equal opportunities, provide equal chance for all employees to apply for jobs,
to be trained and promoted in employment and have that employment terminated fairly. Furthermore, it
is morally wrong to treat parts of the population as inferior and organisations do not benefit from excluding
potential source of talent.

With an equal opportunities policy, an organisation should not discrimination and the following
discrimination is illegal in the UK:

• Sex and Marital Status


• Colour, race, nationality and ethnic or national origin
• Sexual orientation and religious beliefs
• Age

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Check understanding

Are any special measures needed when interviewing a disabled person for a job?
A. No; it is important that a person with a disability is treated in the same way as all applicants.
B. No, because all disabilities are different, and it is impossible to cater for them all.
C. Yes, where it is known beforehand.
D. Yes, because the employer wants to give a good impression.

20.5.3. Discrimination
There are three types or forms of discrimination:

Direct Discrimination A segment of a group is treated less favourably. Example: This position is
not open to women.
Indirect discrimination There seems to be no direct discrimination in a requirement, but a segment
of the group is or can still be treated less favourable when the requirement
is applied. For example, this job position is open to candidates who are
above 1.65m tall. This requirement seems non-discriminatory, but majority
of women will be discriminated
Victimisation A person is penalised for raising an issue of discrimination.

Check understanding

What strategies deployed by HR for attracting potential candidates to apply for vacancies might be
seen to result in indirect discrimination?
A. Advert in local press
B. Word of mouth
C. Now recruiting banners/notices
D. Agency or job centre

Other terminologies:

Harassment A person is intimidated or threatened with abusive or suggestive actions or


language
Positive Discrimination Any action which give preference to a protected person, regardless of
genuine suitability and qualification for the job. For example, a minority
group is given priority in an interview.

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Legislations in the UK such as the Sex Discrimination Act 1986, Race Relations Act 1996 and Disability
Discrimination Act 1995 and 2005 are examples of legislations that promote the equal opportunities
environment.

These legislations affect organisations in areas such as:

• Discrimination on the grounds of race, gender or marital status.


• Equal pay for work of equal value and also disability.
• Administration of recruitment, selection, promotion, training and pay policies.
• Interpersonal behaviours that imply racial or sexual harassment.

The following stages should all come under the control and protection of an organisation’s equal
opportunities policy:

• Advertising job vacancies


• Recruitment and Selection
• Hiring and Termination

20.5.4. Steps taken to implement diversity and equal opportunities policy


Ingham (2003) suggested the following steps to establish a Diversity Policy:

Step 1: Analyse the Business Social and cultural factors that affect and impact an organisation and
Environment its stakeholders need to be defined.
Step 2: Define diversity and its The organisation needs to then determine the benefits of having a
business benefits diversity and equal opportunities (EO) policy.
Step 3: Introduce diversity policy The EO policy should be designed to embody all stakeholders and
into corporate strategy introduced as part of corporate strategy.
Step 4: Embed diversity into core It should be embedded into core HR processes and system.
HR processes and system
Step 5: Ensure leaders implement The CEO of the organisation have to ensure that the policy is
policy implemented effectively, and it is communicated to all staff at all
Step 6: Involve staff at all levels levels.
Step 7: Communicate to all levels There should also be a communication strategy to inform external
internally and externally stakeholders such as customers, suppliers, and the general public, of
the policy and its objectives.
Step 8: Understand your A steering committee should be set up to produce the policy and code
company’s needs of practice. The committee should be made up of representatives of a
diverse group. The committee should also draw up action plans and
management has to ensure that there is proper allocation of resources
to implement the action plans in support of the policy.
Step 9: Evaluate. The implementation of the policy and action plans will have to be
evaluated from time to time and any deviations from the objectives
will have to be addressed.

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An effective diversity and equal opportunities (EO) policy would have these elements:

• Commitment to promoting diversity and equal opportunities.


• Stated in mission statement.
• Clear written policies including disciplinary actions.
• Immediate investigation and appropriate disciplinary actions of complaints.
• Diversity training and awareness.
• Targeting various minority groups.

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CHAPTER 21: INDIVIDUAL AND GROUP BEHAVIOUR IN BUSINESS ORGANISATIONS

CHAPTER 21: INDIVIDUAL AND GROUP BEHAVIOUR IN BUSINESS ORGANISATIONS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO D3a. Describe the main characteristics of individual and group behaviour.

TLO D3b. Outline the contributions of individuals and teams to organisational success.

TLO D3c. Identify individual and team approaches to work.

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21.1 Main Characteristics of Individual and Group Behaviour


Learning Outcome (ACCA Study Guide Area D, Topic D3a):
Describe the main characteristics of individual and group behaviour.

21.1.1. Individual Behaviour


Behaviour is the way in which one acts and conducts oneself and can be caused, motivated and is goal
directed.

Once this goal is achieved, the person’s attention is focused on other activities. Goals of different
individuals differ and individual variations in behaviour occur mainly because of differences in psychological
factors such as perception, attitudes, personality, motivation, and intelligence.

Perception

Perception is the active psychological process in which stimuli are selected and organised into meaningful
patterns in the brain or memory. (The way you receive information.)

Perception is determined by:

Context People see what they want to see. Individuals will not be aware of what is
around them until and unless they find the need to see it.

Nature of the stimuli Our attention tends to be drawn to large, bright, loud, unfamiliar, moving and
repeated stimuli.

Internal factors Our attention is drawn to stimuli that match our personality, needs, interests,
expectations and so on.

Attitudes

Attitudes is the persistent evaluations, emotions and behaviour tendencies towards specific persons,
groups, ideas, objects. (Your feelings toward something.)

Attitude comprises of three components namely:

Cognitive The individual’s information and knowledge about an object or concept and this can
be learned.

Affective The individual’s feelings or emotional reactions.

Behavioural The tendencies to behave in a certain manner.

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Personality

Personality is the total pattern of characteristics ways of thinking, feeling and behaving that constitute the
individual’s distinctive method of relating to the environment. It is developed from dynamic processes
where individuals interact with the environment and other people.

Personality depends on and at the same time also made up of:

Self-image People tend to behave, and expect to be treated, in accordance with their self-image.

Personality A process where an individual develops over time and with experience, their self-
development control and self-awareness.

Motivation

Motivation is a set of forces that initiates, directs and makes people persist in their efforts to accomplish a
goal. (The reasons for doing something.)

Motivation is the:

Initiation of effort When an individual makes a choice on how much effort to put forth.

Direction of effort Where does one put forth the effort.

Persistence of effort How long will they put forth the effort before reducing or eliminating the effort.

Intelligence

Intelligence is the ability to acquire and apply knowledge and skills.

There are many dimensions to intelligence:

Analytical Intelligence Mental agility, logical reasoning and verbal fluency. (IQ)

Spatial Intelligence Ability to see connections and patterns. (IQ)

Practical Intelligence Practical aptitude and handiness. (IQ & EQ)

Intra-personal Intelligence Self-awareness, self-expression, self-control and the ability to handle


stress. (EQ)

Inter-personal intelligence Empathy; understanding of the emotional needs of others,


assertiveness, conflict management, co-operation. (EQ)

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21.1.2. Individual Behaviour at Work


Individual behaviour at work can be studied and understood by looking at the following perspectives:

Employee Expectations

Apart from the legal employment contract of the individual, without realising, also enters into a
psychological contract with the organisation.

A psychological contract refers to how the employee feels he should be treated by the organisation.

Unlike the legal contract, it is not written down anywhere but exists only in the mind of the employee and
many of the characteristics of the individual’s behaviour is determined by it. It affects the employee’s
expectations and if the organisation does not meet these expectations, it will lower the employee’s morale
and vice versa.

The psychological contract can be a cooperative, calculative or coercive one:

Cooperative The employee feels committed and is motivated to pursue organisational objectives
as his own. (Positive)

Calculative The employee feels that the effort that he or she puts in should be at the equal level
as how he perceives the organisation is rewarding or treating him or her. (Neutral)

Coercive The employee feels that he or she is not treated well and feels that he is forced into
what he or she is doing. (Negative)

Person-job Fit

An individual’s behaviour at work is also affected by how perfectly the individual fits the job.

A perfect person – job fit occurs when the job an employee is performing is exactly matched to his level of
skill, knowledge and experience.

If an employee’s competence level is above that required for the job, he will find the job unchallenging,
monotonous and boring, and that will lead to dissatisfaction with both the job and the organisation and
vice-versa.

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Employee’s Traits

All individuals have three main traits that characterise their behaviour at work:

Agreeableness Ability to get along with others and fit into the culture of the organisation.
Conscientiousness Level of commitment an employee has to his job (the higher the level of
conscientiousness, the more dedicated the employee is to his job).
Attitude Beliefs and feelings employees have in terms of job satisfaction and commitment
to the organisation.

Organisation’s Culture

As part of the organisation, individuals have to behave the way the organisation expects them to behave.
Therefore, the culture of the organisation also determines individual behaviour.

Individual’s Role

Based on the Role Theory, individuals position themselves based on what they perceive the situation to be
and people’s expectation of them. Individuals in organisations take on roles and behave based on what is
expected of such roles.

The following are some terms associated with the Role Theory, which determines how an individual
behaves in the work place:

Role Set How people respond to you because of the role taken, i.e. Manager and
Subordinate; Husband and Wife.

Role Ambiguity Happens when there is uncertainty of role is to be adopted by individuals.


Role Incompatibility An individual may be playing two roles, which are conflicting, i.e. a person
/Conflict cannot be both the internal auditor and the external auditor.

Role Signs Example: Style of dressing and style of addressing.


Role Model People you look up to.

Check understanding

1. Role theory explains how people behave according to other people’s expectation. Which one of
the following statements is not true with regard to roles?
A. Role ambiguity happens when one is not sure of his or her role at a given moment.
B. Role conflict happens when two persons with conflicting roles are present in the same place
at the same time.
C. Role set refers to people who will respond to the roles they are assigned.
D. Role signs tell others what role the individual plays at the given moment.

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Individual Behaviour in a Group

Social Influence Presence of others influences attitudes, decisions and actions of individuals.

Social Facilitation Individuals can either perform better (positive social facilitation) or worse
(negative social facilitation) when they know that they are being observed.

Social Loafing Happens when size of groups becomes larger. Individuals feel less
accountable in a group, or they feel that they can work more efficiently on
their own, therefore individual effort decreases.

Group Norms (Culture) Defines what is acceptable, and what is not within a group. Therefore, an
individual may have to conform to the collective behaviour of the group in
order to be included as one of the group members.

Groups

In general, there are two types of groups in an organisation namely,

1. Formal Groups

Formal groups are consciously organised by the organisation, for a task, which they are, held responsible.
They are task oriented and become teams. The popularity of teams in the work place arises because of
their effectiveness in fulfilling the organisation’s work.

2. Informal Groups

Informal groups will variably be present in any organisation. Informal groups include workplace cliques or
a network of people who regularly get together to exchange information or groups of work mates who
socialise outside work. They have a constantly fluctuating membership and structure.

Check understanding

2. Which statement is true with regard to teams and groups?


A. Group members are always loyal to the group(s) they belong to.
B. An individual belongs to only one group at any one time.
C. Task-oriented formal groups are called teams.
D. A group without a leader has little sense of direction.

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3. Why Do Individuals Join Groups? (Also see: Chapter 19 – Mayo’s Human Relation School)

Individuals join group for various reasons and the following are some reasons:

 To satisfy social and ego needs.


 There is something in common amongst group members.
 Resources offered to groups are usually greater compared to individuals.
 To share activity so that the activity that is burdensome can be lighten.
 To give and/or support to team members.

21.1.3 Group Behaviour


Characteristics of Group Behaviour
Sense of identity There are acknowledged boundaries to the group which define
who is ‘in’ and who is ‘out’ and who is ‘them’.

Sense of inclusion and belonging Loyalty to and acceptance within the group. This is expressed as
cohesion or solidarity and as conformity, or the acceptance of
shared norms of behaviour and attitudes within the group.

Interdependence and interactions Group processes are aimed at collaborative activity in pursuit of
shared or common purposes.

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21.2 Contributions to Organisational Success


Learning Outcome (ACCA Study Guide Area D, Topic D3b):
Outline the contributions of individuals and teams to organisational success.

21.2.1 Contributions of Individuals


The main contribution individuals make to the success of the organisation is by effectively and efficiently
performing their function or in layman’s terms “doing their jobs.” Ultimately an employee should bring in
more money for an organisation than what the organisation pays him.

However, the cost and benefits of most employees are not so easy to quantify. Many individuals perform
a support role for which the benefits are not as easily measurable.

In addition to competently performing their jobs, individuals also contribute to an organisation by fitting
into its culture. Normally, individuals are hired by an organisation for two reasons:

1. They will be able to competently perform their job.


2. Their personality is in line with the culture of the organisation.

To achieve its overall objectives, organisations must work efficiently as a collective whole. Thus, it requires
employees to work in a somewhat uniform manner and style. For this to happen, the work styles and
personality traits of individual employees must match the culture of the organisation.

21.2.2 Contributions of Teams


Teams are defined as a small number of people with complementary skills who are committed to a specific
purpose, performance, goals and approach for which they hold themselves mutually accountable. When
individuals work together in a group and they begin to complement each other, this group is considered to
be a team.

Teamwork is what promotes overall unity and effectiveness for an organisation as a whole. Correct and
effective use of teamwork has the following benefits:

Enhanced performance Working in teams help individuals to avoid wasted efforts and reduces
errors. This leads to greater productivity for the individual and therefore the
organisation as a whole.

Benefit the employee Working and interacting with other employees help individuals learn from
their experiences. They gain greater knowledge and a broader perspective.

Reduced costs The enhanced performance and productivity of employees who have
worked in teams also results in lower costs for the organisation.

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Check understanding

A group may contribute all the following to its members, except:


A. A mix of knowledge, skills and abilities.
B. Opportunity for self-criticism.
C. Creative ideas from combinations of expertise.
D. Different viewpoints on the same problem, enabling a more efficient problem-solving method.

(iv) Organisational enhancements

Increased use of teams over time leads to greater cross departmental cooperation across the organisation
(as employees get to know and work with various other employees). Teams would contribute to
organisational success when teams are involved in the following activities:

Planning and Teams are a co – coordinating mechanism and they avoid complex
Organising communication processes between different business functions. This
facilitates better organisation of resources.
Decision-making Decisions are evaluated from more than one viewpoint and with pooled
(Ashridge’s Consults & information. Teams make fewer, but better-evaluated, decisions than an
Joins-style) individual. Since decisions were made by consensus, team members are also
more committed to the decisions made, as there is shared responsibility.
Control Fear of letting down the team can be a powerful motivator. Group norms and
expectations can be used to control the performance and behaviour of
individuals.
Innovating Teams can generate great ideas, for example through brainstorming and
information sharing, as teams would be made up of individuals of differing
skills and specialisation.

CAUTION: Although teams would usually contribute to the organisation success, however, some activities
would still require individual efforts such as supervision, and segregation of duties in internal control. The
use of teams may encourage collusion or complicate the process. Therefore, activities that still require
individuals to perform alone are better off being done by individuals instead of using teams.

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21.3 Approaches to Work


Learning Outcome (ACCA Study Guide Area D, Topic D3c):
Identify individual and team approaches to work.

Teams can be set up based on different approaches with members of differing skills or different locations.

The following are some of the approaches.

Approach Description
Multi – skilled teams Team members have members who are skilled in performing any of the
group’s tasks. There is no clear demarcation as to who is supposed to do
what, as tasks are shared out flexibly amongst group members based on who
is available and who is best suited to do the task.
Multidisciplinary Teams Each of the members of the team is unique and has a different set of skills
and expertise that is needed in the team. The members complement each
other, working together to meet the objectives of the tasks successfully.
Such teams are project based and are common in matrix structures. Members
of such teams are able to understand the overall objectives of the
organisation better and they are able to generate ideas well as members are
from different backgrounds.

Self – managed teams A self – managed team is a highly evolved multi-skilled team that is able to
manage itself. Team members in a self-managed team collaboratively decide
on what needs to be done to complete the tasks successfully.
The members decide on selection and development of its members, task
allocation, distribution of rewards, and how group processes are managed.
Such teams are able to save managerial costs, improve productivity and
members have high initiative and responsibility and are efficient.
Virtual teams A virtual team has its members in different remote locations and they are
interconnected through communication channels. This is made possible
through the use of ICT via the internet, teleconferencing, videoconferencing,
and networked computers. They function like teams but without the physical
proximity

Check understanding

Which of the following statements accurately describes a multi-disciplinary team?


A. All team members collaboratively decide how to organise their work
B. All team members have different skills and specialisms which they pool
C. All team members can perform any and all of the group's tasks
D. All team members are jointly responsible for the leadership of the team

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CHAPTER 22: TEAM FORMATION, DEVELOPMENT, MANAGEMENT AND MOTIVATION

Learning Outcomes

At the end of the chapter, you should be able to:

TEAM FORMATION, DEVELOPMENT, AND MANAGEMENT

TLO D4a. Explain the differences between a group and a team.

TLO D4b. Explain the purposes of a team.

TLO D4c. Explain the role of the manager in building the team and developing individuals within
the team.

i) Belbin’s team roles theory


ii) Tuckman’s theory of team development

TLO D4d. List the characteristics of effective and ineffective teams.

TLO D4e. Describe the tools and techniques that can be used to build the team and improve team
effectiveness.

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22.1 Group and Team


Learning Outcome (ACCA Study Guide Area D, Topic D4a & D4b):
Explain the differences between a group and a team.
Explain the purposes of a team.

Definition of Groups

Groups are defined as two or more persons who interact with one another such that each person influences
and is influenced by each other person.

Groups meaning members in a group have a sense of inclusion and belonging as well as identity.

Check understanding

1. Which of the following collections of people constitute a group?


A. A crowd waiting for a train
B. Eight employees of an organisation who work for the same department
C. All members of a particular voting district
D. Forty people watching a movie in a cinema hall

Definition of Teams

A team is a ‘small number of people with complementary skills who are committed to specific purposes,
performance goals and approach, for which they hold themselves mutually accountable.’

In general, a team is a formal group with a purpose and a leader with members from a diverse group having
different kinds of skills and experience.

Katzenback and Smith (1993) outlined the characteristics of teams as:

1. Basic units of performance for most organisations.


2. Established and motivated by significant performance challenges.
3. Can do better than individuals.
4. Flexible and responsive to changing events and demands.
5. Having a deep sense of commitment towards their goals, growth and success.

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The following table summarises the differences between a groups and teams:

Characteristics of a Group Characteristic of a Team


Members share a common purpose. Members share a specific goal.

Significantly greater members than a team. Fewer members than group.

Each individual member has a specific job No set function for individual members. (Only for
category. multi-skilled teams.)

Ultimate responsibility and power always rests All team members are mutually accountable for
with the group leader. the team’s performance.

Check understanding

2. What is the main difference between a group and a team?


A. Groups only share a common purpose whereas teams have a specific goal to achieve
B. Groups in contrast to teams consist only of members that share similar characteristics
C. Groups arrive at decisions by consensus whereas teams use a majority vote system
D. Groups are put together for a social purpose whereas teams will be assembled for work

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22.2 Role of Manager in Building the Team and Developing Individuals Within the Team
Learning Outcome (ACCA Study Guide Area D, Topic D4c):
Explain the role of the manager in building the team and developing individuals within the team.

22.2.1 Belbin’s Team Roles Theory


According to R. Meredith Belbin (1981), the success of a team depends on the balance of skills and
personality types. A team should be made up of individuals who can complement each other in a team
ensuring the whole is greater than the sum of all efforts of the team members. This is true to the principle
of synergy.

Belbin identified nine roles that should exist in any team for it to be successful. These roles describe the
types of behaviour patterns amongst individual team members. These behavioural patterns characterise
one member’s behaviour in relationship to others, whilst working towards achieving the overall goals of
the team.

Members of a team may adopt more than one role as long as all nine roles are present. Some individuals
are usually inclined towards some roles and some roles may be more dominant and some being sub-
dominant.

The team-role theory helps managers to better understand the following:

 The roles played by individual team members.


 How interactions between team members can be adjusted to increase the overall effectiveness of
the team.

The nine roles can be divided into three main categories:

Cerebral (Thinking) Oriented Action Oriented People Oriented


Plant Shaper Coordinator

Monitor Evaluator Implementer Team worker

Specialist Completer Resource Investigator

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The team roles are as follows:

Role and Description Team-Role Contribution Weaknesses


1. Plant Solves difficult problems Ignores details, too pre -
Creative, imaginative, occupied
unorthodox
2. Resource investigator Focuses on negotiating for the Over-optimistic, loses interest
Extrovert, enthusiastic, team and obtains resources once initial enthusiasm has
communicative the team needs by exploring passed
opportunities and developing
contacts
3. Coordinator Clarifies goals, promotes Can be seen as manipulative,
Mature, confident, a good decision- making, delegates delegates personal work
chairperson, very people well and coordinate efforts of
oriented other team members
4. Shaper Has the drive and courage to Can provoke others, hurts
Challenging, dynamic, thrives overcome obstacles people’s feelings
on pressure, task oriented and
can ‘shape’ the behaviour of
others to work towards
achieving team objectives
5. Monitor – evaluator Sees all options, judges Lacks drive and the ability to
Sober, strategic and discerning accurately inspire others, overly critical
6. Team worker Listens, builds, averts friction, Indecisive in crunch situations,
Cooperative, mild, perceptive calms the waters can be easily influenced
and diplomatic

7. Implementer (Company Turns ideas into practical Somewhat inflexible, slow to


worker) actions respond to new possibilities
Discipline, reliable,
conservative and efficient
8. Completer (Finisher) Seeks out errors and Inclined to worry unduly,
Painstaking, conscientious, omissions, delivers on time reluctant to delegate, can be a
anxious, detail oriented nit-picker
9. Specialist Provides technical knowledge Dwells on technicalities,
Single-minded, self-starting, and skills in rare supply overlooks the ‘big picture’
dedicated

As Belbin indicated, each member has strengths and weakness. Therefore, each individual complements
each other as one member’s weakness may be cancelled out by another member’s strengths.

These team roles are not fixed within any given individual. Team members can occupy more than one role,
or switch to ‘back-up’ roles if required, hence there is no requirement for every team to have nine
members. The nine roles are complementary.

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Belbin suggested that an effective team would have a balance of each personality type, subject to the
following criteria:

 One leader and/or shaper is sufficient


 Equal numbers of evaluators and plants
 Equal numbers of team workers and company workers
 Not too many finishers (one is sufficient)

Check understanding

Appuji is a very task focused individual who is committed to the team achieving its objectives.
According to Belbin's theory, the role she would play in a team would be that of a(n):
A. Implementer
B. Resource investigator
C. Plant
D. Shaper

22.2.2 Tuckman’s Theory of Team Development


Successful teams do not emerge out of nowhere and they go through a process of development. B.W.
Tuckman (1965) identified stages of development of a team and it is useful to understand these stages of
development to manage it more effectively. It describes and explains how a team develops over time.

The basis of the theory is that as time progresses, the way in which a team operates will change. The main
change is that the team will start to rely less and less on a leader and operate more and more as a cohesive
whole.

Below are the five stages of B.W. Tuckman’s theory:

Forming Team members will be dependent upon a leader to guide and direct its activities.
Individual members are usually unsure or unclear on what their roles and
responsibilities should be. The role of the leader is to be a facilitator and focuses on
building relationships. The objectives of the group are still not clearly defined.
Storming Individual members start establishing roles and responsibilities as the team begins its
activities and work. As individuals begin to understand their roles, some conflicts and
personality clashes may exist. The role of the leader is to resolve conflict and focus on
ensuring that the team is cohesive. The team as a whole at this point still needs to be
led.
Norming Individual members become clear of their roles and responsibilities are at this stage. In
addition, rules, values and acceptable behaviours and work styles start to get
established for the team. As the members become less reliant on the leader to lead
them, the leader now focuses on encouraging the team members to focus on the task
instead.

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Performing At this stage, team is functioning as a cohesive whole with no interference or


participation from leader. The team is focused and works towards achieving all goals
and objectives. The leader will probably assimilate into the group as one of the group
members. Later writers added two more stages to Tuckman’s model:
Doming If a team remains a long time in the performing phase, there is a danger that it will be
operating on automatic pilot. ‘Groupthink’ occurs to the extent that the group may be
unaware of changing circumstances. The leader will have to maintain the team and
ensure team objectives are on track.

The stages of development were later advanced to Mourning (Team disbands due to the breakdown in
team dynamics after the performing stage) and Adjourning as the group disbands. (Team disbands as it has
served its purpose)

Check understanding

A team is winding up a challenging project that it has been working on for some time. Next
week, the same team will go on to a new project with quite different challenges. Which stage of the
group development model is this team likely to be going through?
A. Norming
B. Doming
C. Mourning
D. Adjourning

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22.3 Characteristics of Effective and Ineffective Teams


Learning Outcome (ACCA Study Guide Area D, Topic D4d):
List the characteristics of effective and ineffective teams.

22.3.1. Effective Teams


The following are the characteristics of an effective team:

 Team members take pride in the accomplishments and achievements of the team.
 Team members participate equally and respect each other.
 There are low numbers of interpersonal conflicts between team members.
 There is clarity on roles of individual members and the purpose of the team.

Peters and Waterman (1982) defined five key aspects in successful teams and they are:

1. The number of members in a team should be small; otherwise there may be issues of social loafing.
2. Teams should be limited in duration to resolve particular tasks, so that members can be disbanded
and re-join other teams for other purposes. This keeps the momentum of member’s enthusiasm.
(Team members’ work should have reasonable deadlines, so they don’t get stuck in the same team
for too long and become inefficient)
3. Membership should be voluntary, as members who are unwilling to join a team and forced to be
in a team may have discontentment and will not put in their full effort.
4. Communication should be informal and unstructured so that ideas and creativity can flow freely.
Members in a formal setting may feel inhibited by the unnecessary paper work and status barriers.
5. The team should be action-oriented with the focus on completing the task and not just for say.
Members who are able to see their plans executed to fruition are more motivated.

Check understanding

Which one of the following is not a problem in a highly cohesive team?


A. Team members may ignore opinions that might lead to adjournment of the team.
B. Team members develop a sense of overconfidence in all their decisions and actions.
C. Team members’ primary focus is in the tasks assigned.
D. Team members do not welcome self-criticism.

22.3.2. Ineffective Teams


The following are the characteristics of an ineffective team:

 Members do not take pride in the accomplishments and achievements of the team.
 Team members do not participate equally and do not respect each other.
 High numbers of interpersonal conflicts between team members.

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22.3.3. Groupthink
Irving Janis (1972) defined Groupthink as a mode of thinking that people engage in when they are deeply
involved in a cohesive group, when the members' strivings for unanimity override their motivation to
realistically appraise alternative courses of action. (Team becomes less critical, making decisions out of
habit/assumptions rather than active debates)

In other words, groupthink happens when a very cohesive group becomes blinded to outside information
and feedback to the point where its decision-making processes are dangerously distorted.

Janis (1972) also identified symptoms of Groupthink and most of these symptoms have adverse effects
and they are:
 Illusions of invulnerability creating excessive optimism and encouraging risk taking. The sense of
invulnerability may cause the group to take too risky decisions or actions that can cause harm to
the group and its objectives.
 Rationalising warnings that might challenge the group's assumptions and this may cause the group
to lose it reasoning and rationalisation.
 Unquestioned belief in the morality of the group, causing members to ignore the consequences of
their actions.
 Illusions of unanimity among group members; silence is viewed as agreement because members
feel the need to conform to what the group decides.

Avoiding Groupthink

The following are some suggestions that can be used to avoid Groupthink:

 Leaders should assign each member the role of “critical evaluator”. This allows each member to
freely air objections and doubts.
 Higher-ups should not express an opinion when assigning a task to a group because what the
leader says may be used as the mantra of the group and this may mislead the group or inhibit
creation of new ideas.
 The organisation should set up several independent groups, working on the same problem. This
will ensure that the organisation does not put all its ‘eggs in one basket’ and it allows for
constructive conflict among groups. (Not cost-efficient)
 All effective alternatives should be examined, before they are censored. This procedure can be
formalised so that it is not skipped. (Keep an open mind)

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Check understanding

Which of the following group behaviour would explain the scenario where members are so close
together to the extent that it does itself more harm than good.
A. Group cohesiveness
B. Group norm
C. Groupthink
D. Group polarization

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22.4 Tools and Techniques That Can Be Used to Build the Team
Learning Outcome (ACCA Study Guide Area D, Topic D4e):
Describe the tools and techniques that can be used to build the team and improve team effectiveness.

22.4.1. Teambuilding
Teambuilding is a process of removing obstacles that prevent the team members from working effectively
and planning how to improve the overall performance of the team.

Teambuilding may be described as a systematic attempt to develop the processes of collaborative


functioning within a team (such as communication, problem solving, decision making, and conflict
resolution) in such a way as to help the team to overcome any barriers to the effective pursuit of its shared
goals.

Teambuilding is required when:

 Output and productivity decreases.


 There is reluctance to accept instructions or share information.
 Internal conflict causes ineffectiveness and inefficiency.
 Staff has low morale and lacks enthusiasm.

Three Main Issues to Be Addressed in Teambuilding

Team solidarity:  Interpersonal relationships encouraged.


 Constructive conflict.
Members put in effort for the sake of the
 Competition with other groups.
team.

Team Identity:  Team name.


 Expression of self – image.
Members see themselves as part of the
 A separate space.
group.

Shared objectives:  Clear objectives.


 Team members are encouraged to make decisions.
Members commit to the team and work
 Use of positive environment.
towards one objective.

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The Process of Teambuilding

The process of teambuilding usually addresses the following:

Step Description
1.Diagnosis Open discussion with team members to uncover problems affecting the
performance of the team.

2.Task accomplishment Agreement on what the team does, can do and should do.

3.Team relationship Identifying the expectations of the roles and responsibilities of team
members, and what leaders and team members expect of each other.

4.Team organisation Selecting the best team to achieve the identified objectives and determining
the roles and responsibilities of members.

Team Facilitator

The team building process in organisations frequently makes use of a facilitator. The main role of a
facilitator is to ensure that the discussion process between and among team members flows smoothly.
Facilitators help ensure the following:

 All members participate, provide feedback and voice their opinions.


 Discussions remain on track focusing on the issues at hand.
 Any decisions reached have the consensus of the whole team.

Check understanding

The task of team leader is to build a ‘successful’ or ‘effective’ team. The criteria for team effectiveness
include:

(1) Task performance


(2) Team functioning
(3) Team member satisfaction
(4) Group rituals

A. 1 and 2 only
B. 1, 2 and 3 only
C. 1, 2, 3 and 4
D. 2 and 3 only

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22.4.2. Team Effectiveness


J. Newstrom and K. Davis’s identified:

Four Main Factors That Contribute to Team Effectiveness:


Supportive The more support the team receives from the management of the organisation,
environment the more effective it is likely to be.

Skills and role Effective teams are ones whose members have the skill and knowledge necessary
clarity to address the problem or situation at hand. Also each member of the team must
be aware of not only his role but also the roles of all other members.
Superordinate Teams must have an attachment to a “superordinate” or higher goal. They must
goals view accomplishing the goals of the team as being more important than any
individual agenda they may have.
Team rewards Organisations may try to encourage effective team performance by designing
reward systems that recognise team, rather than individual success. It may be
monetary or non- monetary.

Types of rewards:

 Profit sharing: Teams are rewarded based on the performance of the organisation.
 Gainsharing: Teams are rewarded based on set performance measures such as customer
satisfaction, gains in efficiency and knowledge generation and sharing.
 Employee share option schemes: Team members are given an option to purchase company shares
at a lower price.

Check understanding

Which of the following would be an effective technique for encouraging healthy team solidarity?
A. Encouraging competition with other groups
B. Encouraging competition within the group
C. Encouraging members to express disagreements
D. Discouraging members from expressing disagreements

Characteristics of a team (for team rewards to be effective):


 Teams members have their distinct roles and team targets and performance measures are set from
the beginning.
 Team members are able to influence the performance directly by giving them autonomy.
 Team members cooperate, and real synergies are achieved.
 Interdependence of team members. (Team members rely on each other)

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Other tools and means

Apart from the above, to build and improve team effectiveness the following can be explored:

 Organising social events for team members (Example: dinners)


 Sending teams on “away weekends” (Example: when the whole team is sent to a resort for a
weekend to discuss issues facing the organisation)
 Organising outdoor activities for teams (Example: white water rafting)
 Providing monetary rewards for early completion of or exceeding set goals (Example: organisations
that provide a holiday for all members of the best performing sales team).

Assessing Team Effectiveness

When evaluating team, it is important to know what is being measured. It can be measured based on the
following:

Measure Description
Team Performance Effectiveness of the team measured by the degree of goal achievement.
Team Functioning Efficiency in the use of resources in attaining the goals.
Team-member Satisfaction Looking at the general motivational climate of team members’.

When evaluating teams there are occasions where there are no set measure or performance standards
attached to the task. Therefore, other methods of evaluation are used such as

 Observation: A team may be observed in terms of its cohesiveness and the ideas that are
generated in the day-to-day operations, and
 Interviews: Interviews are administered by using a pre-prepared questionnaire to team managers
and members.

Whichever methods used it is important to agree the methods and standards of measure with the team
members, as the evaluation has to be transparent.

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CHAPTER 23: MOTIVATING INDIVIDUALS AND GROUPS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO D5a. Define motivation and explain its importance to the organisation, teams and individuals.

TLO D5b. Explain content and process theories of motivation: Maslow, Herzberg, McGregor, and
Vroom.

TLO D5c. Explain and identify types of intrinsic and extrinsic reward.

TLO D5d. Explain how reward systems can be designed and implemented to motivate teams and
individuals.

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23.1 Motivation
Learning Outcome (ACCA Study Guide Area D, Topic D5a):
Define motivation and explain its importance to the organisation, teams and individuals.

Motivation is the broad term used to define the psychological and emotional forces in an individual that
compel him to act in a certain way.

Motivation helps to explain the work behaviour of individuals and teams in organisations. It also helps firms
to understand why differences often exist between different individuals and teams in terms of
performance and results.

Therefore, it is important that organisations understand what they need to do in order to motivate their
employees. Ultimately, any results an individual or a team deliver will be highly influenced by a combination
of their abilities and motivation levels.

If the organisation does meet their expectation, then it is likely to lead to the motivation cycle. The
following table highlights the motivation cycle.

Team works Team Organisation Reward


Organisation
Organisation hard and motivated by recognise accordingly
takes note of
sets goals achieves expected motivation and repeat
teams effort
goals rewards accordingly the step one.

Motivation can be positive using the carrot approach/reward (pay, praise, acceptance) or negative using
the stick approach (punishment, fine, suspension).

Check understanding

1. Motivation that is due to factors within students or inherent to the task is called:
A. Intrinsic motivation.
B. Motivation
C. Extrinsic motivation
D. Behavioural motivation.

Satisfaction and Motivation

The concept of motivation and satisfaction are often confused, and a distinction needs to be made between
the two.

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An individual who is satisfied are contented with their jobs and may not be seeking a new one. They will
perform the job as required and comply with all policies and procedures but may not perform more than
required. A satisfied worker may be loyal, compliant with regulations, and have good general morale, but
will not do more. They have to be motivated to do more, as motivation will define how much more effort
is being put in above and beyond what is required.

A motivated worker would work harder, want more feedback, makes more suggestions and are usually
satisfied with their jobs. An organisation needs motivated workers because they will work more efficiently
or produce better quality work, applying more creativity and initiative.

Check understanding

2. In Herzberg hygiene ⁄ motivation theory, the factors that can cause higher level of dis-satisfaction
in a job are classified as
A. Motivators
B. Hygiene factors
C. Performing factors
D. Expectancy factors

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23.2 Content and Process Theories of Motivation


Learning Outcome (ACCA Study Guide Area D, Topic D5b):
Explain content and process theories of motivation: Maslow, Herzberg, McGregor, and Vroom.

23.2.1. Content and Process Theories


Content Theories Process Theories
Examine WHAT motivates people (the needs). Examine HOW motivation is initiated, directed
and sustained.

Identifies people’s needs and the relative Identifies the dynamic variables of motivation and
strengths of the needs. how it influences each other.

Assumes that everyone will respond the same Assumes that people are able to select their goals
way. and choose the path towards those goals.

23.2.2. The Maslow’s Hierarchy of Needs Theory (1943)


Abraham Maslow listed five assumptions about people:

1. People always want more;


2. An individual’s need could be arranged in a ‘hierarchy’;
3. Each level of need is dominant until satisfied, the next level of need will only be motivating when
the initial level is satisfied;
4. A need which has been satisfied will not motivate an individual’s behaviour any more, and
5. Self-actualisation needs could rarely be satisfied.

The following diagram illustrates the five needs as described by Maslow:

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The needs are as follows:

Needs Description Example


Physiological needs It refers to basic things to stay alive that can be Shelter, food and
satisfied by money. clothing.

Safety/Security It refers to protection against unemployment, sickness Pension scheme


needs and safeguarded against unfair treatment.

Social needs Majority of people want to be a part of a group. The Friendship at work
‘sense of belonging’ is present here.

Ego/Esteem needs These needs can be expressed as wanting the esteem High status, job title
of other individuals and thinking well of oneself.

Self- actualisation This can be described as achieving something Work achievements,


needs worthwhile in life. benevolence

The first and most important set of needs that individuals want to satisfy are their “physiological” or basic
needs. It is only when this level or their most basic needs are satisfied that can individuals can move on to
satisfy their higher-level needs.

There are however, limitations to Maslow’s theory:

1. An individual’s behaviour may be influenced by several needs simultaneously and not just one
after another.
2. Different individuals respond differently to the needs, therefore their behaviour is unpredictable.
3. Some individuals are willing to defer their gratification of lower level needs whereby individuals in
hope of future benefits may be prepared to ignore current suffering or dissatisfactions.

23.2.3. The Herzberg’s Two-Factor Theory


Frederick Herzberg (1950) developed the Two-factor Theory. He outlined that people’s satisfaction and
dissatisfaction levels with regards to their work were caused by different sets of factors (i.e. the same set
of factors that caused or increased satisfaction levels were not the ones that caused dissatisfaction).

Those factors are categorised into:


 Hygiene Factors
 Motivator Factors

Hygiene Factors

Hygiene Factors relate to the context or environment of work rather than to the job content. They are
purely preventive where if provided it will prevent dissatisfactions but will not motivate positively.
Existence of these factors will not normally by themselves be a source of motivation for employees. This is
because they represent the basic set of expectations employees typically have of the organisation they
work for. However, their absence is very likely to lead to dissatisfaction and cause employees to become
demotivated.

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These factors represent the bare minimum set of conditions that organisations need to ensure are in place
for their employees. The Hygiene Factors can be likened to the drains of a house that keeps it clean, but it
does not generally improve the health of the household.

Some examples of the Hygiene Factors are:

 Appropriate levels of salary.


 Interpersonal relations.
 Working conditions.
 Job security.

Check understanding

1. Which of the following is a hygiene factor?


A. Style of supervision
B. Achievement
C. Personal growth
D. Advancement

Motivator Factors

Motivator Factors are related to the content of work and it can be the job itself. It represents factors that
enrich an employee’s job and therefore cause his motivation levels to increase. These include aspects such
as the work itself as well as recognition of the employee’s efforts and achievements. Given that these
factors are related to what a person does and not with his environment (as is the case with hygiene factors)
they can cause motivation levels to increase.

Some examples of the Motivator Factors are:

 Achievement.
 The work itself.
 Growth and development in the job.
 Responsibility.

Herzberg suggested that when people are dissatisfied with their work it is usually because of discontent
with environmental factors and satisfaction can only arise from the job. Therefore, it is recommended that
organisations must simultaneously provide hygiene factors to avoid employee dissatisfaction but also
provide motivator factors so that employees can grow and increase their satisfaction levels.

Therefore, there should be proper job design to provide:

 Jobs that utilise their full abilities.


 The opportunity for advancement should they demonstrate increasing levels of ability.
 Supportive work environment.

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Check understanding

2. In Herzberg hygiene ⁄ motivation theory, the factors that can cause higher level of dis-satisfaction
in a job are classified as
A. Motivators
B. Hygiene factors
C. Performing factors
D. Expectancy factors

Job Design

Job design involves role definition and it is a process of defining what activities are carried out by a job or
role-handler. In job design it is important to look into how best to suit the employees’ skills and expertise
to the tasks at hand.

There are five core job design dimensions, which are thought to contribute to job satisfaction and
motivating employees:

Dimensions Description
1. Skill Variety The opportunity to exercise different skills and perform different operations.

2. Task Identity The integration of operations into a ‘whole’ task or meaningful segment of tasks.

3. Task Significance The opportunity to perform important tasks for example in areas such as
strategic decision – making.

4. Autonomy The opportunity to exercise discretion or self-management for example, in areas


such as target-setting and work methods.

5. Feedback The availability of performance feedback enabling the individual to assess his
progress and the opportunity to give feedback, be heard and influence results.

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Methods to Motivate
Herzberg defined three avenues or methods to improve staff job satisfaction and level of motivation
through job design and they are:

Job Enrichment A planned, deliberate action to build greater responsibility, breadth and
challenge of work into a job.

It reflects empowerment. Job enrichment represents a ’vertical’ extension of the


job into greater levels of responsibility, challenge and autonomy.

A job may be enriched by:

 Giving the job holder decision making tasks of a higher order;


 Giving the employee greater freedom to decide how the job should be
done;
 Encouraging employees to participate in the planning decisions of their
superiors

Job Enlargement An attempt to widen jobs by increasing the number of operations in which a
jobholder is involved in order to add meaning, significance and variety.

It is a ‘horizontal’ extension of the job by increasing task variety and reducing


task repetition.

Job enlargement is, however, limited in its intrinsic rewards.

Job Rotation A planned transfer of staff from one job to another to increase task variety.

It is a ‘sequential’ extension of the job

23.2.4. The David McClelland Motivation Theory (1953)


David McClelland (1953) has identified three types of needs that exist for individuals (and subsequently,
teams):

Needs Explanation Examples


Achievement needs Identify the drive and desire some individuals or Individuals want further
teams have in regard to accomplishing the goals challenges and additional
that have been set by the organisation responsibilities.

Affiliation needs Identify the drive and desire some individuals and Individuals want recognition
teams have to be able to relate to people on a and praise.
personal level.

Power needs Identify the drive and desire some people and Individuals want promotion
teams have to obtain positions of authority in an within the organisation.
organisation

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23.2.5. Douglas McGregor’s Theory X and Theory Y


Douglas McGregor suggested a manager’s approach is based on attitudes somewhere on a scale between
two extreme sets of assumptions: Theory X and Theory Y. He suggested that managers in the USA tended
to behave as though they subscribe to one or two opposing philosophies in going about their duties.

As such, this theory can be used to improve managers’ awareness of the assumptions underlying their
management style and how best they can motivate their employees.

Theory X

Manager with Theory X assumptions:


Subordinates Manager’s assumptions
 Dislike work and responsibility.  To be an authoritarian and supervise closely,
 Wishes to avoid responsibility. is tough and supports tight controls, applying
 Has little ambition. detailed rules and controls.
 Wants security above all.  Supervision is task – driven, controlled with
detailed rules and uses stick approach to
‘motivating’ staff.

Theory Y
Manager with Theory Y assumptions:

Subordinates Manager’s assumptions


 Learns under proper conditions, will accept  A manager with this sort of attitude to his staff
and seek responsibility. is likely to be a democrat, benevolent,
 Value work and are motivated by self- participative and believer of self-control.
achievement.  Carrot approach to motivate prevail.
 Committed to objectives is a result of the  Capacity to exercise a relatively high degree of
rewards associated to the achievement of imagination, ingenuity and creativity in the
objectives. According to the conditions, it may solving problems by most workers.
be a source of satisfaction or punishment.

Both are intended to be extreme sets of assumptions and not actual types of people. However, when
employees are treated as if they were “Theory X” will begin to behave accordingly whereas employees
treated as “Theory Y” will rise to the challenge and behave accordingly.

23.2.6. Victor Vroom’s Expectancy Theory


Victor Vroom (1964) believes that, people will be motivated to do things to reach a goal, if they believed in
the worth of that goal and they can see that what they do will help them in achieving it. People’s motivation
towards doing anything is the product of the anticipated worth that an individual place on a goal and the
chances of achieving that goal. Vroom’s Expectancy Theory can be illustrated by a formula:

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𝐹𝑜𝑟𝑐𝑒 = 𝑉𝑎𝑙𝑒𝑛𝑐𝑒 × 𝐸𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦 × 𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑎𝑙𝑖𝑡𝑦

Component Description
Force The strength of one’s motivation.

Valence The value of the perceived outcome to an individual.

Expectancy The probability that an action will lead to a desired performance.

Instrumentality The probability that desired performance will lead to rewards.

Essentially, an individual’s performance is the result of a number of factors and they are:

1. Perceptions that effort will lead to effective performance, which will then lead to attractive
rewards, either intrinsic or extrinsic, that are perceived to be available;
2. The worker’s perception of his or her place in the organisation or role; and
3. Their characteristics including skills, personality, training and etc.

Therefore, a person will be motivated, says the theory, if he or she sees that there is a reasonable chance
of reaching the level of performance required and that outcome will be rewarded.

Example: Peter is a final year engineering student who has his end of term exam coming up. Peter knows
that he must pass this exam in order to receive his degree (valence). Although the exam will be a difficult
one, Peter has been a good student during the year and knows that if he works hard, he will do well
(expectancy). Peter is very keen to obtain this qualification, as he believes it will help him land a well-paid
job (instrumentality). Therefore, Peter becomes motivated to study for his exam (force).

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23.3 Type of Intrinsic and Extrinsic Reward


Learning Outcome (ACCA Study Guide Area D, Topic D5c):
Explain and identify types of intrinsic and extrinsic reward.

Intrinsic Rewards

Intrinsic rewards occur when an individual engages in an activity that offers no external rewards. They are
therefore psychological rather than material and relate to the concept of job piece of work, the status that
certain jobs convey, and the feeling of achievement that comes from doing a difficult job.

Intrinsic rewards also occur when an individual overcomes any challenges or obstacles that are present in
his particular activity. This typically results in an increased intrinsic motivation in the individual to continue
with the activity. This phenomenon is outlined in the Cognitive Evaluation Theory. This theory states that
as an individual overcomes the challenges associated with a particular activity, she begins to feel
competent in the activity and wants to increase the time she spends in the activity.

Example: An example would be a novice tennis player who masters the backhand. The player begins to feel
more competent and wants to go to mastering more sophisticated strokes such as the serve.

In addition to reasons of enjoyment people also engage in activities that offer only intrinsic rewards
because of feelings of obligation. That is to say they engage in a particular activity because they believe
they are morally required to do so and the only reward they expect to receive is a feeling of satisfaction
and fulfilment. An example here is people who do volunteer work for various charities.

Check understanding

1. Which of the following is an intrinsic reward?


A. Company car
B. Extra holiday entitlement
C. On the job training of new recruits
D. Bonus payment

Extrinsic Rewards

Although many people enjoy their work, they also want some form of external reward. This extrinsic
motivation and reward occur when an individual undertakes a particular activity in order to receive an
expected external benefit or reward. Extrinsic rewards unlike intrinsic rewards are separate from (or
external to) the job itself, and dependent on the decisions of others.

Extrinsic rewards the individual may receive include tangible items such as a salary increase or promotion
or intangible items such as public recognition or praise for his efforts. Most people undertake an activity
(job or otherwise) to gain both intrinsic and extrinsic rewards. A common example is that of a student who
studies hard because she both enjoys the subject and also because she wants to receive a good grade.

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Check understanding

2. Which type of motivation is based on tangible rewards, is external to the individual and is typically
offered by a supervisor or manager?
A. Intrinsic motivation
B. Competitive motivation
C. External motivation
D. Extrinsic motivation
E. Legitimate motivation

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23.4 Design Reward Systems and Implement to Motivate Teams and Individuals
Learning Outcome (ACCA Study Guide Area D, Topic D5d):
Explain how reward systems can be designed and implemented to motivate teams and individuals.

Rewards

A reward is a token (monetary or otherwise) given to an individual or team in recognition of some


contribution or success.

Employment is basically an economic relationship; the employee works for the employer and in exchange,
the employer provides reward to the employee.

Facts on rewards:
 Reward is a part of psychological contract
 Reward influences the success of recruitment and retention policies
 Reward consumes resources
 Reward affects motivation and performance management

Reward is a crucial part in the process of motivation as described by the theorists especially the Process
Theories. For example, based on Victor Vroom’s Expectancy Theory, the strength of one’s motivation is
dependent on valence, the value of the perceived outcome to an individual, which is the reward. There
must be a perception that effort will lead to attractive rewards, either intrinsic or extrinsic. Without
rewards there will be no motivation.

Check understanding

1. The motivation theory shows the downside of 'extrinsic rewards' is explained in


A. Victor Vroom expectancy theory
B. Edward Deci motivation theory
C. Maslow's motivation theory
D. Fredrick Herzberg motivation theory

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Reward Systems (Formal Systems)

Reward systems are the principles, processes and methods of how rewards are managed to meet its
objectives.

The reward system should pursue three behavioural objectives:


To support recruitment The reward system should enable an organisation to attract, retain and
and retention motivate competent employees so that its overall objectives may be met.

To motivate employees to Reward systems should be able to increase the predictability of


high levels of performance employees’ behaviour and increase the willingness of employees to accept
change and be flexible. It should be used as part of a staff development
plan to improve the performance of the employees to achieve
organisational objectives.

To promote compliance Everyone clearly understands what is expected of them, and those
with workplace rules and who demonstrate compliance are rewarded with special activities,
expectations events, and benefits reserved for rule followers.

Check understanding

2. According to Herzberg, for creating self-motivated workforce employers should focus on the
motivator factors
A. De-motivator factors
B. Intrinsic factors
C. Extrinsic factors

Reward Techniques

Reward system should attempt to achieve internal equity i.e. when comparisons of rewards are made
within the organisation, the employees will conclude that the overall structure is fair.

Three techniques can contribute to the establishment of internal equity:

 Job analysis: to collect and evaluate information about the tasks, responsibilities and the context
of a specific job.
 Job evaluation: to determine the relative worth of jobs within a single work organisation.
 Performance appraisal: the aim is towards improvement of individual performance.

If the internal equity is not achieved, employees will conclude that the psychological contract has been
breached and their behaviour will be affected.

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When setting rewards other factors that may affect it are:

 Individual issues VS team issues


 Market rates VS company rate
 Negotiated pay scales
 Legislations (for example, minimum wage rate), etc.

Components of a reward system

There are three main components to a reward system for employees:

a) Base pay: established reward for time spent working e.g. salary.
b) Indirect pay: benefits such as health insurance and childcare.
c) Performance related pay: pay intended to reward performance learning or experience.

Types of Performance Related Pay

1. Piecework: Payment based on a fixed amount per unit produced or work completed.
2. Management by objective: If a certain objective is met, a reward is given.
3. Team rewards:
4. Profit sharing: Teams are rewarded based on the performance of the organisation.

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CHAPTER 24: LEARNING AND TRAINING AT WORK

CHAPTER 24: LEARNING AND TRAINING AT WORK

Learning Outcomes

At the end of the chapter, you should be able to:

TLO D6a. Explain the importance of learning and development in the workplace.

TLO D6b. Describe the learning process: Honey and Mumford, Kolb.

TLO D6c. Describe the role of the human resources department and individual managers in the
learning process.

TLO D6d. Describe the training and development process: Identifying needs, setting objectives,
programme design, delivery and validation.

TLO D6e. Explain the terms ‘training’, ‘development’ and ‘education’ and the characteristics of
each.

TLO D6f. List the benefits of effective training and development in the workplace.

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CHAPTER 24: LEARNING AND TRAINING AT WORK

24.1 Importance of Learning and Development in the Workplace


Learning Outcome (ACCA Study Guide Area D, Topic D6a):
Explain the importance of learning and development in the workplace.

24.1.1. Definition of Learning


Learning is the process of acquiring knowledge through experience that leads to a change in behaviour.

The process of learning also helps an organisation in developing the talents and skills of its employee base
and reduces dysfunctional behaviours such as absenteeism, tardiness and indiscipline.

Learning in the workplace involves the development of new skills, competences and attitudes to meet new
situations.

An individual can learn through:

Formal Learning There is a deliberate attempt to teach and learn; and an assessment or test of the
knowledge or skills gained based on agreed measures of standard. It is normally
classroom based and highly structured. At the end of the process there may even be
a qualification being awarded.

Informal Learning which takes place in the work context (on the job learning) It takes place
Learning spontaneously and incidentally on an almost daily basis for most employees. It can
also be self-directed learning or through a process of coaching and mentoring.

Spontaneous In spontaneous learning, the learner learns in a social context, and it is an active and
Learning dynamic process. The learner engages and relates to the work and learns from
shared learning experiences of colleagues and peers.

Incidental In incidental learning, the process of learning is unintentional and unplanned for. It
Learning is developed when forced to adapt to situations. A learner learns through:
 Observation, repetition, social interactions, and problem solving;
 Implicit meanings in workplace policies or expectations, and
 Mistakes, assumptions, beliefs and attributions.

Check understanding

Which of the following is a type of learning?


A. Accidental Learning
B. C. Instantaneous Learning
C. Time based learning
D. Informal Learning

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24.1.2. The Importance of Learning


Table below explains importance of learning to:

Individuals  Understanding
 Competence
 Skills
 Knowledge
 Experience

Psychologically:

 Improved self – esteem


 Meets social needs
 Improves job satisfaction
 Morale improves
 Meets development needs
 Career growth

Organisation  Increase productivity and lowers costs


 Be more empowered and the benefits of empowerment can be
reaped.
 Be more motivated in what they do
 Be more flexibility and are adaptable to change.
 Reduce the need for detailed supervision

Check understanding

Which of the following statements is the psychological effect of learning?

A. Understanding
B. Improved self-esteem
C. Skills
D. Actualization

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24.2 Learning Process


Learning Outcome (ACCA Study Guide Area D, Topic D6b):
Describe the learning process: Honey and Mumford, Kolb.

Schools of Learning Theory

There are three schools of learning theory and they are:

1. The Behaviourist Theories: Observable behaviour


2. Cognitive Views: What goes on internally to create learning?
3. Humanist Learning Perspective: Individual differences in learning

24.2.1 The Behaviourist Theories


The behaviourist approach suggests that learning is the development of associations between stimuli and
responses through experience. It concentrates on the relationship between stimuli and responses and
believes that learning is a passive process. It assumes that a person is reactive, and a passive robot who
responds predictably without thinking to stimulation.

Based on the behaviourist theories, IF we want to improve on learning:

 Objectives have to be clear;


 Frequency of repetitive response is important in acquiring skills;
 Reinforcement is important to obtain repetition of correct behaviour; positive reinforcement
preferred over negative reinforcement; and
 Immediate feedback of results is strongly motivating.

24.2.2 The Cognitive Approach


The cognitive or problem-solving approach to learning is based on the idea the human mind takes sensory
information and interprets, rationalises and imposes organisation and meaning on it. The learning process
is an active, interpretive, idiosyncratic experience, and unique to every individual.

Based on the cognitive approach, IF learning is to be improved:

 Instructions should be clear and well organised to facilitate ease of understanding;


 The way the problem is displayed is important for learners to understand;
 Prior knowledge is important as the mind would build on previous experiences and knowledge.

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24.2.3 Humanist Learning Perspective


The Humanist Learning Perspective is an adult learning experiential approach. It recognises the importance
of experience, as opposed to formal instruction.

In the process of learning, adults learn when they need to and individuals are unique in their learning styles
and strengths. Learning is pursued through self-directed learning approaches and cooperative learning
activities.

The humanist learning perspective was suggested first by David Kolb’s (1975) The Experiential Learning
Cycle and Honey and Mumford (1982) later built upon Kolb’s work and developed four distinct learning
styles or preferences.

Kolb’s Experiential Learning Cycle


David Kolb suggested that the act of doing puts the learner in an active problem – solving role and it is a
form of self – learning which encourages the learner to formulate and commit themselves to their own
learning objectives.

In the process, the learner reflects and internalises. Therefore, learners are not passive recipients but need
to actively explore and test the environment. Based on his findings, there is no end to learning but another
turn of a continuous cyclical process.

Stage 1: Concrete Experience A planned or accidental process.

(Feeling: Action) E.g. An individual gets on a bicycle and begins pedalling but
soon falls off.

Stage 2: Observation and Reflection Based on the experience on a personal basis.

(Watching: Analyse Action) E.g. Instead of getting back on the bicycle, the individual sits
back and examines the events, which led to his fall.

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Stage 3: Abstract Conceptualisation Generalising from reflection and developing hypotheses based
on experience and knowledge and construction of ways of
(Thinking: Understand the principles)
modifying the next occurrence of the experience.

E.g. The individual comes to an understanding that he fell off


because he lost his balance. He lost his balance because he was
pedalling too slowly.

Stage 4: Active Experimentation Consciously trying out hypotheses in other situations, leading
to the next concrete experience.
(Doing: Apply the techniques)
E.g.: The individual decides to get back on his bike, but this time
to pedal faster so as to maintain his balance.

Check understanding

1. All the statement below is not true based on Kolb’s learning styles, except?
A. Divergent style: Prefers to gain knowledge by incorporating experiences into already existing
cognitive structures.
B. Assimilative style: Strong preference on hands-on approaches and such as concrete
experiences and active experimentation.
C. Accommodative style: Preference for concrete experiences, but to reflect on these from
different perspectives.
D. Convergent style: Prefers to apply ideas and will take an idea and test it out in practice.

Honey and Mumford’s Learning Styles


P. Honey and A. Mumford developed a theory on learning styles that identifies four distinct types of
learning styles or preferences building on Kolb’s model. They have adapted the learning cycle and the
following is a diagram of their model:

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The following are the different styles of learners as identified by Honey and Mumford:

Theorists  Taking an ‘hands off’ approach


Prefer to study and understand principles by:  Learning from programmed and structured training
 Allowing time for analysis
Reflectors  They prefer to work in their own pace.
Prefer to think through first by observing a  Produce well thought-out conclusions after
phenomenon, think about them and then research and reflection.
choose the next course of action.  Tend to be fairly slow, non-participative and
cautious.
Activists  Learns best through training based on hands-on
Prefer to try things ‘hands on’ and deal with experience.
practical, active problems and do not have  Are excited by participation and pressure, such as
patience with theory. new projects.
 Flexible and optimistic, but rushes into things
without preparations.
Pragmatists  Learns best through on-the-job training
Prefer to work with real tasks or problems and programmes.
only like to learn if they can see its direct link  Always has an action plan in handling tasks.
to practical problem.  May be hasty in discarding good ideas, which
requires more time for development, if they feel it
is not practical.

Check understanding

2. Which of the following words correctly explains the learning cycle developed by Kolb, Honey and
Mumford?
A. Programmed leaning
B. Action leaning
C. Cognitive leaning
D. Experiential leaning

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24.3 Role of the Human Resources Department and Individual Managers in Learning Process
Learning Outcome (ACCA Study Guide Area D, Topic D6c):
Describe the role of the human resources department and individual managers in the learning process.

Organisations today are expected to “partner” with their employees by providing them with increasing
opportunities for continuous learning. This function is taking on by the Human Resources Department
(HRD), led by the Human Resource Manager.

Responsibilities of HRD:

1. Training for the present


2. Educating for the future
3. Developing to lead

There is an increasing emphasis and importance being placed on the HRD to utilise an employee’s abilities
by coaching them to maximise their potential. HRDs now take a very active role in encouraging and
supporting employee learning on a continual basis both on and off the job.

Example 1

Many HRDs have implemented policies that either finance or reimburse employees for any (job related)
educational courses they enrol in.

HRDs also take an active role in stimulating and supporting employees to learn continuously as part of their
work life.

24.3.1 Roles of Training Manager


Usually in an HRD, there will be a Training Manager who is given the responsibility of taking care of the
training and development of employees. The following are the roles of the training manager:

 Planner for training


 Organising training activities/programmes
 Training manager
 Instructor
 Consultant
 Advisor

Some senior training managers who are training specialists may be involved in:

 The identification or assessment of training needs;


 The design, content and methods of training to be employed; and
 The evaluation of training.

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A Training Manager has four prime responsibilities:

Planning and organising Training activities such as the facilities, trainers, equipment for
training. The manager may also need to train the trainers;

Determining and managing training Such as course structure, syllabus and record systems.
activities
There is much groundwork that has to be done by the manager
before and during the training;

Directing training activities Ensuring that the activities are smooth and effective, and it
involves monitoring standards and activities, before, during and
after the training; and

Consulting and advising Ensuring the training manager is specialised in training matters
and technical matters.

Check understanding

The role of training manager is to ensure develop skills and competence among workers. Therefore, a
training manager has four primary responsibilities, except

A. Planning and Organizing


B. Coordinating production output
C. Directing training activities
D. Consulting and advising

24.3.2 Role of Heads of Department


The Human Resource Manager and Training Manager cannot work in isolation to ensure that the four
conditions for an effective learning process (stimulus, response, motivation and reward) are present for
employees in an organisation. They need the support of individual managers from every department of the
organisation. Individual managers need to work with the HRD to promote and improve the learning process
for their subordinates.

Given that they are the ones who work closely with subordinates, they are in the most suitable position to
evaluate subordinates’ strengths and weaknesses or expertise and knowledge gaps. Along with evaluating
the performance of their subordinates, managers need to:

 Identify learning needs.


 Encourage and support their efforts for learning: allowing them time away from work to attend
training programmes.
 Create a working atmosphere that promotes informal learning: creating forums where employees
share their best practices.

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Check understanding

The training done in guidance of instructor on one place and having trainees at different locations is
classified as

A. Tactile training
B. Instructor led classroom training
C. Distance training
D. e-Training

24.3.3 Differences in the Roles and Responsibilities of Human Resource Manager and Other
Functional Department
The following table shows the differences in the roles and responsibilities of the department managers and
the human resource manager.

Other Functional Department Responsibilities Human Resources Department Responsibilities


1. Submitting information on department 1. Analysing training needs
training needs
2. Formulating the general policy
2. Looking after apprentices
3. Supervising apprentice training
3. Making sure that release is arranged for off-
the-job training 4. Arranging for outside training with education
institutions
4. Mentoring and coaching
5. Training the trainers
5. Giving on-the-job training

Note: The training manager and the human resource manager has very distinct roles and responsibilities,
although in small organisations the human resource manager may play the role of training manager.

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24.4 Training and Development Process


Learning Outcome (ACCA Study Guide Area D, Topic D6d):
Describe the training and development process: Identifying needs, setting objectives, programme design,
delivery and validation.

Training and development refers to the design and implementation of learning programmes that will
produce a measurable and noticeable change in a person’s knowledge, skills and attitudes.

Below are five stages involved in the training and development process:

1. Identifying Needs
2. Setting Objectives
3. Programme Design
4. Delivery
5. Validation

24.4.1. Stage 1: Identifying Needs


Training needs can be defined as the gap between what people should be achieving and what they actually
are achieving. It is the required level of competence minus the present level of competence.

It can be identified using the following means or methods:

Performance Appraisals
By understanding issues that may be present, superiors are able to suggest and recommend trainings that
could improve the performance of employees or propel the employees’ performance to greater heights.
Performance appraisals will scrutinise data from departmental records i.e. personnel statistics, accident
records, training reports and staff appraisals and the feedback from employees.

Job Analysis
During job analysis, the Job Description is dissected to show the detailed responsibilities, duties and tasks
that is to be carried out; and each responsibility is matched by an analysis of the knowledge and skills
required by the job-holder in the Job Specification.

Therefore, the areas of a job where training is necessary can be found when there is a gap between what
is required to perform the job compared to what the employee is able to do. The job analysis can be used
to generate a training specification covering the knowledge needed for the job, the skills required to
achieve the result and the attitudinal changes required.

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Other Methods
The following are other methods to assess training needs:

 The features of an organisation and a diagnosis of its problems such as a drop in the overall
performance or any part of it in terms of output, sales, profit, and costs. By finding out where the
drop-in performance is or issues are, the management is able to define the training needs to
address the weaknesses.
 The policies of an organisation, which may require training as a means of achieving goals.
 Human Resource functions of an organisation, which would address issues such as new job
positions, the need for job rotation, job enlargement, integration of positions, promotion policies
and career development plans. These issues would require the need for training.
 Grievances, absenteeism, labour turnover would indicate the general health of the welfare of the
employees and it is a good indicator of whether there is a need for training to address these issues.

By observing employees, as any lack of competency would show in his or her day-today running of the job.

 What other competitors do will indicate the need to either match up or do better than what they
do.
 Surveys of staff with questionnaires or interviews would help management to hear from the
employees, what their training needs are.

24.4.2. Stage 2: Setting Objectives


This step is to set specific and measurable knowledge and performance objectives based on these gaps or
deficiencies. The goal should be that once these objectives have been achieved, the expertise gap that
exists should then have been completely filled.

In defining the training objective, it is important to take into consideration the following factors:

 Task: what the learner has to demonstrate in the achievement of the objective
 Behaviour: what the learner should be able to do
 Standard: the level of achievement the learner is expected to demonstrate
 Environment: the conditions under which the learner is expected to demonstrate achievement
 Objectives should be SMART (Specific, Measurable, Achievable, Relevant, and Time-related)

24.4.3. Stage 3: Programme Design


This leads to the stage of designing a specific training programme. What must be decided upon here is not
only what must be the content but also how this matter should be taught.

First task is to decide what must be taught that is to group the training objectives identified in Stage 2 into
a number of courses, blocks or sessions. This “curriculum” must then be checked to ensure that it meets
both the learning needs of potential attendees and also the objectives of the organisation.

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24.4.4. Stage 4: Delivery (execution of the training)


At this stage, the training programme is actually implemented, and any supporting material distributed.
The training manager and the line manager may evaluate the training at this point.

Training and development methods can be broadly categorised into on-the-job and off-the- job training.

On-The-Job Training
Essentially means training is provided at work and several methods can be adopted and they are as follows:

Observation Learners follow and watch experienced colleagues at work

Information and advice The learner’s manager may be available to give advice and function as a
from colleague learning resource.

Job instruction by An experienced colleague gives instructions to the learner whilst explaining
colleagues and/or demonstrating a technique or procedure and supervises as the learner
attempts it himself or herself.

Coaching by colleague A colleague or trainer explains and demonstrates procedures or techniques.


The learner then tries, with the guidance, advice and correction of the trainer.
The coach helps to identify problems or further learning needs and gives
encouragements.

Mentoring by a A more experienced or senior member of the organisation accepts a role as


colleague the mentor take responsibility for long term personal and career
development goals of a learner.

Work experience The learner may be given the opportunity to transfer to various tasks on a
through Job Rotation planned schedule with the purpose of giving hands on experience of the task
to the learner.

Induction training A new employee will be formally introduced and integrated into an
organisation through the process of induction. It helps the new recruit to
socialise into the culture of the organisation.

Check understanding

Conducting a training need analysis is important for line manager. However, the manager need to
ensure he/she:

A. Has a thorough understanding of the training that the employees have gone through
B. Has an understanding of the organisational strategy and departmental objectives?
C. Is accustomed to the day-to-day operational environment of the department
D. Has experience in the work that needs to be trained

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Off-The-Job Training
Off-the-job training involves trainings that are conducted outside of the workplace and the methods
include the following:

Formal training courses Lectures at institutions,

Workshops at training centres,

Information briefings, seminars or conferences.

Self-study courses Computer based training or assessment packages,

Provided by external training Video or interactive video-based training packages, and


providers
Open or distance learning materials.

Visits and tours To work sites where procedures and practices are demonstrated,

To clients’ or suppliers’ organisations so as to broaden awareness


of customer/supply side issues, and

To other departments or branches in order to broaden awareness


of business processes and differences in practices and culture.

Research assignments Information search, and

Preparation of a written project report or presentation.

Advantages & Disadvantages


Training Advantages Disadvantages
On-The-Job It takes into account of the job context Undesirable aspects of jobs contexts
and it is highly relevant to the job. such as short cuts and corner cutting are
also learnt.
It allows the learner to transfer the
learning to the job more effectively and Does not suit learners who prefer the
vice versa. theorist/reflective learning styles.

It is best suited to pragmatists who An organisation that has low tolerance


prefer hands-on learning styles as it for errors may not encourage on-the-job
offers learning by doing. training as it uses a trial and error
approach.
The learner does not need to make any
adjustment and they can apply what There is a risk of irreversible mistakes
they have learnt directly to the job. made by the learner.

It develops greater rapport between the


trainer and the learner.

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The learner may be distracted and


succumb to pressures at work and loses
focus on the learning.
Off-The-Job Allows exploration or experimentation The learning may not be directly
without the risk of consequences for relevant or transferable to the job or job
actual performance at work. content.

The learner is able to focus on learning, May be perceived as a waste of working


away from distractions and pressures of time to abandon work to go for training.
work.
Immediate and relevant feedback may
It allows for standardisation of training not be available.
programmes.

24.4.5. Stage 5: Validation


At this stage, the success (or failure) of the training programme must be evaluated. One common approach
is to invite feedback from all participants. Alternatively, students can be given a test or exam at the end of
the course on the subject matter that was taught.

This stage is vital as it provides a platform from which the programme can be modified or amended to
improve its quality and effectiveness.

Hamblin’s Five Sequential Levels of Evaluation


Level 1: Reactions Reactions of the trainees are evaluated to the content and methods of
training. Feelings of how enjoyable and useful the training were being
evaluated. If the trainees recommend the training to others and they want to
attend again, it shows a positive outcome.

Level 2: Learning Learning is evaluated on whether the trainees have learned the skills and
knowledge as expected. One of the expected outcome is that trainees can do
what they were trained to do.

Level 3: Job Behaviour Job Behaviour is evaluated by whether learning has transferred to the job.
The trainees may make suggestions as to how the training can be applied to
the job. Trainees may be more disciplined and have a positive attitude after
the training.

Level 4: Organisation Organisation changes can be an evaluation by checking whether the training
has helped departmental development. Has the course of training resulted in
a noticeably increased output?

Level 5: Ultimate Value Ultimate Value of the training is evaluated to see how the organisation as a
whole has benefitted from the training in terms of greater profitability,
survival or growth. An increased in departmental productivity contributing to
the profitability of the organisation would deem the training to be successful.

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Check understanding

Hamblin has 5 sequential levels explaining the evaluation of training. Which of the following is the
correct order?

A. Job Behaviour, Learning, Reaction, Organisation, Ultimate Value


B. Organisation, Reaction, Learning, Job Behaviour, Ultimate Value
C. Learning, Reaction, Organisation, Job Behaviour, Ultimate Value
D. Reaction, Learning, Job Behaviour, Organisation, Ultimate Value

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24.5 Training, Development and Education


Learning Outcome (ACCA Study Guide Area D, Topic D6e & D6f)):
Explain the terms ‘training’, ‘development’ and ‘education’ and the characteristics of each.
List the benefits of effective training and development in the workplace.

24.5.1 Training, Development & Education


Training
Training is the planned and systematic modification of behaviour through learning events, programmes
and instruction, which enable individuals to achieve the level of knowledge, skills and competence to carry
out their work effectively.

Training was originally concentrated in giving employees the technical skills they need to perform their job.
However, today many organisations are also sending their employees on training programmes other than
the ones designed to impart technical skills.

Development
Development is the growth or realisation of a person’s ability and potential through the provision of
learning and educational experiences.

It is a term used to describe activities and individual will undertake to help him not only improve his current
job performance but also to gain broader knowledge and skills so that he can further progress his career.

It is a long-term process of self- improvement. It is undertaken also to enable individual to grow and assume
positions with greater responsibilities or change careers completely.

Check understanding

Which term is referred to the learning opportunities designed to help employees grow.

A. Training
B. Education
C. Development
D. All of the above

Education
Although the term ‘education’ is most often used to refer to formal education (i.e. schools, colleges and
universities), it actually has a much broader meaning.

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Education is any activities to develop understanding, knowledge, skills, and moral values for every aspects
of life not confined only to one field of activity. It covers any experience that provides and enables an
individual to learn.

It is a lifelong process and comes from a number of sources including books, television, newspaper, family
and friends.

24.5.2 The Differences & Benefits of Training and Development


Differences
The following table summarises the differences between Training and Development:

Training Development
Focus on job development Focus on career development

Narrowly based and job or task oriented More general, future and individual oriented

Involves timely interventions to satisfy gaps in Fulfilment of innate potential and ability
knowledge and ability through continuous involvement not just
periodic interventions

Develop individual’s ability to meet the current The development process is usually long term
and future human resource needs focused on future needs of the organisation

Benefits
There is a widely accepted view today that employees are an organisation’s greatest assets and like all-
important assets they must be looked after. Training and development represents the way an organisation
invests to not only maintain but also improve the quality of its most vital asset.

Benefits of training and development to the organisation (employer) are as follows:

 Lowers recruitment costs as it is cheaper to train internally compared to recruiting from outside.
 Increased productivity because individuals become more skilled to do the work.
 Improves job performance when they know how to do it better after training.
 Less need for detailed supervision as workers are trained to do the work.
 Encourages empowerment because individuals will have the skills and knowledge to do the work.
 Flexibility, as people become more multi-tasked.
 Recruitment and succession planning improves as people are more prepared to fill the positions
left by retirees or when they are promoted.

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Benefits of training and development to individual (employees) are as follows:

 Enhances portfolio of skills and this improves the employability of individuals.


 Psychological benefits as training means employees are valued in the company and this motivates
them.
 Social needs are met when individuals receive training.
 Needs and aims to develop abilities and talents satisfied through training.
 Training provides acquired skills for future use.
 Increases job satisfaction, promotion and earning prospects.

Check understanding

How does effective training and development offer competitive advantage to an organisation?

A. Deficiency is caused by a lack of ability


B. Removing performance decencies
C. Individuals have the aptitude and motivation to learn
D. None of the above

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CHAPTER 25: REVIEW AND APPRAISAL OF INDIVIDUAL PERFORMANCE

Learning Outcomes

End the end of the chapter, you should be able to:

TLO D7a. Explain the importance of performance assessment.

TLO D7b. Explain how organisations assess the performance of human resources.

TLO D7c. Define performance appraisal and describe its purposes.

TLO D7d. Describe the performance appraisal process.

TLO D7e. Explain the benefits of effective appraisal.

TLO D7f. Identify the barriers to effective appraisal and how these may be overcome.

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25.1 Importance of Performance Assessment


Learning Outcome (ACCA Study Guide Area D, Topic D7a & D7b):
Explain the importance of performance assessment.
Explain how organisations assess the performance of human resources.

25.1.1. Importance of Performance Assessment


The main reason why almost all organisations have implemented a system of performance appraisal is to
allow both the organisation and its employees to know if they are performing their tasks and work
efficiently; or in other words, if they are doing their jobs.

It is a system where managers and supervisors in an organisation discuss the work of their subordinates.

It looks into the employee’s:

 Strengths and weaknesses,


 Needs for training and development, and
 Potential for promotion.

Current thinking holds that performance appraisal are absolutely vital to the success of an organisation and
should be conducted throughout the course of the year (rather than on only an annual or semi-annual
basis).

This helps both the organisation and the employee to take any corrective action (if need be) earlier, thereby
increasing the chances of both the employee and organisation achieving their goals and objectives.

Check understanding

What are the general purpose of performance appraisal?

i. Strengths and weaknesses


ii. Need for training and development
iii. Potential for demotion

A. i and ii only
B. ii and iii only
C. i and iii only
D. All of the above

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25.1.2. Assessing Performance


The key or most crucial element to assessing the performance of human resources for organisations is to
create some specific performance criteria or set of expected competencies beforehand. These will then
serve as a benchmark against which the efforts and successes of their employees can be measured and
evaluated.

Most organisations create and communicate a set of these performance standards for each of their
employees. This way every employee knows exactly what is expected of him going forward. This method
offers the benefit of removing some of the subjectivity involved in the evaluation process. Assessing the
employee then becomes a matter of examining his performance and any tangible results she has achieved
against the predetermined goals or targets that have been set for her.

Most organisations do this by setting them goals and targets (although not numerical ones) against which
their performances can be measured and evaluated. These goals and targets need to be set using Peter
Drucker’s SMART acronym.

Check understanding

Evaluating and aligning employee’s performance with company's set objectives is called

A. Appraisal management
B. Performance management
C. Hierarchy of management
D. Off-the-job training

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25.2 Performance Appraisal and its Purpose


Learning Outcome (ACCA Study Guide Area D, Topic D7c):
Define performance appraisal and describe its purposes.

Performance appraisals are defined as are regular and systematic review of performance and the
assessment of potential with the aim of producing action programmes to develop both work and
individuals

Performance appraisal is only one part of a complete performance assessment. It involves a face – to – face
meeting between an employee and his boss.

Although most organisations usually only hold performance appraisal meetings on annual or semi-annual
basis, managers and supervisors are required to perform appraisals on their subordinates on a much more
regular basis (informal appraisal).

Check understanding

Performance appraisal is an objective ……………………. of an individual's performance against well-


defined benchmarks.

A. Job evaluation
B. HR Planning
C. Assessment
D. None of the above

25.2.1. Purpose of Performance Appraisal System


1. Judgement
An appraisee needs to be assessed as to whether he or she has achieved what has been determined. Once
a judgement is given as to the appraisee’s achievement of the objectives set, rewards can be given and
organisations will be able to have a basis of further development.

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With a fair and objective appraisal, the following reviews can be done:
Performance Review  Allows managers and subordinates to plan personnel and job objectives in the
light of performance.
 Agree on standard of performance.
 Compare actual and standards of performance.

Reward Review  Assess the level of reward payable in light of appraisee’s performance.

Potential Review  Identifying potential candidates for promotion.


 Establishing an inventory of actual and potential performance within the
undertaking, as a basis for human resource planning.

Initial Selection  To determine whether the initial selection procedure has been effective in
Procedure Review finding the most suitable candidate.

Check understanding

Identity the statement which explain the main purpose of employee assessment.

A. Making correct decisions


B. To effect promotions based on competence and performance
C. Establish job expectations
D. None of the above

2. Development
Upon deciding on an appraisee’s performance and plans for the future, further training and development
plans can be drawn. As part of the appraisal, objectives will be set and a structured system will be used to
determine and measure the performance of the individual. Any deviations from objectives will be met by
training and development activities.

3. Encourages Two-Way Communication


Encourage communication between superior and subordinates.

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25.3 Process of Performance Appraisal


Learning Outcome (ACCA Study Guide Area D, Topic D7d):
Describe the performance appraisal process.

25.3.1. Performance Appraisal Process


The performance appraisal process consists of reviewing an employee’s performance and then delivering
the results of the review to the employee in a face-to-face appraisal interview. The results that are
presented should ideally be a recap and summary of the time period for which the review or appraisal is
based and all previous communications that have been made to him.

It involves three important phases:

1. The formulation of desired competencies and standards where the individual can be objectively
and consistently assessed.

2. Recording of assessments: This happens before and during the appraisal interview and it uses a
standard framework.

3. The appraisal interview: An important process where both the appraiser and appraise will
contribute to the assessment and agree on action plans for development.

A typical formal performance appraisal system would break the 3 phases into 6 stages:

Stage 1 The criteria for assessment are identified, based on the job analysis, performance
standards and person specification.
Stage 2 The subordinate’s manager prepares an appraisal report. In some systems both the
appraisee and appraiser prepare a report and the reports are then compared.
Stage 3 An appraisal interview is conducted, for an exchange of views about the appraisal report,
targets for improvement and solutions to problems that may arise.
Stage 4 The assessment is then reviewed by the appraiser’s own superior, so that the appraisee
is not subject to only one person’s prejudices. To be fair, formal appeals may be allowed
as a check and balance.
Stage 5 An action plan and implementation of an action plan to achieve improvements and
changes are designed and agreed.
Stage 6 Follow up by monitoring the progress of the action plan.

25.3.2. The Performance Appraisal Interview


The appraisal interview involves the following steps and it is part of Stages 3 to 5 of the process of
performance appraisal.

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Step 1: Preparation
Planning  Timetable of events
 Place and environment
 Format and agenda of the interview defined
 Development and action plans

Documentation  Collect relevant data


 Job description
 A diary of employees highlights and low points
 Employee’s self-assessment form
 A statement of performance (rating sheet or appraisal form)

Review employee’s history  Employee’s file with background notes on attendance, time-
keeping, personality, temperament and family
 Job requirements
 Goals and standards previously committed by employee
 Employee’s self-appraisal form
 Evaluate job performance versus job expectations
 Note any variances in the employee’s performance that need
to be discussed
 Consider career opportunities or limitations for the employee
and prepare to discuss them

Consult other sources of feedback  Peer assessments


 Comments from clients, or outside agencies

Give appraisee time to  Both parties should be prepared by completing the Appraisal
prepare/self-appraise Form

Step 2: Conducting the Interview


 Put the employee at ease
 Explain the purpose of the interview
 Discuss the employee’s progress
 Managers should act as counsellors rather than judge and critic

Skills needed for the interview:

 Ask open ended questions


 Allow time for appraisee to ask questions
 Refrain from asking multiple or confusing questions
 Encourage participation with body language and appropriate cues
 Periodically summarise, reflect and check that point is understood

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Step 3: Gain Commitment


Summarise to check understanding:

 Manager should sum up the whole discussion and restate any decisions, commitments,
agreements or recommendations.

Agree plan of action:

 Training and development needs


 Recommend action along with the key dates for action
 The resources needed for support.

Step 4: Complete Appraisal/Improvement/Development Report


 Write up agreed action plans on training and promotion
 Write up the shortcomings discussed and the results
 Write up the help needed by employee and promises made.

Step 5: Follow up
 Monitor progress
 Keep employee informed
 Take action as agreed such as: Organising training

25.3.3. Giving Feedback


Feedback can be defined as communication, which offers information to an individual or group about how
their performance, results or behaviours are perceived or assessed by others.

It is an important element in performance appraisals. Without feedback, there is no appraisal and only a
one-way communication. There will be no improvements.

Feedback such as recognition and constructive criticisms are good and it enhances the individual’s
confidence. Feedback will provide reassurance, which indicates that they are on the right track and people
generally want to know how they are doing.

There are two main types of feedback, both of which are valuable in enhancing performance and
development:

Motivational feedback: used to reward and reinforce positive behaviour and performance by praising and
encouraging the individual, and allowing him or her to celebrate positive results, progress or
improvements. Its purpose is to increase confidence and motivation.

Development feedback: given when a particular area of performance needs to be improved, helping the
individual to identify what needs to be changed and how this might be done. Its purpose is to increase
competence and aid learning.

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25.3.4. Appraisal Interview Techniques


In the appraisal interview, skills and insights of the appraiser is crucial to ensure feedback is positive and
motivational effects are beneficial to individuals and the organisation. There are three main options or
strategies that can be used whilst providing an employee with feedback:

Tell and sell The superior takes a judgemental approach pointing out the employee’s strengths
approach and weaknesses where he has met his targets and where he has fallen behind.
Tell and listen The appraiser adopts a non-judgemental approach and allow the appraisee to talk
approach about her/his strengths and weaknesses as well as allowing him/her to explain where
and why he/she has not met the expectations.
Problem solving The appraiser does not tell how the appraisee has done and focus is on the work
approach problems instead of the assessment

Appraisal Methods
A variety of appraisal techniques can be used to measure and describe the criteria in different ways.

Overall assessment The manager writes a narration form his judgments about the appraisee. There
will be no guaranteed consistency of the criteria and areas of assessment and
sometimes, inexperienced managers may not be able to convey clear, effective
judgments in writing.
Guided assessment Assessors are required to comment on a number of specified characteristics and
performance elements, with guidelines as to how terms such as ‘application’,
‘integrity’ and ’adaptability’ are to be interpreted in the work context. This is
more precise, but still rather vague as the comments of the appraiser may still
be subjective.
Grading Managers are asked to select one of a number of levels or degrees on a scale to
which the individual in question displays the given characteristics. For example,
on a scale of 1 to 7 rate the employee’s punctuality, with 1 as the highest and 5
as the lowest.
Behavioural incident These concentrate on employee’s behaviour, measuring against typical
methods behaviour in each job, as defined by common critical incidents of successful and
unsuccessful job behaviour.
Result-oriented This reviews performance against targets and standards of performance agreed
schemes in advance by both the manager and subordinate. For example, if an employee
receives between 5 to 10 customer complaints in a year, the employee’s
customer relation skills are considered to be moderate as compared to
employees who received less than 5 complaints for the year.
360-degree With this approach, feedback and evaluation on an appraisee’s performance is
approach provided by his/her boss as well as his/her subordinates, peers and sometimes
even customers (connected parties). The feedback of these parties is then
communicated to the employee during the appraisal meeting.

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Check understanding

The method of keeping and reviewing, the record of employees' undesirable behaviour at different
time intervals is

A. Forced distribution method


B. Alternation ranking method
C. Critical incident method
D. Paired comparison method

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25.4 Effective Appraisal


Learning Outcome (ACCA Study Guide Area D, Topic D7e & D7f):
Explain the benefits of effective appraisal.
Identify the barriers to effective appraisal and how these may be overcome.

25.4.1. Benefits of Having an Effective Appraisal Process:


 Identification of training and development needs on an individual, departmental and organisation
level.
 An opportunity to identify more suitable areas/jobs for currently poor performing employees.
 Increased and more effective communication between managers/ supervisors and their
subordinates.
 An objective picture of how well the business is performing along individual employee, department
and organisation lines.
 Opportunities for employees to be able to set/ evaluate their career development goals.

25.4.2. Barriers to Effective Appraisal


In theory, such appraisals may seem very fair to the individual and very worthwhile for the organisation,
but in practice the appraisal system often goes wrong.

J Lockett identified the following appraisal barriers:

Appraisal as Appraisals are seen as a time to confront problems and it may lead to the following
Confrontation problems:
 Lack of agreement on performance levels.
 The feedback is exaggerated and subjective: in other words, the manager is biased,
allowing personality differences to get in the way.
 The feedback is badly delivered as both parties are defending their grounds.
 There is a lack of attention to appraisee’s development needs and potential.

Appraisal as The appraisal is seen as a one-sided process in which the manager acts as ‘judge, jury
Judgement and counsel’ for the prosecution. This puts the subordinate in the defensive.

Appraisal as The appraisal is conducted as if it were a friendly chat without purpose or outcome.
Chat Many managers, embarrassed by the need to give feedback and set stretching targets,
reduce the appraisal to an informal chat and leave the interview with a number of
unresolved issues.

Appraisal as Appraisal is a form filling exercise, to satisfy the personnel department. Its underlying
Bureaucracy purpose, that is, improving individual and organisational performance is forgotten.

Appraisal as The appraisal is used to wrap up past year problems, but it should be part of a
Unfinished continuing future-focused process of performance issues. Current issues will then be
Business

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brought forward next year and will never be addressed and left unfinished or not
reviewed in future appraisals.

Check understanding

1. Appraisal is perceived as ____________, if it is just a form-filling exercise meant to satisfy the


needs and objectives of the human resources department.
A. Chat
B. Bureaucracy.
C. Confrontation.
D. Judgement

Other barriers to effective appraisal are as follows:


Different Reviewer This represents how standards may vary from reviewer to reviewer. For
Standards instance, performance one reviewer may classify as good, another could
as classify as average.

Personal Bias This represents how reviewers may let their personal feelings for the
employee affect the appraisal. For instance, if the reviewer knows the
other person well, he may grade him higher.

The Halo Effect This represents the tendency of ratings on just one factor to influence or
set the overall rating of the employee. For instance, a sales manager may
overlook many of a subordinate’s faults if the subordinate has obtained a
large sales order.

The Recent Effect This represents the tendency of some reviewers to base their appraisal on
the most recent performance of the employee. For instance, a manager
may put down tardiness as a weakness or a subordinate solely because he
was late to work during the week of review.

The Contrast Effect This occurs when a reviewer compares the performance of an employee
to his peers rather than appraising him independently.

The Cluster Effect This represents the tendency of a reviewer to rate all employees of a peer
group the same regardless of individual performances.

The Isolation Effect This reflects the tendency of some reviewers to base the whole appraisal
on a single incident. For instance, a production manager gives a
subordinate a poor appraisal solely based upon a work place occident that
happened months before.

The Job Effect This represents the tendency to automatically award higher appraisals for
higher-ranking jobs. For instance, a senior manager: believes that his
managers must always be given a higher grade for their appraisals than
assistant manager .as they have more responsibilities.

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Check understanding

2. All these may contribute to failure in performance appraisals, except:


A. Appraisee becomes defensive because the appraiser acts as a judge or jury.
B. Appraisee sees the process as a confrontation, where the appraiser attacks the appraisee with
negative comments about the latter’s performance in the recent year.
C. The appraisal process highlights key areas of weaknesses, after which both the appraiser and
appraisee discuss ways of improvement in a non-judgmental manner.
D. The appraisal process is seen as an annual activity, which may be regarded as a nuisance.

25.4.3. Overcoming Barriers Performance to Effective Appraisal


Below are ways to overcome barrier to effective appraisal:

Training Reviewers attend training programmes that highlight the above


“effects” and consequences of appraisal process
Diary-Keeping System Reviewers are required to maintain a diary of both positive and
negative critical incidents that occur for each employee they are
to appraise during the entire appraisal period.
 To rely less on their memories and more on factually
reported incidents.
Principles of Truly Participative,  The appraisal is part of day-to-day operations.
Performance-oriented Appraisal  Supervisors are assigned the responsibility to appraise
Programme subordinates.
 Criteria for job performance must be related to the job itself.
 Employees should participate in establishing the
achievement measures for his/her job.
 Supervisor’s prime responsibility is to coach and collaborate
subordinate’s development.
 Communication of good performance standards that are
expected of employees.
 Compensation system is linked to performance
achievement.
 Frequent and timely feedback sessions must be conducted.
Creating a career path and counselling must be part of the
performance review cycle.

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Learning Outcomes

End the end of the chapter, you should be able to:

TLO E1a. Explain the importance of effective time management.

TLO E1b. Describe the barriers to effective time management and how they may be overcome.

TLO E1c. Describe the role of information technology in improving personal effectiveness.

TLO E2a. Identify the main ways in which people and teams can be ineffective at work.

TLO E2b. Explain how individual or team ineffectiveness can affect organisational performance.

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26.1 Importance of Effective Time Management


Learning Outcome (ACCA Study Guide Area E, Topic E1a):
Explain the importance of effective time management.

Time like money, information and materials, is a resource. Everyone has a fixed and limited amount of time,
and various demands at work compete for a share of time. In an organisation, every individual is paid an
amount for his or her time at work, thus every minute costs the organisation as there is a time cost to every
individual’s time.

The main aim of time management is to increase the efficiency and effectiveness of an individual in regard
to how he uses his time. When this happens, a person is said to have achieved effective time management
mainly because he has been able to achieve more (work, activities, and etc.) in the same time period.

Overall, effective time management allows an individual to:

 Maximise productivity.
 Better allocation of his time.
 Plan each day and week more efficiently.
 Eliminate or reduce amounts of wasted time.
 Reduced stress and anxiety amongst employees.
 Impose a better sense of discipline in his work life.

The majority of tools and techniques in time management involve individuals making “to do lists”, setting
priorities and establishing goals for themselves

Check understanding

The spirit of time management is taking charge of your life and not allowing _________ to control you

A. Interruptions
B. Distractions
C. Anxiety
D. Poor study skills and habits

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26.2 Barriers to Effective Time Management


Learning Outcome (ACCA Study Guide Area E, Topic E1b):
Describe the barriers to effective time management and how they may be overcome.

26.2.1. Barriers to Effective Time Management


Scarcity of time People have too much to do in too little time.

Meetings Meetings are often time wasters.

Interruptions Most individual encounters interruptions during the day. For example, social
phone calls and casual colleague chats.

Procrastination Procrastination occurs when an individual puts off doing work that he typically
finds unappealing by paying attention to distractions that are less important or
productive.

Ineffective Ineffective delegation may be caused by the lack of proper training for the
delegation subordinate in managing the work and it will cause the manager having to redo the
work or over micro-managing.

Not setting the Giving priorities to unimportant and non-urgent work will only cause problems as
right priorities urgent work becomes an emergency later and important work are not tended to.

Check understanding

What contributes to barriers to effective time management?

A. Being well organized


B. Lack of money
C. Procrastination
D. Lack of time

26.2.2. Overcoming Barriers to Effective Time Management


Set Goals
An employee needs to know what they are supposed to accomplish in the time they have. To ensure
effective and efficient use of time, goals need to be SMART.

Action Plans
An action plan that set out how you intend to achieve your goals should be written down: the timescales,
the deadlines, the tasks involved, the people to see or write to, the resources required, how one plan fits
in with another and so on. These need not be lengthy or formal plans: start with notes, lists or flowcharts
that will help you to capture and clarify your ideas and intentions.

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Priorities
Now you can set priorities from your plan. You do this by deciding which tasks are the most important and
focus on one thing at a time

Prioritising generally involves arranging all tasks, which may be faced by an individual at the same time in
order of preference.

The order or sequence of the things to be done will be based on what will be most valuable to the
attainment of his immediate or long-term goals.

Other methods
 Delegate work effectively.
 Conquer procrastination.
 Be assertive and learn how to say NO: Some individuals are not assertive, and this only creates
more interruptions as the individual is asked to handle tasks that are unrelated and unimportant.
 Identify time wasters and eliminate them.

26.2.3. Work Planning


Work planning means planning how, when and by whom work should be done, to achieve objectives
efficiently.

Work that is planned will allow an individual to manage his or her time more effectively.

The following are the steps a manager would take in work planning:

1. The establishment and effective treatment of priorities by sequencing which are the things that
is to be done first based on urgency and importance.

2. Scheduling or timetabling of tasks and the tasks are then allocated to individuals within
appropriate timelines, to achieve work deadlines and attain departmental goals.

3. Co-ordinating individual tasks amongst employees and activities of groups.

4. Establishing checks and controls to ensure objectives are met within specified deadlines.

5. Agreeing the mechanism and means to re-schedule and handling of unscheduled events and
contingencies.

Methods used to work planning are as follows:

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1. Loading
Loading is the allocation of tasks to other people, or machines.

It depends upon a number of factors:

The skills and expertise required to do the tasks.

The work that has already been allocated to people with the appropriate skills.

The demand for commonly used facilities (such as computers and printers).

2. Sequencing
When sequencing, the priority of the task at hand is looked into and this can be based on commitments,
urgency and importance.

If these issues are not involved, here are some other possible criteria for sequencing tasks:

Method Description
Shortest task first It gets lots of things out of the way quickly.

Longest job first It gets the most daunting task out of the way rather than letting it hang about
becoming even more daunting.
Arrival time This is the ‘first come, first served’ basis that is encountered every day.

Most nearly finished This allows for tasks that are nearly finished to be completed so that it gets out
of the way of more tedious tasks.
Shortest queue at the This avoids idle time of the next process.
next operation
Least changeover cost For example, if you are about to go on holiday, you should finish off all the
things that it will be more costly or difficult for someone else to take over while
you are away.

3. Scheduling
Activity scheduling is task sequencing and it provides a list of activities, in the order in which they must be
completed. Time scheduling adds the timescale or start and end times/dates for each activity.

Time schedule can be determined by different methods:

 Forward scheduling: Used, starting with a given start time/date and working through estimated
times for each stage of the task to the estimated completion time/date. This method can be used,
for example, when completing routine accounting tasks.
 Reverse scheduling is where you begin with a deadline or completion time/date and work
backwards through estimated times for each stage of the task, determining start times for each
stage – and for the task as a whole – which will enable you to meet the deadline. This method can
be used to meet deadlines, for example, for a report to be prepared, for office re – location and
many other projects, which have a set of completion dates.

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4. ABCD Method of in-Tray Management


When a task or piece of paper comes into your in-tray or ‘to do list’, it should be dealt with and not merely
looking at it and put it back for later. This would mean that it has to be handled again later, especially if it
is a trivial or unpleasant item.

It should be managed using one of the following methods:

Act on the item immediately

Bin it, if you are sure it is worthless, irrelevant and unnecessary

Create a definite plan for coming back to the item

Delegate it to someone else to handle.

Check understanding

Which of following is/are suggested as time management technique(s)?

A. Concentrate on one key task at a time


B. Clean up and get organized
C. Make good use of technology
D. All of the above.

26.2.4. Managing People in Relation to Time Management


Stephen Covey outlines four generations of people in relation to time management. Managers should
identify which generation individuals in the workforce are at and train and develop them to mature to a
higher generation to improve time management. Individuals should also be made aware of the generations
so that they can aspire to move from one generation to another:

Generation Subordinate Explanation


First Reminders Subordinates keep lists and notes here. Items that are not done by the
end of the day will be transferred to the next day’s list.
Second Planning and Subordinates use calendars and appointment books. This can also be
preparation done on a computer. This generation plans, prepares, and schedules
future appointment and sets goals.
Third Planning, Subordinates tend to use detailed forms of daily planning on a computer
prioritising or on a paper – based organiser. This approach implies spending some
and time in clarifying values and priorities.
controlling
Fourth Being Subordinates distinguish clearly between urgency and importance. The
efficient and point here to note is to not ignore urgent things, but to embrace
proactive important things without waiting for them to become urgent.

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26.3 Role of Information Technology in Improving Personal Effectiveness


Learning Outcome (ACCA Study Guide Area E, Topic E1c):
Describe the role of information technology in improving personal effectiveness.

Information technology (IT) is the term used to label the subject area in which technology is used to transfer
information quickly and efficiently to users. It is a very broad definition that can be applied to almost any
device that transmits information to its user.

IT either helps them to perform their tasks faster and/or more accurately thereby helping them to increase
their personal effectiveness.

There are numerous devices in existence today that fit this requirement. Common types include:

 Ordinary everyday devices such as calculators that have become so common that they are no
longer thought of as technology.

 Computers or PCs and various software programmes such as word processors and spreadsheets
that enable people to perform various office functions more quickly and efficiently.

 The Internet, which allows individuals immediate access to wide sources of information and data,
thereby quickening and improving the decision-making process. It also allows individuals to use
tools such as videoconferencing (or skype) and employees can also do homeworking or remote
working.

 E-mail and smart phones that allow individuals to interact with others instantaneously. smart
phones have evolved tremendously, and it is not only just a communications tool anymore. It has
integrated computing capabilities that allow individuals to be accessible to work and for work
anywhere.

 Personal planners and programmes that help individuals map out, plan and schedule their days’
activities.

 Specialised software programmes such as Microsoft Project that has coordinating tools and Gantt
Chart that help individuals when they are managing project and performing a specific function.

Check understanding

1. With the investment in system and technology, which of the following can be used as terms to
describe people who no longer need to go into a centrally located office to do their work, usually
because of advances in technology?

A. Homeworkers
B. Teleworkers.
C. Distance workers.
D. All of the above.

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2.The advancement in technology especially the internet, has allowed employees to collaborate on
work from any location, across different time zones and national borders. What is regarded as the
defining feature of a dispersed collaboration apart from the use of communication technology

A. Each work group has its own task to complete


B. Each colleague does not work face-to-face
C. Colleagues are spread across different locations
D. Dispersed collaborations lack the social cues that profile traditional working relationships

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26.4 CONSEQUENCES OF INEFFECTIVENESS AT WORK


Learning Outcome (ACCA Study Guide Area E, Topic E2a):
Identify the main ways in which people and teams can be ineffective at work.
Explain how individual or team ineffectiveness can affect organisational performance.

26.4.1 Ineffectiveness At Work


Ineffectiveness at work can be caused by either systems or people. Most of the problems are caused by
people and teams.

The following are some of the reasons:

Objectives that are Where objectives are:


not SMART  Ambiguous
 Does not have a clear measurable outcome that can be used as a
performance control measure.
 Not achievable and employees are demotivated Not relevant to what the
employees are doing and they see no reasons why they need to work
effectively towards it.
 If it not time bounded, scope of work will creep and costs may escalate.
Organisation Depending on the environment and the tasks that are performed in the
Structure That Inhibits organisation, individuals and teams may become ineffective at work if the
Effectiveness organisation structure is not suited for the task, people and the environment.
Problem If Lack of Slow in making decisions and decisions made are not effective.
Effective Warnings of trouble not received from subordinates.
Communications Control becomes difficult.
Tools Division in management teams.

Lack of Coordination This breaks down the purpose of having an organisation as an organisation is
supposed to be a social arrangement that has a collective goal. If there is lack
of coordination, synergies will not be achieved.
Lack of Clear Policies Employees are unclear of what are the policies and decisions are made without
a clear guidance. Although autonomy should be encouraged but without a clear
policy to guide individuals and teams, decisions made may not be congruent
with the objectives of the organisation, causing ineffectiveness.
Lack of Proper If the organisation does not have proper sequence of steps or procedures, work
Procedures will not be standardised, and it will cause issues such as duplication or work and
work that is redundant. It only builds up wastes and causes bottlenecks. No
continuity of work as no proper procedures to guide new employees. Thus,
benefits of specialisation will be lost.

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Procedures That Are Formalising procedures involves a lot of resources especially the manager’s
Too Rigid time and money. The benefits might not always justify the cost especially if the
business volume is relatively small. The advantage of flexibility is lost as it may
be sensible to allow employees some flexibility when performing their tasks.
Loss of creativity. Non-responsive to customer and environmental changes.

Bad Team Dynamics Issues such as infighting and groupthink can cause ineffectiveness. Teams that
are set up without proper consideration of recommendations by Belbin and
Tuckman would cause teams to be ineffective. It is important to set up a team
made up of individuals that will complement each other, and they should also
be given time to form, storm, norm and perform.

26.4.2 Effect of Individual or Team Ineffectiveness on Organisational Performance


In an organisation, individuals and teams are the basic performing units. If the individuals and teams do
not perform effectively, it will lead to the organisation not performing as well.

Teams on the other hand are supposed to consists of different individuals with unique strengths and
weaknesses, where by virtue of being in a team would allow them to cancel off their weaknesses and make
their strength more relevant and effective towards the achievement of the organisation’s objectives. If a
team is not formed properly and is not effective in what it does, it will affect the organisation’s
performance.

Check understanding

1. Team ineffectiveness can be increased by all these elements, except…


A. Unclear understanding of team timing
B. Ignoring ineffective team processes
C. Developing and reinforcing various group norms
D. Attention to team tasks

2. Balancing job between the needs of the organization and the needs of a team is not easy. The main
problems resulting in ineffective work include unequal participation between workforce and distorted
communication.
This statement is TRUE or FALSE?

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CHAPTER 27: COMPETENCE FRAMEWORKS AND PERSONAL DEVELOPMENT

Learning Outcomes

At the end of the chapter, you should be able to:

TLO E3a. Describe the features of a ‘competence framework’.

TLO E3b. Explain how a competence framework underpins professional development needs.

TLO E3c. Explain how personal and continuous professional development can increase personal
effectiveness at work.

TLO E3d. Explain the purpose and benefits of coaching, mentoring and counselling in promoting
employee effectiveness.

TLO E3e. Describe how a personal development plan should be formulated, implemented,
monitored and reviewed by the individual.

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27.1 Competence Framework


Learning Outcome (ACCA Study Guide Area E, Topic E3a):
Describe the features of a ‘competence framework’.

27.1.1 Competency
A person is said to be competent when it is observed that he or she has the ability to complete a specific
task efficiently and successfully.

The competencies include skills, knowledge and attitude expressed in visible behavioural terms that a
jobholder must have to perform effectively; and they are demonstrated to an agreed standard,
contributing to the overall objectives of an organisation.

Check understanding

Which of the following is the definition of competence?

A. All of the experiences collected over a lifetime.


B. The ability to monitor one’s behaviour as it unfolds.
C. A process whereby humans collectively create and regulate social reality.
D. The discriminatory response of an organism to a stimulus.

27.1.2 Types of competencies


Three different types of competencies:

Behavioural Ability to relate well with others

Occupational What people have to do to achieve results

Generic Applies to everyone e.g. adaptability and initiative

Professional competency is defined as:

The ability to perform a work role to a defined standard with reference to real working environments (IFAC,
2001).

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Competency Frameworks

Competency frameworks are a benchmarking tool for professional bodies to ensure that its members have
relevant and up-to-date skills to do their job competently and effectively.

Government agencies have been using competency frameworks (occupational standards) as a basis for
consistent and flexible qualification frameworks to ensure that those qualified are suitable to and can
contribute at work.

In an organisation competency framework are used in the areas of:

 Recruitment and selection


 Training and development
 Performance appraisals
 Rewards management
 Succession planning

Check understanding

1. The term competence refers to the ability to transform skills into result-oriented actions in a work
setting. Personal characteristics required to complete tasks in a given job would be:

A. Work-based competence.
B. Occupational competence.
C. Behavioural competence.
D. Generic competence.

2. Work-based competences refer to performance expectations at workplace which must be attained.


(True / False)

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27.2. How A Competence Framework Underpins Professional Development Needs?


Learning Outcome (ACCA Study Guide Area E, Topic E3b):
Explain how a competence framework underpins professional development needs.

For professional accountants, its competency framework was developed by the International Federation
of Accountants (IFAC) and it is used by all the accounting bodies under IFAC for the purpose of guiding
them in education and training practice.

IFAC has specified competences required in professional accountants and there are five broad sets of skills
require:

1. Intellectual skills
2. Technical and functional skills
3. Personal skills
4. Interpersonal and communication skills
5. Organisational and business management skills

27.2.1. Benefits of Professional Competency Framework


Diagram 28.2.1 Benefits of Professional Competency Framework

27.2.2. Developing A Competency Framework


The development of a competency framework requires a process of:

1. Environmental analysis: A detailed analysis of the environment in which the professional operates
2. Identifying the key roles and responsibilities and sub-dividing these roles into tasks.
3. Specifying the attributes required for these tasks to be completed to a defined standard.
4. A set of defined standards for the identified tasks can be developed which are measurable and
verifiable.

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The measures used for assessing competence can include

 On-the-job tests,
 Observation,
 Simulations, and
 Written tests.

Check understanding

Which of the following statements is true about competence?

A. If a person has process competence, he or she will automatically have performative competence.
B. Each person must choose between process competence and performative competence; it’s
impossible to have both.
C. Performative competence refers to the ability to produce appropriate communication while
process competence refers to the cognitive activity necessary to generate performance.
D. Performative competence refers to the ability to pretend to be someone you aren’t.

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27.3 Personal and Continuous Professional Development


Learning Outcome (ACCA Study Guide Area E, Topic E3c):
Explain how personal and continuous professional development can increase personal effectiveness at
work.

Development involves training and learning that will allow an individual to gain better working experiences
for the future through a system of guidance and support.

There are different approaches to development and they are as follows:

27.3.1. Personal Development


Personal development programmes are designed to improve the individuals’ job management and
personal well – being and it allows members to be more rounded and flexible in adapting to changes. It
fosters employee satisfaction, commitment and loyalty.

Learning opportunities may include courses such as time management, stress management, learning how
to be assertive and motivation.

Personal development implies a wide range of activities with the objectives of:

 Improving performance in an existing job;


 Improving skills and competences, perhaps in readiness for career development or organisational
change;
 Planning experience and pathways for career development and/or advancement within the
organisation;

27.3.2. Continuous Professional Development (CPD)


An individual who is pursuing a profession such as an accountant, doctor, engineer or architect; has to go
through a system of education training as well as practical experience exposure.

As a professional one of the key ethical principle that he or she has to uphold is Professional Competence
and Due Care. They are obliged:

 To maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service; and
 To act diligently in accordance with applicable technical and professional standards when
providing professional services.

The maintenance of professional competence requires a continuing awareness and an understanding of


relevant technical, professional and business developments. Continuing professional development enables
a professional accountant to develop and maintain the capabilities to perform competently within the
professional environment.

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27.3.3. Management Development


This involves the realisation and development of the potential of suitable candidates for managerial
positions and leaders in the organisation. It also attempts to improve managerial effectiveness through
learning programmes that are planned such as job rotations, mentoring and education programmes e.g.
an MBA.

Check understanding

Improving current and future management performance is called

A. job rotation
B. job training
C. lifelong learning
D. management development

27.3.4. Career Development


An individual’s career can be planned and developed through a path that offers opportunities for higher
positions in the organisation. It involves a detailed analysis of the individual’s potential and how he/she
can be groomed towards a career goal and suitable training programmes and learning opportunities can
be used.

Check understanding

Peter Honey and Mumford defines ‘an attempt to improve managerial effectiveness through a planned
and deliberate learning process’, which include development of leadership skills in preparation for
increasing managerial responsibility, as

A. Career development.
B. Professional development.
C. Management development
D. Personal development.

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27.4. Purpose and Benefits of Coaching, Mentoring and Counselling


Learning Outcome (ACCA Study Guide Area E, Topic E3d):
Explain the purpose and benefits of coaching, mentoring and counselling in promoting employee
effectiveness.

27.4.1 Coaching
Coaching is a process of helping another individual to improve awareness, to set and achieve goals in order
to improve a particular behavioural performance.

It involves improving a person’s skills in doing a particular task. It can extend the depth and range of an
employee’s knowledge and skills very quickly and can be used to introduce new techniques or to replace
staff.

Coaching represents the most common type of “on-the-job” training where an employee learns his new
job by actually doing it. A more experienced employee or supervisor will train the employee on what the
job’s requirements and functions are, as well as on how to perform the various functions. The coaching
technique is used throughout all levels of the organisation.

Basic Steps to Coaching:

Diagram 28.4.1 Basic Steps to Coaching

Benefits of Coaching:

 It is a relatively inexpensive way of training an employee for a new position (regardless of the level
of the position).
 The employee is learning whilst he is working.
 The employee gets immediate feedback on his performance.
 It is an effective method of training evidenced by its widespread use

27.4.2 Mentoring
J. Newstrom and K. Davis define a mentor as a role model who guides another employee (a protégé).

Mentoring happens when one person offers help, guidance, advice and support to facilitate learning of
another. It is an approach to management and it involves shaping an individual’s beliefs and values in a
positive way. It is often a longer-term career relationship between someone who is very experienced and
the learner.

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Mentors are usually older and more experienced members of an organisation. Their purpose is to help
younger, less experienced members of the organisation in their career paths. Organisations can either
formally assign a protégé to a mentor or allow them to each seek out their own mentor.

Role of A Mentor:
Diagram 28.4.2 Role of A Mentor

Check understanding

__________is possibly an experienced person, teacher, counsellor, role model or even a motivator
who fosters growth in the individual’s personal life and career besides building a long-term
relationship?

A. Coaching.
B. Mentoring.
C. Counselling.

Characteristics of A Mentor:
 Support their protégés throughout the course of their careers.
 Help the protégé develop interpersonal and work skills.
 Give technical, ethical and general business guidance and practical support and advice.
 Be an impartial sounding board (Therefore there are usually not the protégé’s immediate
superior).
 Provides continuous personal support and motivation.
 Sound knowledge and understanding of the company and its business and how different
individuals learn.
 Credible and willing to share experiences.
 Challenges and helps others to learn from their experience and actions.

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Benefits of Mentoring:
 Increased loyalty from protégés to the organisation.
 Increased efficiency and productivity from protégés.
 Better succession plans and procedures for the organisation.
 Enhances knowledge of the protégé.
 Covers not only on current job functions.
 It builds a sustainable partnership between the mentor and the protégé.
 It creates a psychosocial function as well and builds a sense of acceptance for the protégé.
 It offers counselling and friendship to the protégé.

27.4.3 Counselling
Counselling is a purposeful relationship where one person helps another to help him/herself.

It involves the discussions an employee will have with another individual in regard to a problem he or she
is facing. These problems are normally emotional and can be work related.

The conversations or discussions between a counsellor and an employee (or counselee) are usually kept
confidential. The aim of counselling is to help employees overcome any emotional problems they are
experiencing which may also be affecting their work performance.

Characteristics of A Counsellor:
 Observant
 Sensitive
 Empathetic
 Impartial
 Discreet

During the process of counselling, the counsellor has to involve adopt active listening, and ask open
questions.

Benefits of Counselling
Employer Employee
Enable employer to have workforce with more Help employees to explore his or her thoughts,
stable mental health. feelings and behaviour.

Demonstrate to employees that they are valued as Prevent under-performance.


assets.

Show employer’s commitment.

Counselling could be directive or non-directive. The approach adopted depends on the issues involved.

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Check understanding

Effective counselling can prevent _ of an employee, thus reducing labour turnover and lowering
absenteeism rates.

A. Encouragement.
B. Underperformance.
C. Confidence.

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27.5. Personal Development Plan


Learning Outcome (ACCA Study Guide Area E, Topic E3e):
Describe how a personal development plan should be formulated, implemented, monitored and reviewed
by the individual.

A personal development plan (PDP) is a type of action plan that an individual write to chart out her personal
development path. It helps the individual to visualise the development he or she wants to make and to
track the progress that he or she is making in this direction.

The individual may set stretching goals that may challenge the individual to better performance and reach
greater heights in his personal or career life.

These plans help individuals to identify what knowledge and skills they need to learn and develop in order
to achieve their ambitions.

A PDP basically consists of a person identifying the following:


Where he presently is? Example: in terms of his current job and future prospects
Where he would like to be? Example: in terms of what job or career he would like to have
How he can get there? Example: in terms of what new knowledge, expertise or skills he must
acquire

A PDP would have elements that will help an individual to develop the following skills and with the objective
or personal or career development:
 Specialists Skills: The ability to handle specific tasks
 Manual Skills: Involving the use of hands and techniques
 Intellectual Skills: Improving cognitive thinking skills such as creative and thinking
 Mental Skills: Such as analytical skills
 Perceptual Skills: The ability to see things beyond the present
 Social Skills: Interpersonal skills that will allow the individual to develop better relations with
people.

The stages of a personal development plan are:


Stage 1: Formulation
This is the first stage in the writing of a PDP. It involves an individual assessing his present position by
assessing the individual’s strengths and weaknesses:
● What am I presently doing? (Example: what job)
● What future prospects do I have? (Example: career advancement possibilities)
● What knowledge, expertise and skills does my job require?
● What additional knowledge, expertise and skills do I possess?
● What are my other strengths? (Example: interpersonal skills)
● What are my present weaknesses? (Example: lack of IT skills)
● What are my objectives or ambitions? (Example: to be in management in two years).

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A skills analysis can be done using the following diagram. The use of this analysis allows the employee to
incorporate what he or she likes to do.

The second step in the formulation process involves assessing what the individual wants his or her future
position to be.
 What job or career would I like to be in?
 What knowledge, expertise and skills would this new position require?
 Which of my current strengths would this job utilise?
 Which of my present weaknesses would hinder me? The third step involves identifying the
“learning gap”.

A recommended approach to use at this stage is to divide the learning/development into short, medium
and long-term objectives.

Check understanding

1. Chun Hui has been working with an organisation for almost five years with no change of job. He
needs a personal development plan. What is the first thing he should do?
A. A skills analysis.
B. Set SMART goals.
C. Identify future changes in his current role.
D. Develop a detailed plan to gain more learning experiences.

Stage 2: Implementation
At this point an individual planner has identified the various activities he must engage in to acquire the
additional knowledge, expertise and skills he wants. Furthermore, he has categorised these objectives into
short, medium and long-term time frames.
He now needs to set a time limit or deadline by which he must achieve each of these objectives as well as
a date by which he must begin working towards the objectives. Once this is done he can begin
implementing his PDP.

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Stage 3: Monitoring
It involves an individual routinely looking at the time frames he has set for himself and “checking off” the
ones he has achieved. A personal journal that documents the progress can be used.

Stage 4: Review
An individual examines how many of his objectives he has accomplished after a certain time interval
(Example: 6 months).
If a significant number of objectives have not been accomplished, then the individual needs to reassess
whether the time targets he has set for himself are realistic or not. If the previously set objectives are then
thought to be unrealistic, the individual needs to amend or create a new PDP for himself.

Check understanding

2. Attending a training course on the latest financial standards is an example of personal


development. (True / False)

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CHAPTER 28: CONFLICT

Learning Outcomes

End the end of the chapter, you should be able to:

TLO E4a. Identify situations where conflict at work can arise.

TLO E4b. Describe how conflict can affect personal and organisational performance.

TLO E4c. Identify ways in which conflict can be managed.

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28.1 Conflict at Work and its Effect on Personal and Organisational Performance
Learning Outcome (ACCA Study Guide Area E, Topic E4a & E4b):
Identify situations where conflict at work can arise.
Describe how conflict can affect personal and organisational performance

What is Conflict?
Conflict is any differences of interests between individuals or groups caused by behaviour that hinders the
achievement of goals of another person or group.

Conflict can exist at three levels:

 Perception: realisation that conflict exists,


 Feelings: anger and mistrust, and
 Behaviour: reaction from perception and feelings.

Types of Conflict
Types Explanation Consequences
Destructive Destructive conflict is damaging to working ● Distraction from the
relationships, and blocks achievement of objectives
organisation goals ● Splits within groups
● Defensive behaviours
It is caused by:
● Group to disintegrate
● Poor or limited communication
● Hostility
● Poor coordination
● Status barriers
● Workload issues

Constructive Constructive conflict is not personality-based, ● Challenges obsolete ways of


beneficial to the organisation, and there is no doing things
legacy of bad feelings. ● Stimulates change and
innovation
It promotes better understanding and builds
● Defines responsibility and
relationships after the conflict.
authority limits more closely,
as people become more
territorial of their roles and
responsibilities
● Provides a fresh approach,
often broadening the range
of alternatives for dealing
with a problem and etc.

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Check understanding

What is meaning of constructive conflicts

A. there is a clear winner and a clear loser


B. it prevents all new conflicts
C. both people get what they want
D. it helps to build new insights and establishes new patterns in a relationship

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28.2 Managing Conflict


Learning Outcome (ACCA Study Guide Area E, Topic E4c):
Identify ways in which conflict can be managed.

How Conflicts can be Avoided


Conflicts can usually be avoided if the signs of conflicts and the reasons are known early and addressed
promptly.

Symptoms or Signs of Conflict


Conflict can be manifested in many ways and the following are some of the signs or symptoms of conflict:
● Absenteeism
● Poor time-keeping
● Refusal to obey instructions
● High labour turnover

Causes of Conflict
Charles Handy suggested that conflicts usually stem from two issues:
1. Differences over territory, and/or
● Violation of territory.
● Overcrowding (too many people for the amount of work or responsibility).
● Territorial Jealousy.

2. Differences over objectives and ideologies.


● Overlapping of formal objectives.
● Overlapping of role definition.
● Contractual relationship is unclear.
● Existence of concealed objectives.
Therefore, it can be seen from the causes of conflict that if objectives, roles and responsibilities are made
clear from the start conflict can be avoided. As such, management has to avoid the situations as suggested
by Handy.

28.2.1. Ways in which Conflict can be Resolved or Referred


The following are some of the methods or solutions of strategies on how conflict can be managed:

1. Communicate
Direct and informal discussions to solve issues such as:
● Personality or style clashes
● Incompatible working styles
● Excessive work demands
● Dissatisfaction with authority or own status.

2. Separate
This is used especially for personality clashes. It may be easier to just walk away than to confront.
May be better to involve formal proceedings and have a third party mediate.

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3. Avoidance
● Conflict is avoided by “sweeping it under the carpet”.
● Pretend it does not exist.
● This method may not be effective because bad feelings may bottle-up and may explode
eventually if conflict is not resolved.

4. Suppression
Good method for minor conflicts where the issue is smoothed over to preserve working
relationships.

5. Power Strategy or Dominance


● Needs adequate real power but one party will lose.
● Application of power or influence to settle the conflict.
● May have lingering resentment and hostility as it creates a win-lose situation.

6. Defuse
● Calming everyone down to buy some time.
● Problem not solved and may still reappear and get worse.

7. Compromise
● Bargaining, Negotiating, Conciliating.
● Parties involved have given something up and therefore neither party is completely happy.

8. Integration/collaboration
Emphasis to be put on the task and individuals must accept the need to modify their views for the
task’s sake, and group effort must be seen to be superior over individual effort.

9. Confront the problem


● Bringing it out and it may be difficult.
● High-risk strategy but can resolve problem
● By negotiation or by power.

Check understanding

1. Yee Ming Sheng is having difficulties with conflict in the team, due to 'clashes' or incompatibilities in
the personalities of two of his staffs. Yee Ming draws up an alternative for managing the problem.
Which option, from the following alternatives, would be the least practicable?

A. Educate the members about personality differences


B. Encourage the members to modify their behaviours
C. Encourage the members to modify their personalities
D. Remove one of the members from the team

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2.During the “win-lose” situation, the conflict management style that is used by people is labelled
______________________

A. a collaboration style
B. an aggressive style
C. a competitive style
D. a confrontational style

28.2.2. Grievances
Grievances happen when there is something in the work situation which employees feel is unfair, wrong,
unjust, or unreasonable. A grievance may become a complaint, which expresses employee dissatisfactions,
or a dispute, which is a formal expression of dissatisfaction at organisation level.

As it is a formal process, it protects both parties and it is usually fair as it is applicable to all employees. The
person who raises the complaint may have to fill in forms and a process of arbitration may follow.

Grievances at work, about work.


Usually revolve around the following issues:
Pay Unequal pay, unfair payment
Job Excessive work, Unequal distribution of work, inhumane deadline or targets
Job Security No contract of employment, no job description
Physical Working Lack of ergonomics, bad cleanliness, restricted space, noise
Conditions
Social Environment Unfair treatment, favouritism, Nepotism

Handling Grievances
Stage 1 ● Grievances should be raised with the employee’s immediate superior.
● IF cannot be resolved here, proceed to stage 2
Stage 2 ● Arrangement to discuss with senior manager will be made.
● Senior manager may request for HR to be present.
● The two parties involved can be accompanied by a friend.
● IF not settled at this stage, will move to Stage 3
Stage 3 ● Senior manager will refer case to ACAS (The Advisory, Conciliation, and
Arbitrations Service).
● At this stage, it will go through the process of arbitration.
● Decisions for the arbitrators are final and binding on both parties.
Stage 4 ● IF conciliation does not take place in stage 3, and trade union is involved.
● It will be escalated into a DISPUTE.

ACAS is an independent UK organisation and has the objective of improving employment industrial
relations which will lead to better organisations and working life. It is devoted to preventing and resolving
employment disputes.

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28.2.3. Discipline
Discipline can be defined as control or order exercised over people.

Sources of discipline:
● Accepted behavioural codes, and
● Legally enforced regulations.

Three approaches to bring about desired discipline among staff


Positive discipline Systems, procedures that employees have to follow.
Negative discipline A promise of sanctions (punishment). Results in disciplinary action:
a. Punitive - offender must be punished.
b. Deterrent - Offender who is punished becomes a reminder to others not
to break discipline.
c. Reformative - calling attention to the offence, so that it will not happen
again.
Self-discipline ACAS guidelines to discipline. The procedures are:
1. Informal talk
2. Oral warning
3. Written or official warning
4. Suspension
5. Demotion
6. Discharge

28.2.4. Negotiation
Purpose of Negotiation
● Try to achieve a positive outcome.
● Need to step back, look the problem objectively, identify the reasons of conflict, and find common
ground.
● Use of language tactfully.
● Ultimate goal is to have both parties are satisfied with the outcome.

Managing Conflict Using Negotiation


Ask questions
● Find out the other side’s interests and concerns.
● Understand the other side and provide new ideas for mutual benefit. Gauge the opponent’s
approach: Win-win or win-lose?

Achieve a Win-Win Situation


Both parties cooperate and seek solutions to benefit both.

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Respect and Trust


● Reduces defensiveness, and increases the sharing of useful information. People are more generous
toward people they like or trust.
● An attitude of friendliness and openness generally is more persuasive than an attitude of
deception and manipulation.
● Be interested in the other side’s concerns.

Outcomes of Negotiations
● Win-win: both parties satisfied with outcome, working out the problem through compromise and
this should always be the first choice of solution
● Win-lose: one party gets what he wants and the other do not
● Lose-win: the first party does not get what he wants but the other does
● Lose-lose: neither party gets what it wants (also part of compromise)

Check understanding

In the process of managing conflicts at work place, which of the following approaches will maximise the
prospect of consensus?

A. Acceptance
B. Avoidance
C. Assertiveness
D. Negotiation

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CHAPTER 29: COMMUNICATING IN BUSINESS

CHAPTER 29: COMMUNICATING IN BUSINESS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO E5a. Describe methods of communication used in the organisation and how they are used.

TLO E5b. Explain how the type of information differs and the purposes for which it is applied at
different levels of the organisation: strategic, tactical and operational.

TLO E5c. List the attributes of good quality information.

TLO E5d. Explain a simple communication model: sender, message, receiver, feedback, noise.

TLO E5e. Explain formal and informal communication and their significance in the workplace.

TLO E5f. Identify the consequences of ineffective communication.

TLO E5g. Describe the attributes of effective communication.

TLO E5h. Describe the barriers of effective communication and identify practical steps that may be
taken to overcome them.

TLO E5i. Identify the main patterns of communication.

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29.1 Methods of Communication


Learning Outcome (ACCA Study Guide Area E, Topic E5a):
Describe methods of communication used in the organisation and how they are used.

29.1.1. Define Communication


G. Moorhead and W. Griffin define communications as the social process in which two or more parties
exchange information and share meaning. It is the transmission or exchange of facts, ideas, opinions or
emotions by two or more people.

Effective communication between employer and employees is essential for an organisation if it hopes to
achieve its long-term objectives.

29.1.2. The Three Main Purposes of Communication in an Organisation


For Its Employees to:

 Coordinate actions, tasks and or activities that require joint efforts.


 Share information.
 Express themselves (with regard to their views, feelings and opinions).

29.1.3. Methods of Communication


1. Conversations/Meeting: Face-to-face meetings where people can get immediate feedback. Good
for individual discussion and relationship building.
2. Team briefings: Communication is from one to many where there is a more cohesive message sent
and message does not get distorted. It is more personal compared to other methods such as
memos and emails. Good for achieving a consistent message to a small number of people.
3. Presentations: One to many where visual aids can be used. Good for the illustration of a course of
action or concept.
4. Telephone: Over telecommunications channel over remote locations using either land lines or
mobile communications. Good for more personal, urgent, less detailed discussion, and building
relationships

Check understanding

Which of the following methods of communication is the most effective?

A. presenting written material along with film projector


B. multi-media method
C. presenting written material
D. cannot be determined

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29.1.4. Factors That Affect the Choice of an Appropriate Medium for Communication
 Speed. The need to disseminate or spread information widely and quickly. A phone call, for
example, is quicker than a letter.
 Complexity. A written message, for example, allows the use of diagrams, figure working and time
for perusal at the recipients own pace and repeated if necessary.
 Need for a written record. For example, for the confirmation of business or legal transactions.
 Need for interaction. Where concurrent feedback is required for immediate exchange of
information or questions and answers. Face-to-face and phone discussions are often used to
resolve conflicts, solve problems and close sales, for these reasons.
 Confidentiality. Some information has to be coded technically through the process of encryption
and decryption to ensure that the message is kept confidential.
 Cost. The best possible result at the least possible price.

Check understanding

Eunice Dablo is a sales representative who frequently visits customers in their homes and places of
business to present the latest products. She also takes orders (where inventory is available). Which of
the following technology tools will help increase her effectiveness directly?

A. Computer telephony integration


B. Asymmetric Digital Subscriber Line (ADSL) broadband
C. Electronic Data Interchange (EDO)
D. Mobile communications

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29.2 Type of Information and The Purposes for Which It Is Applied at Different Levels
Learning Outcome (ACCA Study Guide Area E, Topic E5b):
Explain how the type of information differs and the purposes for which it is applied at different levels of
the organisation: strategic, tactical and operational.

Information Systems (IS) caters to the different levels of management and at different levels of
management the decisions taken have different characteristics.

The following table illustrates the different types of decisions made at the respective levels of
management:

Level Decision
Strategic level Unstructured Decisions

(CEO, Managing Director)  Problems included:


 Not easy to analyse
 No logical underlying solutions
 Unique and non-programmable
 Sets the long-term objectives of an organisation
 Information for decisions are unpredictable
 No fixed methodology to solving problems

Tactical level Semi-structured Decisions

(Head of Department /  Information requirements and methodology known


 Some level of discretion is needed
Department managers)
 Concerns the effectiveness of the organisation
 Decisions on the use of resources in the organisation by the
respective functions of the organisation

Implementation of policies and procedures that will help the organisation


to achieve the long-term objectives set at the strategic level.

Operational level Structured Decision

(Supervisory / front-line  Problems include


managers) o Defined number of elements.
o Can be solved systematically.
 Structured decisions can be made by the system
 Structured and programmed decisions
 Concerns the efficiency of the organisation

Decisions on day-to-day operations of the organisation.

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The following are the examples of the different types of information systems used by the respective level
of management:

Strategic Level
The management at the Strategic Level is involved in Strategic Planning and they are mainly the Board of
Directors, Chief Executive Officers and General Managers. They use Executive Information Systems (EIS) to
assist them in making unstructured decisions.

Check understanding

1. Strategic information is important for


A. Day to day operations
B. Meet government requirements
C. Long range planning
D. Short range planning

Tactical Level
The management at the Tactical Level is involved in Management Control and Tactical Planning and they
are mainly the functional managers such as the Marketing Manager, Accounting and Finance Managers
and the Production Managers. They use Management Information Systems (MIS) and Decision Support
Systems (DSS) to help them in making semi-structured decisions.

Check understanding

2. Tactical information is important for managers in an organization for …………………..


A. Day to day operations
B. Meet government requirements
C. Long range planning
D. Medium range planning Operational Level

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The management at the Operational Level is involved in Operational Planning and Control and they are
mainly the Supervisors and Junior Managers. They use Transaction Processing System (TPS) to assist them
in making structured decisions.

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29.3 Attributes of Good Quality Information


Learning Outcome (ACCA Study Guide Area E, Topic E5c):
List the attributes of good quality information.

The objective of information systems is to produce good information that is of high quality and useful to
its users.

The characteristics of good information can be remembered with the mnemonic ACCURATE and they are
as follows:

Accurate Information provided should be correct and reliable and is from a dependable
source
Complete Information is complete and there are no missing details important to its user

Cost Effective Information should not cost more to obtain than the benefit derived from it

Understandable Users must be able to understand what is presented

Relevant Information should be relevant to the needs of the organisation and the individual
Adaptable Information should be tailored to the needs and level of understanding of its
intended users
Timely Information should be made available on time for decisions to be made

Easy to Use It should not be cumbersome to use and should be presented clearly through the
correct channels of communication.

Check understanding

1. The mnemonic which represent qualities of good information are ... (choose any two)
A. Relevant
B. Comprehensive
C. Accurate
D. Authoritative

2. Match quality of information and how it is ensured using the following list:
Quality How It is Ensured
(i) Accurate (iv) Include all data
(ii) Complete (v) Use correct input and processing rules
(iii) Timely (vi) Include all data up to present time

A. (i) and (v)


B. (ii) and (vi)
C. (iii) and (vi)

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29.4 Simple Communication Model


Learning Outcome (ACCA Study Guide Area E, Topic E5d):
Explain a simple communication model: sender, message, receiver, feedback, noise.

Effective communication is a two – way process, often shown as a ‘cycle’. Signals or messages are sent by
the communicator and received by the other party who sends back some form of confirmation that the
message has been received and understood.

The following diagram illustrates the communication process.

There are 6 elements of the communications process:

Sender Initiates the communication process and decides on the meaning, then encodes
a message.
Message( encoder) Information that the Sender wants to transmit.
Medium Means of transmitting the message to Receiver.
Receiver (decoder) Receives and decodes the message.
Feedback Reaction of the receiver, which indicates to the sender that the message has or
has not been received, understood and interpreted accurately.
Noise Anything in the environment that impedes the transmission of the message.

Types of Noises
 Physical noise: passing traffic or machinery operation,
 Technical noise: a bad internet connection or a poor telephone line,
 Social noise: differences in personalities, status or education, or
 Psychological noise: anger, stress or prejudice, which can distort what is heard.

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Check understanding

1. The third stage in the communication process is:

A. encoding the message


B. receiving the message
C. selecting an appropriate medium
D. formulating a response

2. Which of the following statements describes the correct sequence between sender and receiver within
the communication cycle?

A. Medium, encoded message, decoded message


B. Decoded message, encoded message, medium
C. Encoded message, medium, decoded message
D. Medium, decoded message, encoded message

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29.5 Formal and Informal Communication


Learning Outcome (ACCA Study Guide Area E, Topic E5e):
Explain formal and informal communication and their significance in the workplace.

29.5.1 Formal Communication


In an organisation, the organisation structure defines the lines of essential communication and it facilitates
the exchange of information regarding the operations of the organisation. The lines of communication are
crucial because it shapes the formal pathway for the sending and receiving of information.

Formal communication channels in an organisation may run in three main directions:

1. Vertical Channel:
This channel of communication follows the lines of authority of an organisation up and down the scalar
chain.

Downward Communication

It defines how executives and managers communicate with the employees who report to them or are under
their chain of command.

It is very common and takes the form of instructions, briefings, rules, and policies and the announcement
of plans, from superiors to subordinate.

Types of communication that will flow through this channel include:

 Executives describing the strategies and objectives of the organisation to their subordinates.
 Managers setting goals and targets for employees who work in their departments.
 Managers appraising the performance and work of their subordinates.

Upward Communication

This channel of communication represents the exact opposite to the downward flow of communication.
Subordinates communicate with their seniors using this channel.

It takes the form of reporting back, feedback and suggestions. Managers need to encourage upward
communication to take advantage of employees’ experience and knowhow and to be able to understand
their problems and needs in order to manage better.

Upward channels are normally much more rigid than downward channels of communication.

Types of communications that will flow along these channels include:

 Subordinates reporting progress they have made on various activities.


 Subordinates providing their viewpoints and/or suggestions to their seniors.

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2. Horizontal or Lateral Communication


This channel of communication is between people of the same rank, in the same section or department,
or in different sections or departments. Lateral communication channels are very important for multi –
department organisations.

They represent the way employees (holding the same rank) communicate with employees from other
departments.

Horizontal communication between ‘peer groups’ is usually easier or more direct than vertical
communication, being less inhibited by considerations of rank. Lateral communication can be formal or
informal.

 Formal. To co-ordinate the work of several people, and perhaps departments.


 Informal. To furnish emotional and social support to an individual.

They ultimately help an organisation to work and move forward in a single coordinated direction.
Therefore, most organisations also formalise these channels of communication.

Check understanding

All these are not an example of lateral communication, except?

A. A manager explaining new operational procedures to staff


B. Staff passing on to the supervisor the main points from a recent conversation with a customer
C. A committee coming together to review health and safety issues
D. During appraisal, a person receives feedback about his performance results

3. Diagonal Communication
This is interdepartmental communication by people of different ranks. Diagonal communication is evident
in the communication between departments in the technostructure, and the rest of the organisation.
Departments such as the Human Resources or Informational Systems, have no clear line authority linking
them to managers in other departments.

Since diagonal communication puts together the ideas and information of people in different functions and
levels, it facilitates co-ordination, innovation and problem solving. It also helps to avoid blockages and
speeds up decision-making.

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29.5.2 Informal Communication


Informal channels of communication are channels that are not consciously structured by management into
a fixed pattern. They are not established by the organisation. Instead, they occur spontaneously and are
used by employees to exchange ideas, information and their views with each other.

Communication in these channels is normally oral (rather than written as with formal channels). They are
as important as formal channels of communication to an organisation.

Formal communication channels represent the way the organisation would like its employees to
communicate. Informal channels represent the way employees like to communicate with each other.

1. The Grapevine Channel


Grapevine is a network of social relations that arises spontaneously as people associate with one another.
It may distort information but if used selectively can transmit information most efficiently where news is
required to travel quickly

The management may also use it to prep the subordinates or as a means of “testing the waters”.

The grapevine flourishes when there is:

 Lack of information and people fills up the gap.


 Insecurity in the situation.
 A personal interest in the situation.

2. Rumours
 Information transmitted may be true or false or some elements of both.
 It travels quickly and can be influential if it is important bad news.
 It can lower morale and disrupt work if it is not control especially if it concerns bad news of news
that is untrue.
3. Gossips
 Idle talk and often of little consequences but it can be hurtful and malicious.
 It can be a morale booster as it improves team relations by bringing in a personalising factor,
bringing members of a group closer together.
 An important indicator of employee concerns because if employees are unconcerned they will not
gossip about the matter.

Check understanding

Which of the following is not an element of communication through an informal organisational


network?

A. Selective
B. Accurate
C. Up-to-date
D. Fast

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29.6 Consequences of Ineffective Communication


Learning Outcome (ACCA Study Guide Area E, Topic E5f & E5g):
Identify the consequences of ineffective communication.
Describe the attributes of effective communication.

29.6.1 Ineffective communication


Ineffective communication affects the organisation and it disrupts the achievement of organisational goals.
The following are the effects of ineffective communication analysed based on the direction of the formal
flow of communication:

Lack of Downward Communication Consequences:


 Poor awareness of corporate objectives at lower management levels.
 Poor understanding of working instructions and responsibilities.
 Poor morale of assistant managers.

Lack of Upward Communication Consequences:


 Warnings of trouble not received.
 Benefits of creativity of subordinates lost.
 Subordinate participation limited or inhibited.
 Control becomes difficult.
 Introduction of change is difficult.

Lack of Lateral Communication Consequences:


 Division in management teams.
 Lack of co-ordination.
 Rivalry between departments.
 Lack of advice and involvement by staff specialists.

As discussed, the informal communication channels in an organisation are also an important element of
organisation communication. Therefore, if an organisation does not take advantage of this channel, it may
lead to the following issues:

 Individuals in the organisation do not get an overview of the organisation and coordination may
be a problem.
 Slows down the organisation, as formal channels can be rigid and this inhibits the individuals in
the organisation to adapt to changes and be flexible. Departments in the organisation may
become too self-serving.
 The organisation can be unsociable and individuals will eventually be reduced to only operators of
procedures.
 Stifles creativity and innovation.

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Check understanding

Poor lateral communication will result in which of the following?

A. Lack of direction
B. Lack of coordination
C. Lack of delegation
D. Lack of control

29.6.2 Effective Communication


Essentially, effective communication involves ensuring information that is transmitted is:

 Timely,
 Accurate, complete and to the point,
 Directed to the right people, and
 Understandable.

Effective communication should ensure the communication process:

 Adopts feedback, as it is important to know whether there is any communication breakdown.


 Should use more than one communication network, in case if one channel breaks down there are
still other networks to fall back on.
 Restrict the number of communication ‘links in the chain of communication’, because too many
channels may also cause information to be channelled to the wrong receiver or cause information
overload.
 Clarity of information should be ensured.

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29.7 Barriers of Effective Communication


Learning Outcome (ACCA Study Guide Area E, Topic E5h):
Describe the barriers of effective communication and identify practical steps that may be taken to
overcome them.

29.7.1 Communication Barriers


1. Common Communication Barriers
The following are some common barriers to effective communication:

 Distortion: The meaning of a message is lost in the coding or decoding stages.


 Noise: this refers to general interference in the environment of communication, which prevents
the message getting through clearly. This might be physical, technical, social or psychological
noise.
 Misunderstandings, due to lack of clarity or poor explanation.
 Non-verbal signs such as gestures or facial expressions may contradict the verbal message.
 Failure to give feedback.
 Overload: a person is given too much information.
 Differences in social, cultural or educational background.

Check understanding

1. The fault in communications process that leads to the meaning of the message being misunderstood is
known as……………

A. Feedback
B. Noise
C. Distortion
D. Disruption

2. Communication Barriers in relation to the Communication Channels


D. Fisher defines barriers to communication as obstacles that distort or block the flow of needed
information. It is important to note here that barriers do not completely stop the flow of communication
but do however transform the quality of communication (from effective into ineffective).

Fisher identifies two main barriers to communication that exist in organisations:

Barriers to downward communication


Downward communication can be a barrier when:

 It is a one-way flow of communication that typically provides subordinates with no means of giving
their feedback or responses.
 It is very often “multi-layered”. By this what is meant is that often this type of communication does
not directly flow from a senior employee to junior ones but instead through intermediaries of mid-
level employees.

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Steps that can be taken to overcome these barriers include:

 Senior employees should take steps to maintain regular contact with employees and ensure they
provide them with opportunities to give their feedback.
 Use multiple channels of communication including those that provide a mechanism for providing
feedback such as group and face-to-face meetings

Barriers to upward communication


The main barriers to upward communication flows include:

 Reluctance of subordinates to report any negative information or developments to their seniors.


 The structure of highly formal organisations that discourage subordinates from freely
communicating with seniors.

Steps that can be taken to overcome these barriers include:

 Senior employees should hold regular meetings with subordinates inviting their feedback (both
positive and negative).
 Senior employees should maintain “open door” policies that encourage their subordinates to
come to them with problems or negative news.

Check understanding

2. During the process of communication anything that stops information getting to its intended recipients
is considered barriers. Is this statement true or false?

Barriers to Lateral Flow


The main barriers to effective lateral communication include:

 Different perspectives and goals that exist between departments. These often lead to each
employee viewing and interpreting communication from only his (or his department’s)
perspective.
 Lack of organisation reward and recognition. Research has found that employees are evaluated by
most organisations on their ability to communicate vertically (both downwards and upwards) and
not laterally. Therefore, employees do not see an incentive for communicating laterally.

Steps that can be taken to overcome these barriers include:

 Ensure that all employees have a thorough understanding of the overall goals of the organisation
(especially those objectives that will require cross-departmental coordination to get achieved).
 Ensure that lateral departmental efforts are recognised and rewarded.

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Communication Barriers in relation to the Sender and Receiver


Apart from the issues related to the channels of communication in the organisation, the most common
causes of barriers to effective communication can usually be traced back to the sender and the receiver.

a. The Sender
Use of inappropriate / For instance, if the sender uses language that is too technical or the
ineffective language information he provides is too detailed, the receiver will not be able to
absorb the full meaning of the communication.
Selective content This is a common occurrence amongst subordinates who only want to
pass on positive news and developments when communicating to their
seniors. Obviously this represents ineffective communication as a
complete message or information is not being passed on.
Lost or distorted content This typically occurs when a sender does not communicate directly with
all intended receivers but uses intermediaries instead. Typically, some
content of the message is lost or distorted when it is being
communicated from one intermediary to the next.
Lack of communication skills Some individuals may not have the skills to communicate effectively. The
encoding process or the medium used for communication is incorrect or
the sender does not know how to read feedback sent by the receiver.

b. The Receiver
Selective interpretation This occurs when a receiver purposely interprets a message/information
to suit his purposes.
Preconceived notions This occurs when the receiver has an established opinion on either the
sender or the topic of message/information.

29.7.2 Overcoming Barriers


a. The Receiver and Sender
The receiver and the sender in the communication play a key role in ensuring effective communication.

The Sender has to be:

Clear He should clarify the purpose of the communication to the receiver.


Direct He should send information directly to the receiver whenever possible.
Relevant He should match the media to the message. For instance, highly formal
information should be communicated in written form.
Appropriate He should use language that is simple and easy to understand.
Furthermore, the style of language and communication should match the
level of understanding of the receiver.
For instance, the R &D manager when writing a memo to another manager
should take care to ensure that it is not too technical or detail-orientated.
Accessible He should encourage and be attentive to feedback from the receiver.

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The Receiver has to be:

Open-minded He should absorb the message/information being communicated, with an


open mind.
Communicative He should provide feedback showing he has understood what the sender
is trying to communicate.

b. Use of Good Interpersonal Skills


Interpersonal skills are skills used in interactions and relationships between two or more people. With
interpersonal skills, managers can better understand and manage roles, relationships, attitudes, and
perceptions when people are involved.

Interpersonal skills are needed to:

● Understand and manage the roles, relationships, attitudes, and perceptions operating in any
situation in which two or more people are involved, Communicate clearly with other people, and
● Achieve aims from any interpersonal encounter.

c. Listening Skills
Effective listening is important in communication because as part of the communication process, without
good listening skills the message may not be properly decoded and the message may be distorted by noise.

Good listening skills have the following characteristics:

 Receivers are prepared to listen and are interested.


 The receivers need to keep an open mind to ideas especially the key points.
 Listen critically by understanding the assumptions, omission and whether there is any biasness.
 Avoid distractions such as taking notes. However little note taking is needed to ensure key ideas is
not forgotten.

d. Use of non-verbal communications


Non-verbal communication is communication without words, or other than by words.

The purpose and use of non-verbal communication:

 To confirm or add to the meaning of our words;


 To give appropriate feedback to another communicator;
 To create a desired impression;
 To recognise people’s real feelings;
 To recognise interpersonal problems; and
 To modify communication/response strategy.

Be aware, though, that body language can also undermine the spoken message and show that people
believe the body language more than the words!

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If you can be aware of other people’s body language, and interpret its meaning, you can:

 Receive feedback from listeners and modify your messages accordingly;


 Recognise people’s real feelings when their words are constrained by politeness or dishonesty;
 Recognise interpersonal problems; and
 Read situations so that you can modify your communication/response strategy.

Check understanding

What are the factors which can badly affect listening?

A. message overload-excess of listened material


B. high speed of speaking
C. a sizable hearing loss-physiological problem
D. all of the above

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29.8 Main Patterns of Communication


Learning Outcome (ACCA Study Guide Area E, Topic E5i):
Identify the main patterns of communication.

Leavitt conducted an experiment on written communication among members in a group or team to


examine the effectiveness of these four networks. The results of his findings are as follows:

1. The Circle

In a circle pattern, each group member (or receiver) can only communicate with the person(s) adjoining
him. Therefore, in all probability the content of the communication from the sender will have changed by
the time the circle is “complete” and it is relayed back to her. Information may be distorted as the
information passes from one receiver to the next. This method has the slowest speed in solving problems.

2. The Chain

The chain pattern has the same method of communication and the same disadvantage of the circle pattern
as each group member (or receiver) can only communicate with the person(s) adjoining him. A further
disadvantage is that the sender receives no feedback.

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3. The Y

This pattern of communication is a derivative of the chain pattern. It shares the same disadvantages as the
circle and the chain and an additional disadvantage of having its three groups or employees being
completely isolated from each other. E.g. B, D and E are isolated from each other and the only means of
communication is through

4. The Wheel

This pattern of communication is cited as the most efficient communication method listed in solving
problems. This is mainly because the leader in the middle can communicate directly with each group
member. Decisions can be reached in the faster than other channels. However, it still has the disadvantage
of the fact that each group member (or receiver) can only communicate with the person(s) adjoining him.

Usually the person in the middle is the leader, which controls all communication. This method has the
fastest speed in solving problems.

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The following table summarises the Leavitt’s findings:

Leader Speed of solving problems Job Satisfaction


Circle None Slowest Highest

Chain C but less so compared to 3rd Fastest 2nd Highest


Wheel and Y

Y C 2nd Fastest 3rd Highest

Wheel C Fastest Lowest

Apart from the above networks, another common network used in organisations is the all channel network
which can be likened to the informal communication of an organisation.

Check understanding

1. Ray Shen is the leader of a virtual team which stays in contact via e-mail. Team members send all
messages to Ray Shen, who forwards them to the rest of the network. Which communication pattern
is reflected in this situation?

A. The circle
B. The wheel
C. The all-channel
D. The 'Y'

2. From the list below, which pattern of communication is the quickest way to deliver a message from
sender to receiver?

A. The circle
B. The chain
C. The wheel
D. The Y

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CHAPTER 30: FUNDAMENTAL PRINCIPLES OF ETHICAL BEHAVIOUR

CHAPTER 30: FUNDAMENTAL PRINCIPLES OF ETHICAL BEHAVIOUR

Learning Outcomes

At the end of the chapter, you should be able to:

TLO F1a. Define business ethics and explain the importance of ethics to the organisation and to the
individual.

TLO F1b. Describe and demonstrate the following principles from the IFAC (IESBA) code of ethics,
using examples.

i. Integrity
ii. Objectivity
iii. Professional competence
iv. Confidentiality
v. Professional behaviour

TLO F1c. Describe organisational values which promote ethical behaviour using examples.

i. Openness
ii. Trust
iii. Honesty
iv. Respect
v. Empowerment
vi. Accountability

TLO F1d. Explain the concept of acting in the public interest.

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30.1 Importance of Business Ethics


Learning Outcome (ACCA Study Guide Area F, Topic F1a):
Define business ethics and explain the importance of ethics to the organisation and to the individual.

Definition of Ethics

Ethics is about what is right and wrong, and it is a set of written and unwritten rules based on legality and
morality. It is associated with responsibility.

Definition of Business Ethics

Business Ethics is a branch of ethics, which examines the rules and principles within a commercial context.
It deals with the ethical responsibility of the business towards its shareholders, other stakeholders and
society.

The key objective of companies is the maximisation of profit to shareholders and owners but nowadays,
companies also have responsibilities towards society at large. Decisions made are not just based on
commercial factors but also its impact on society. Research has shown a strong economic justification for
organisations to behave ethically.

In the context of business, business ethics concerns with how the organisation makes its profits? Its
strategies, products, or services, process and etc. are they ethical?

Check understanding

1. Ethics are moral principles and values which……

A. Govern the actions of an individual


B. Provide employees with rules on how to behave
C. Are legally enforceable
D. Guide a firm's behaviour

General Ethical Principles

There are no clear cut rules to follow in ethics, so the decision-making of individuals is very subjective and
may be made based on different perspectives and principles of ethics. For example, discrimination on the
basis of either gender or age is not only illegal in The UK but also viewed as being highly unethical. However,
in Malaysia, organisations will almost frequently advertise for job vacancies that state that only candidates
of a certain age or gender can apply.

An individual’s ethical stand may differ based on different principles of ethics:

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Principle Description

Utilitarianism:
1.Deontology Ethics is judged by the performance of
Choosing action that is likely to
duties. It is the intention of an action that result in the greatest good for the
forms the moral substance. greatest number of people.

Pluralism:
2.Absolutism Only one set of ethical principles that It accepts the existence of
is applicable to all situations and at all different views, where a range of
(Deontological) perspectives have to be
times.
understood in the attempt to
establish a course of action.
3.Relativism A wide variety of acceptable ethical beliefs
It emphasises the importance of
and practices exist. What is ethical will moralisation as a social
(Deontological) phenomenon.
depend on the perceptions and conditions
at the particular time. It might be ethical to Relativism:
perform a negative ‘act’ with good The relativist approach suggests
that moral statements are
intention (for example, whiter lie ).
essentially subjective (arise from
culture, beliefs or emotion of the
4.Teleology The moral substance of an action depends
speakers)
on the consequences. The ethics of the In other words, it is the view that a
consequence depends on who receives the wide variety of acceptable ethical
beliefs and practices exist. The
consequence. ethics that are most appropriate in
5.Egoism Decisions are often based on self-interest. a given situation will depend on
Actions that benefit self are considered the conditions at that time.
(Teleological)
ethical. Absolutism:
It is the view that there is an
6. Pluralism Different views may exist but consensus unchanging set of ethical
can be reached. Decisions are made to principles that will apply in all
(Teleological) situations, at all times and in all
accommodate the needs of both the societies.
majority and the minority.
7.Utilitarianism Greatest good for the greatest number of
(Teleological) people. Actions would be to serve the
majority or the largest proportion of
society.
8.Universalism Treat others as we would like to be treated.
(Teleological) Actions would provide a consequence onto
others that the action taker would like to
receive.

9.Rights Decisions made should not disadvantage


individuals of their unquestionable claims.

10.Virtues Decisions made are based on virtues such


as firmness, fairness, objectivity and
loyalty. Usually embedded in the creation
of a code of conduct or behaviour.

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Check understanding

2. 'Teleological ethics refers to ……….?


A. Is used to judge is an action is right, fair and honest
B. An action can only be judged by its consequences
C. Developing the individual personal characteristics
D. The key purpose of ethics is to increase freedom.

Therefore, there is no definite rule as to what is right or wrong and it depends on:

 Individual personality traits: Factors such as the individual’s value systems, upbringing, education,
religious beliefs, experiences and so forth.
 Culture of a country: Culture prevailing in a country and which principle of ethics the culture the
country is more inclined towards.
 Culture of the organisation or industry: Ethics of an industry and organisation influences the
individual’s decision-making.

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30.2 Principles from IFAC (IESBA) Code of Ethics


Learning Outcome (ACCA Study Guide Area F, Topic F1b):
Describe and demonstrate the following principles from the IFAC (IESBA) code of ethics, using examples.

i) Integrity
ii) Objectivity
iii) Professional competence
iv) Confidentiality
v) Professional behaviour

Compliance or Principle Based


In general, there are basically two approaches of management to ethics:

 Compliance based: Ethical standards are based on what the organisation has to do and not what
it should do.
 Principle based: Ethical standards are based on what the organisation should do to uphold
moral principles. (Principle based = Integrity based)

International Federation of Accountants (IFAC)


The IFAC is the worldwide organisation for the accountancy profession, consisting of 159 members and
associates in 124 countries worldwide.

Its mission is to serve the public interest by:

 Strengthening the worldwide accountancy profession


 Contributing to the development of strong international economies
 Establishing and promoting adherence to high quality
 professional standards
 Furthering the international convergence of such accounting standards, and
 Speaking out on public interest issues where the profession’s expertise is most relevant

Code of Ethics
The Code of Ethics for Professional Accountants IFAC seeks to reinforce professional accountants’
adherence to the values stated above.

There are five ethical codes and it forms the principles of ethical practice for accountants, and they are as
follows:

30.2.1. Integrity
All professional accountants are obliged to be straightforward and honest in all professional and business
relationships. Integrity also implies fair dealing and truthfulness.

A professional accountant shall not knowingly be associated with reports, returns, communications or
other information where the professional accountant believes that the information:

 Contains a materially false or misleading statement;


 Contains statements or information furnished recklessly; or
 Omits or obscures information required to be included where such omission or obscurity would
be misleading.

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30.2.2. Objectivity

All professional accountants are obliged not to compromise their professional or business judgment
because of bias, conflict of interest or the undue influence of others.

A professional accountant may be exposed to situations that may impair objectivity. A professional
accountant shall not perform a professional service if a circumstance or relationship biases or unduly
influences the accountant’s professional judgment with respect to that service.

Check understanding

In order to discharge their duties ethically, finance directors must ensure that the information
published by their organisations provides a complete and precise view of the position of the business,
without concealing negative aspects that may distort the reader’s perception of its position. This duty
describes which of the following ethical principles?

A. Probity
B. Objectivity
C. Honestly
D. Independence

30.2.3. Professional Competence and Due Care


Professional accountants are obliged:

 To maintain professional knowledge and skill at the level required to ensure that clients or
employers receive competent professional service; and standards when providing professional
services.
 To act diligently in accordance with applicable technical and professional

Competent professional service requires the exercise of sound judgment in applying professional
knowledge and skill in the performance of such service

Professional competence may be divided into two separate phases:

• Attainment of professional competence; and


• Maintenance of professional competence.

The maintenance of professional competence requires a continuing awareness and an understanding of


relevant technical, professional and business developments. Continuing professional development
enables a professional accountant to develop and maintain the capabilities to perform competently
within the professional environment.

Diligence encompasses the responsibility to act in accordance with the requirements of an assignment,
carefully, thoroughly and on a timely basis.

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A professional accountant shall take reasonable steps to ensure that those working under the professional
accountant’s authority in a professional capacity have appropriate training and supervision.

Where appropriate, a professional accountant shall make clients, employers or other users of the
accountant’s professional services aware of the limitations inherent in the services.

30.2.4. Confidentiality
All professional accountants are obliged to refrain from:

 Disclosing outside the firm or employing organisation confidential information as a result of


professional and business relationships without proper and specific authority or unless there is a legal
or professional right or duty to disclose; and
 Using confidential information acquired as a result of professional and business relationships to their
personal advantage or the advantage of third parties.
A professional accountant shall maintain

 Confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure,
particularly to a close business associate or a close or immediate family member.
 Confidentiality of information disclosed by a prospective client or employer.
 Confidentiality of information within the firm or employing organisation.

A professional accountant shall take reasonable steps to ensure that staff under the professional
accountant’s control and persons from whom advice and assistance is obtained respect the professional
accountant’s duty of confidentiality.

The need to comply with the principle of confidentiality continues even after the end of contractual
relationships between a professional accountant and a client or employer. When a professional accountant
changes employment or acquires a new client, the professional accountant is entitled to use prior
experience. The professional accountant shall not, however, use or disclose any confidential information
either acquired or received as a result of a professional or business relationship

30.2.5. Professional Behaviour


All professional accountants are obliged to comply with relevant laws and regulations and avoid any action
that the professional accountant knows or should know may discredit the profession. This includes actions
that a reasonable and informed third party, weighing all the specific facts and circumstances available to
the professional accountant at that time, would be likely to conclude adversely affects the good reputation
of the profession.

In marketing and promoting themselves and their work, professional accountants shall not bring the
profession into disrepute. Professional accountants shall be honest and truthful and not:

 Make exaggerated claims for the services they are able to offer, the qualifications they possess, or
experience they have gained; or
 Make disparaging references or unsubstantiated comparisons to the work of others.

Source: Handbook of the code of ethics for the processional accountants (IFAC, 2010)

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Check understanding

All these are fundamental principles of the IFAC code of ethics except?

A. Integrity
B. Openness
C. Confidentiality
D. Objectivity

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30.3 Organisational Values


Learning Outcome (ACCA Study Guide Area F, Topic F1c):
Describe organisational values which promote ethical behaviour using examples.

i) Openness
ii) Trust
iii) Honesty
iv) Respect
v) Empowerment
vi) Accountability

Principles and Ethical Values

In its efforts to promote an ethical culture in the organisation there are a few principles and values that an
organisation may want to promote. These values should be promoted throughout the organisation and be
part of the way things are done in the organisation.

There are 4 main ethical systems within an organisation:

1. Personal ethics
2. Professional ethics
3. Organisation cultures
4. Organisation systems (formal codes)

Fiduciary Duties of Managers

Business objectives should be formed based on two general views and this supports the view of fiduciary
responsibility of the managers.

 Stakeholder View: Balancing the views and interests of the various stakeholders is important as
the organisation does not exist for its own sake and will affect other stakeholders.
 Consensus Theory: Decisions are not all selected or controlled by management. Decisions and
objectives are set based on a consensus of differing views of all stakeholders who are interested
and affected by the organisation.

Therefore, management have a fiduciary duty in the organisation to serve not only just the purpose of the
organisation of wealth maximisation but also some external purpose such as to

 relieve distress
 maintain peace
 contribute to the economy
 promote the interest of its stakeholders.

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30.3.1. Organisational Values


Openness

Openness is about being transparent and being straightforward and honest in all dealings. Transparency is
also one of the core principles of corporate governance.

It is important to ensure that in all aspects of work the organisation should be fair in its dealings.
Organisations should not be secretive and hide information from stakeholders and all relevant data and
information should be available in decisions and use of resources.

Trust

Trust is one of the most prized values in an organisation. It is about trustworthiness and being reliable and
doing what you say you will do.

An organisation that displays such values is able to earn customers’ and employees’ loyalty.

Honesty

Honesty involves the determination to communicate the truth as best we know it and not being deceiving
or misleading. It is about being sincere and unpretentious.

An organisation that is honest discharges its fiduciary duty of care, competence and earns its trust and
loyalty from its stakeholders. It should strive to be honest in its communications and conduct to earn the
trust of its stakeholders

Respect

Respect is about honouring the fundamental worth and dignity of all people, including oneself.

It is about being open and tolerant of differences and treating others the way you want to be treated. It is
also about treating others with courtesy and consideration. In any dealings it should be done peacefully
without anger, insults and disagreements.

An organisation therefore has to treat its stakeholders with respect even if they are our competitors.

Empowerment

Empowerment is about giving an individual or group to make a decision and in the case of ethics it is about
empowering the individual to think and act ethically.

Individuals in organisations are faced with numerous choices and decisions each day and they should be
educated and trained to make decisions that are ethical or least consider the consequences of their actions.

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Organisations in doing so must have a system of ethical education and training in encouraging employees
to engage in ethical reasoning.

Accountability

Accountability is about being responsible and answerable for what you are supposed to do. Being
accountable is being able to think before doing and consider the consequences. This is because one has to
recognise that what we do, and what we don’t do, matters.

An organisation needs to understand that they are accountable to many stakeholders and therefore needs
to do its best to look after the interest of the stakeholders, regardless of who they are.

Check understanding

Unethical behaviour can be identify from which of the following situations?

A. Printing warning signs on its potentially dangerous plastic packaging


B. Informing investors that the profit forecast may not materialise
C. Delaying payments to its suppliers despite continuous request
D. Stating that it will aim to recruit more people from ethnic minority groups

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30.4 Concept of Acting in the Public Interest


Learning Outcome (ACCA Study Guide Area F, Topic F1d):
Explain the concept of acting in the public interest.

The Concept of Acting in the Public Interest

As defined by IFAC, Public Interest is the collective well-being of the community of people and institutions
the professional accountant serves, including clients, lenders, governments, employers, employees,
investors, the business and financial community and others who rely on the work of professional
accountants.

To protect the public interest, a professional accountant must keep up to date with the expectations of
society in order to fulfil their role and build confidence in the profession. They have to be technically
competent and exercise professional responsibility, in areas including accounting principles, accounting
standards, and sound business management.

In organisations, the person that will most likely be professionally bounded to act in the public interest is
the professional accountant. Therefore, they are seen to be the conscience of the organisations that will act
on behalf of public interest above all. The confidence in the professional accountant’s expertise and
integrity in financial reporting and assurance is of great importance.

Check understanding

1. The accountancy profession responsibility is to act in the public interest. Therefore


A. The auditor must be careful of all public testimony.
B. Irregularities in an audit must be reported to the public.
C. A professional accountant’s responsibility is not exclusively to satisfy the needs of an individual
client or employer.
D. The public interest always outweighs the confidentiality interest of the individual client or
employer.

The Seven Principles of Public Life

The seven principles are applicable to the public sector (government) and it is set by the UK government’s
Committee of Standards of Public Life.

The seven principles are:


i) Selflessness
ii) Integrity
iii) Objectivity
iv) Accountability
v) Openness
vi) Honesty
vii) Leadership.

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Check understanding

2. All these are principles of public life except:


A. Objectivity
B. Professional Due
C. Leadership
D. Selflessness

Some ethical problems faced by managers


The following are some of the ethical issues faced by managers when dealing with government officials.

1. Extortions : Officials threaten companies with adverse consequences unless suitable


payment is made.
2. Bribery : Payments for services that a company is legally not entitled to
3. Grease Money : Payments made to officials to quicken the processes which were
deliberately stalled by the officials.
4. Gifts : Some cultures view this as a necessity in the process of negotiation but are
considered as bribes in some cultures.

Check understanding

3. See Soon Plc is trying to get a trading permit, for which it qualifies. Unfortunately, there is a backlog
at the issuing office, and See Soon Plc has been notified that there will be a delay in the processing
of her permit. The divisional manager of See Soon Plc offers a donation to the issuing office's staff
welfare fund, so that the official concerned will expedite the paperwork. Which of the following
statements is true of this action?
A. It is not unethical, because the money is offered for positive purposes.
B. It constitutes grease money
C. It is not unethical, because Alex is legally entitled to the benefit it is claiming.
D. It constitutes bribery.

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Learning Outcomes

At the end of the chapter, you should be able to:

TLO F2a. Recognise the purpose of international and organisational codes of ethics and codes of
conduct, IFAC (IESBA), ACCA etc.

TLO F2b. Describe how professional bodies and regulators promote ethical awareness and prevent
or punish illegal or unethical behaviour.

TLO F2c. Identify the factors that distinguish a profession from other types of occupation.

TLO F2d. Explain the role of the accountant in promoting ethical behaviour.

TLO F2e. Recognise when and to whom illegal, or unethical conduct by anyone within or connected
to the organisation should be reported.

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31.1 Purpose of Codes of Ethics and Conduct


Learning Outcome (ACCA Study Guide Area F, Topic F2a):
Recognise the purpose of international and organisational codes of ethics and codes of conduct, IFAC
(IESBA), ACCA etc.

Purpose of international and organisational codes of ethics and codes of conduct, IFAC (IESBA), ACCA
etc.

The purpose of international and organisational codes of ethics and codes of conduct is to guide the
accountant in how to be seen to act in a professional manner in the course of professional work.

The International Federation of Accountants (IFAC) is the global organisation for the accountancy
profession. It aims to protect the public interest by encouraging high quality practices by the world's
accountants. IFAC members and associates, who are primarily national professional accountancy bodies,
represent 2.5 million accountants employed in public practice, industry and commerce, government, and
academia.

IFAC's ethics committee established a Code of Ethics for Professional Accountants have aligned standards
globally. It enables the development of high standards and it aims to identify the responsibilities that a
person employed as an accountant takes on.

IFAC identifies potential threats to the profession and offers safeguards on how to manage the threats.
This code indicates a minimum level of conduct to which all professional accountants must adhere. ACCA
adopts the same principles in the IFAC code.

IFAC Code of Ethics for Professional Accountants is split into three parts:

• Part A Framework applied to all professional accountants introduces the fundamental principles
 Integrity
 Confidentiality
 Professional Competence
 Objectivity
 Professional Behaviour

• Part B Professional Accountants in Public Practice provides guidance on applying the principles that is
relevant to those who work in public practice in areas of:

 Issues of professional appointment


 Conflicts of interest
 Second opinions
 Fees and other types of remuneration

• Part C Professional Accountants in Business provides guidance that is particularly relevant to those
who work in commerce, in areas such as:

 Potential conflicts
 The preparation and reporting of information
 Acting with sufficient expertise, and
 Financial interests and inducements.

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Check understanding

Which of the following is not one of those parts of Code of Ethics for Professional Accountants?

A. A part that applies principles in specific situations to professional accountants in public practice.
B. A part that establishes the fundamental principles of professional ethics for professional
accountants and provides a conceptual framework for applying those principles.
C. A part that applies principles in specific situations to all certified auditors.
D. A part that applies principles in specific situations to professional accountants in business.

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31.2 Ethical Awareness and Unethical Behaviour Punishment


Learning Outcome (ACCA Study Guide Area F, Topic F2b & F2e):
Describe how professional bodies and regulators promote ethical awareness and prevent or punish illegal
or unethical behaviour.
Recognise when and to whom illegal, or unethical conduct by anyone within or connected to the
organisation should be reported.

31.2.1. Regulatory Bodies


In promoting ethical awareness and regulatory matters, the professional bodies in the UK are regulated by
three systems:

a. The government and FRC


b. The Professional Oversight Board (POB), which is an oversight mechanism.
c. Self-regulation by the accountancy profession.

The Government

The government’s role is to set legislations and enforce them. In areas of accountancy the government is
advised by The Financial Reporting Council (FRC). The government has also delegated some statutory
powers to the FRC.

The Financial Reporting Council

The Financial Reporting Council is the UK’s independent regulator responsible for promoting high quality
corporate governance and reporting to foster investment. Three professions are under the jurisdiction of
the FRC and they are:

 Accountants,
 Auditors,
 Actuarial Practice.

The UK Corporate Governance Code is also under FRC. The following are the bodies under FRC:

The Accounting Standards Board (ASB)

 Sets, amends and withdraws UK accounting and financial reporting standards.

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Check understanding

1. The documents that set forth fundamental concepts on which financial accounting and reporting
standards will be based are:
A. Accounting Principles Board Opinions.
B. Statements of Financial Accounting Concepts.
C. Statements of Financial Accounting Standards.
D. All of the above.

The Auditing Practices Board (APB)

 Develops standards for auditing and assurance services and their effective application.
 Develops ethical standards for auditors relating to the independence, objectivity and integrity of
auditors.

Board for Actuarial Standards (BAS)

 Set and improve actuarial standards.

Financial Reporting Review Panel (FRRP)

 Enquires into obvious differences from the standards for financial reports of large companies under
the accounting framework (Companies Act and accounting standards).

Accountancy & Actuarial Discipline Board (AADB)

 An independent investigative and disciplinary body for accountants and actuaries in the UK.
 Responsible for operating and administering an independent disciplinary scheme covering members
of ICAEW, ACCA, CIMA, CIPFA, ICAI and ICAS.
 Deals with cases affecting the public interest in the UK.
 Investigates any misconduct by an accountant or accountancy firm.

Professional Oversight Board (POB)

 Independent oversight of the professional accountancy bodies in regulating its members.


 Statutory oversight of the supervision of the auditing profession.
 Statutory monitoring of the quality of the auditing function through the Audit Inspection Unit (AIU).

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POB does not have statutory powers over accountancy but makes recommendations on:

 Education, training and continuing professional education and development


 Standards
 Ethical matters
 Professional conduct and discipline
 Registration
 Monitoring

POB has statutory powers on audit and can:

 Where appropriate, agree amendments to their procedures with audit firms.


 Make recommendations to supervisory bodies for proper regulatory action.
 Refer matters to the AADB and the FRRP, where appropriate.

Check understanding

2. With regards to accurate reporting on internal control and the financial statements when
performing an integrated audit under requirements of the Public Company Accounting Oversight
Board, the report should be ………?
A. Only a combined report may be issued.
B. Neither separates report nor a combined report may be issued
C. Either separate reports or a combined report may be issued.
D. Only separate reports may be issued.

Self-regulation by the accountancy profession


Accountancy professions such as the ACCA would have regulations to govern its members and it will be
based on the code of ethics upholding the five key principles of Integrity, Confidentiality, Professional
Behaviour, Objectivity and Professional Competence. Any breach of the principles would be subjected to
disciplinary procedures, which may lead to removal as a member of the profession, as well as potential
fines or reprimands.

The regulations may also be related to other issues such as:

 Entry and education requirements


 Eligibility to engage in public practice.

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31.2.2. Reporting Unethical Conduct


Any issue that brings a threat to the public interest may be reported to regulators such as the government,
the FRC, the POB and professional bodies. Under the FRC, cases are handled by the AADB, which is the
independent investigative and disciplinary body for accountants and auditors in the UK.

The AADB will investigate the cases presented to determine whether or not there has been any misconduct
by an accountant or accountancy firm.

Cases may also be reported to the FRRP which will conduct enquires into obvious deviations from the
standards.

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31.3 Difference Between Profession and Other Occupations


Learning Outcome (ACCA Study Guide Area F, Topic F2c):
Identify the factors that distinguish a profession from other types of occupation.

Occupation and profession are both regular activities for which a person receives income and can also be
called work or a job.

However, there is a distinction between an occupation and a profession. Unlike occupations, professions
have the following criteria:

 Restriction to entry.
 Regulatory body to establish a code of conduct.
 Governance by a governing professional body.
 Training to develop specialised field of knowledge and set of skills.
 Certification for practice.
 Oath to uphold ethical conduct.
 Rules and responsibilities towards clients, profession and society; not only to self and employer.

The most common types of professions are doctors, lawyers, accountants and architects. All such
professions require rigorous training and are governed by professional bodies. They have to adhere to strict
ethical standards and professionals may be removed if deemed to have contravened any of the codes of
practice.

Check understanding

1. What is the difference between a profession from other occupations…?


A. Professions apply specialized knowledge which is not available to those outside the profession.
B. Professions have access to a body of specialized knowledge that is not available to by those
outside the profession.
C. Professions rely on a body of specialized knowledge which is not accessible to by those outside
the profession.
D. Professions rely on a body of specialized knowledge which is not easily understood by those
outside the profession

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2. The professions can be distinguished from other occupations in terms of their work and source of
income.
A. Professions put the interests of their clients/patients first. They manage their own work but this
should be reviewed and approved. Their income comes from the professional fees they charge.
B. Professions put the interests of their profession first. They manage their own work and do not
need to have it reviewed and approved. Their income comes from the professional fees they
charge.
C. Professions put the interests of their clients/patients first. They manage their own work and do
not need to have it reviewed and approved. Their income comes from the professional fees they
charge.
D. Professions put the interests of their profession first. They manage their own work and do not
need to have it reviewed and approved. Their income comes from the profit they generate.

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31.4 Role of the Accountant


Learning Outcome (ACCA Study Guide Area F, Topic F2d):
Explain the role of the accountant in promoting ethical behaviour.

Accountants as professionals are said to be the conscience of the company because in the Board of
Directors, they are probably the only ones that are governed by a strict ethical code.

The accountants are to promote ethical behaviour, and they must do the following:

 Strictly follow the ethical code of conduct or regulatory body.


 Remain and be seen to be ethical and objective in all dealings.
 Record and report all information honestly and fairly.

An accountant is expected to have the following qualities:

Personal Qualities:

 Reliability: Things get done and it meets professional standards.


 Responsibility: Ownership of work.
 Timeliness: Conscious of timelines and deadlines.
 Courtesy: Consideration towards clients and colleagues.
 Respect: Builds constructive relationships and recognise values and rights of others.

Professional Qualities:

 Independence: Not bias and seen to be independent.


 Scepticism: Prudent and inclined to question.
 Accountability: Answerable for actions.
 Social responsibility: Duty not only to the organisation but also to society at large.

Check understanding

One of the main functions of an accountant is to make investment decisions for an organisation which
meets all stakeholders interest.
A. True
B. False

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CHAPTER 32: CORPORATE CODES OF ETHICS, ETHICAL CONFLICTS AND DILEMMAS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO F3a. Define corporate codes of ethics.

TLO F3b. Describe the typical contents of a corporate code of ethics.

TLO F3c. Explain the benefits of a corporate code of ethics to the organisation and its employees.

TLO F4a. Describe situations where ethical conflicts can arise.

TLO F4b. Identify the main threats to ethical behaviour.

TLO F4c. Outline situations at work where ethical dilemmas may be faced.

TLO F4d. List the main safeguards against ethical threats and dilemmas.

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CHAPTER 32: CORPORATE CODES OF ETHICS, ETHICAL CONFLICTS AND DILEMMAS

32.1 Corporate Codes of Ethics


Learning Outcome (ACCA Study Guide Area F, Topic F3a and F3b):
Define corporate codes of ethics.
Describe the typical contents of a corporate code of ethics.

32.1.1. Definition of Corporate Code of Ethics


A corporate code of ethics is a formalisation of ethical values, responsibilities and commitments of an
organisation and it is usually a written document.

It is a formal communication to all stakeholders of the organisation’s ethical stand and what the
organisation strives to achieve in terms of its ethical behaviour.

It sets out a guide for individuals in the company as to how to behave ethical and what is expected of them;
and how a breach of ethical standards is managed.

Check understanding

Maximize profit for its shareholders is the main objective of Corporate code of ethics. (True/False)

32.1.2. Contents of Corporate Code of Ethics


An organisation would usually have the following objectives in mind when setting the code of ethics:

 To improve performance of the organisation by building ethical values


 To improve the behaviour of internal stakeholders
 To build and improve the organisation's reputation
 To build trust amongst and with the organisation’s stakeholders

Typical issues that are address by the code include:

 Bribery and facilitation payments


 How the organisation competes
 Conflicts of interest
 Gifts and entertainment
 Use of company assets
 Safeguarding important and confidential information
 Political involvement and contributions
 The application of human rights standards in our business
 Environmental responsibilities
 Timely payments of suppliers
 Collections from customers.

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Check understanding

________________is primarily concerned with the relationship of business goals and techniques to
specifically human ends.

A. Business Ethics
B. Code of Conduct
C. All of These
D. None

The following is a sample code of ethics from the Institute of Business Ethics, UK (2011) with
recommended sections.

CODE OF ETHICS

Introduction

Purpose of the Code

 Values that are important and what they mean for the business.
 Describe the leadership commitment in maintaining high standards both within the organisation
and in its dealings with others.
 Set out the role of the organisation and end with a personal endorsement of the code and the
expectation that the standard set out in it will be maintained by all involved in the organisation.

The Purpose, Values and Impacts of the Business

Describe the service which is being provided, nature of the business, its location etc.

A. How to use this code?


 Describe its purpose, relevance, audience and context.
 Describe other supporting documents, tools or sources of support.
 Provide a summarised ethical decision-making framework.
B. Employees
How the business values employees? The company's policies on:
 Working conditions,
 Recruitment,
 Development and training,
 Rewards,
 Health, safety & security,
 Equal opportunities and diversity,
 Retirement and redundancy,
 Discrimination and harassment.
 Use of company assets by employees.

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C. Shareholders or other providers of money


 The protection of investment made in the company and proper 'return' on money lent.
 A commitment to accurate and timely communication on achievements and prospects.
D. Suppliers Prompt settling of bills.
 Co-operation to achieve quality and efficiency. No bribery or excess hospitality accepted
or given.
E. Society or the wider community
 Compliance with the spirit of laws as well as the letter.
 The company's obligations to protect and preserve the environment.
 The involvement of the company and its staff in local affairs.
 The corporate policy on sponsorship as well as giving to educational and charitable
appeals.
F. Implementation and reinforcement
 The process by which the code is issued and used.
 Means to obtain advice.
 Awareness raising examples (Q & As).
 Training programmes for all staff.
G. Assurance, reporting and reviews
 Suggest ways of knowing if the code is effective.
 Report to the board or board committee at least annually.
 Procedures for updating the code.

Source: Institute of Business Ethics, UK (2011)

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32.2 Benefits of A Corporate Code of Ethics


Learning Outcome (ACCA Study Guide Area F, Topic F3c):
Explain the benefits of a corporate code of ethics to the organisation and its employees.

Corporate code of ethics is beneficial to organisations and employees as it is able to do the followings:

Compliance Under the UK Corporate Governance Code, an ethical code of conduct is needed,
and this is published internally and externally, therefore employees know what is
expected of them

Communication Ethical codes communicate to both external and internal stakeholders the
organisation’s ethical stand and this will help build trust.

Consistency With a published code, employees of all levels will have a standardised system. No
stakeholder will be treated differently.

Risk reduction As there is a standard of ethical behaviour set, any deviations from it can be
noticed and reported before it becomes out of hand.

Ethical employees The ethical standards set will attract like-minded people who will uphold the
ethical values.

The recent explosion in outsourcing and offshoring among multinational organisations has brought
Corporate Ethics into a new light. Many pressure groups are advocating increased political, economic, and
social pressure on these multinational organisations to force their virtual extensions along their global
value chain to perform in line with their Codes of Conduct.

Check understanding

1. The advantages of managing corporate ethics in the workplace consist of ……?

A. Cultivate strong team work and productivity


B. Avoid criminal acts
C. Lower fines
D. All of these

2. The principles that govern and guide business people to perform business functions is?

A. Business Ethics
B. Code of Conduct
C. All of these
D. None

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CHAPTER 33: ETHICAL CONFLICTS AND DILEMMAS

Learning Outcomes

At the end of the chapter, you should be able to:

TLO F4a. Describe situations where ethical conflicts can arise.

TLO F4b. Identify the main threats to ethical behaviour.

TLO F4c. Outline situations at work where ethical dilemmas may be faced.

TLO F4d. List the main safeguards against ethical threats and dilemmas.

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33.1 Ethical Conflicts


Learning Outcome (ACCA Study Guide Area F, Topic F4a):
Describe situations where ethical conflicts can arise.

The ethical standards of a professional accountant are defined within the IFAC’s Handbook of the Code of
Ethics for Professional Accountants. The IFAC Handbook within Parts B and C also defined the likely conflicts
that a professional accountant may face in business and public practice. Any threat to the IFAC Code of
Ethics is a conflict of Public interest.

IFAC Code of Ethics:

 Integrity
 Confidentiality
 Objectivity
 Professional competency
 Professional behaviour

Check understanding

Sornapriya is a practitioner and she is aware that a client has ‘skimmed’ unrecorded cash receipts and
thus not reported them to the tax authorities. Which fundamental principle(s) of IFAC Code of Ethics
is she violating, If Sornapriya signs the entity’s tax return after preparing the return?

A. Integrity and Objectivity


B. Independence
C. Confidentiality
D. Professional Competence and Due Care

33.1.1 Professional Accountants in Business


Ethical conflicts may arise when a professional accountant in businesses is asked to:

 Act contrary to law or regulation.


 Act contrary to technical or professional standards.
 Facilitate unethical or illegal earnings management strategies.
 Deceive others, or intentionally mislead others such as auditors and regulators.
 Issue, a financial or non-financial report that materially misrepresents the facts.

Apart from the above, a conflict of interest may also be present in the following areas:

 Preparation and reporting of information


 Acting with insufficient expertise
 Having a financial interest in the company
 Receiving inducement to act in contrary of the fundamental principles.

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33.1.2 Professional Accountants in Public Practice


As a professional accountant in public practice, there are many situations that may create a conflict of
interest. A threat to confidentiality may be present when a professional accountant in public practice
performs services for competing clients.

Ethical conflicts may also arise for professional accountant in public practice in the following areas:
 Professional Appointment
 Client acceptance
 Engagement acceptance
 Changes in professional appointments
 Second Opinions on issues such as accounting, auditing and reporting by a non- client
 Fees and Other Types of Remuneration
 Marketing Professional Services
 Gifts and Hospitality
 Custody of Client Assets
 Objectivity in all services

Check understanding

Dariah Ltd has an overseas factory in a country that allows child labour to be used. Even though it
states that this practice is legal, this behaviour is

A. Illegal
B. Unethical
C. Ethical
D. Economical

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33.2 Main Threats to Ethical Behaviour


Learning Outcome (ACCA Study Guide Area F, Topic F4b):
Identify the main threats to ethical behaviour.

Diagram 34.2 Overview of the Main Threats to Ethical Behaviour

Under Part A of the IFAC’s Handbook of the Code of Ethics for Professional Accountants (2010), five threats
were identified that would compromise ethical behaviour of a professional accountant.

Threat Description Examples


Self-interest threat A financial or other interest will a. Financial Interest
inappropriately sway the professional b. Close business relationships
accountant’s judgment or behaviour. c. Family and personal
relationships
d. Gifts and hospitality

Self-review threat May occur when a professional a. Recent service with assurance
accountant evaluates his own earlier client
judgments. b. General services such as
authorizing, execute
transactions on behalf of client
c. Preparing financial records
d. Valuation services

Advocacy threat A professional accountant will promote a. Firm representing client in legal
a client’s or employer’s position to the issues
point that the professional b. Firm representing client in
accountant’s objectivity is negotiation with banks.
compromised.

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Familiarity threat Due to a long or close relationship with a. Where there are family or
a client or employer, a professional personal relationship
accountant will be too sympathetic to b. Employment with client
their interests or too accepting of their c. Recent services with client
work. d. Long associations with client.

Intimidation threat A professional accountant will be a. Self-interest threats exist


deterred from acting objectively because the firm has something
because of actual or perceived to lose
pressures, including attempts to b. Litigation where client
exercise undue influence over the threatens to sue
professional accountant. c. Risk of bad publicity
d. Second opinion is sought by
client with another firm.

Check understanding

1. When an individual's self-interest conflicts with acting in the best interest of another, this is called:
A. Integrity
B. Conflict of interest
C. Competitive Pressure
D. Personal morality

2. Identify the four threats to professional principles:


A. Self-promotion, self-review, advocacy, integrity
B. Self-interest, self-review, confidentiality, intimidation
C. Self-interest, objectivity, advocacy, intimidation
D. Self-interest, self-review, advocacy, intimidation

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33.3 Ethical Dilemmas


Learning Outcome (ACCA Study Guide Area F, Topic F4c):
Outline situations at work where ethical dilemmas may be faced.

Ethical Dilemma

An ethical dilemma exists when two ethical values become incompatible. (for example, duty to client VS
duty to society)

A conflict of interest exists when an individual has a duty to two or more parties. It is not wrong but an
individual as a professional has to declare the conflicts.

Ethical dilemmas happen when there is a tension between the following values:

1. Personal Values (Individual held principles)


2. Societal Values (the law)
3. Corporate Values (Codes of ethics of the company)
4. Professional Values

Raising and Dealing with Ethical Dilemma:

A professional can go through the following channels to raise an ethical issue:

1. Whistle-blower function
2. Professional Board
3. External organisations such as suppliers and customers
4. Authorities such as the Public Oversight Board
5. Anonymously.

Conflict Resolution

If there is conflict between statute (law) and professional ethics, the law should be considered. However,
when there is a conflict between contractual obligations and professional ethics, the latter should be
considered over contractual obligations.

Individuals should also consider:

1. Transparency
(i) Is my decision defensible?
(ii) Do I mind other people know what I did?
2. Effect
(i) What are the consequences of my actions?
(ii) Who and what will I affect?
(iii) Have all factors been taken into consideration?
3. Fairness
(i) Will a third party see my decisions as fair and equitable?

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Check understanding

1. Which of the following is not a value present in most ethical decisions?


A. Be fair and just
B. Be charitable
C. Act responsibly
D. Be honest

2. Which of the following is not an example of why ethical problems occur in business?
A. Personal gain and selfish interest
B. Conflicts of interest
C. Cross-cultural stability
D. Competitive pressures on profits

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33.4 Main Safeguards Against Ethical Threats and Dilemmas


Learning Outcome (ACCA Study Guide Area F, Topic F4d):
List the main safeguards against ethical threats and dilemmas.

Safeguards
Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level.
They fall into two broad categories:

1. Safeguards created by the profession, legislation or regulation; and


2. Safeguards in the work environment.

Safeguards Created by the Profession, Legislation or Regulation


 Educational, training and experience requirements for entry into the profession.
 Continuing professional development requirements.
 Corporate governance regulations.
 Professional standards.
 Professional or regulatory monitoring and disciplinary procedures.

Safeguards in the Work Environment


 Employing a system of corporate oversight or other oversight structures.
 Employing ethics and conduct programs in the organisation.
 Recruitment procedures emphasizing the importance of employing high calibre competent staff.
 Strong internal controls.
 Appropriate disciplinary processes.
 Leadership that stresses the importance of ethical behaviour
 Expectation that employees will act in an ethical manner.
 Policies and procedures to implement and monitor the quality of employee performance.
 Timely communication of the employing organisation’s policies and procedures, including any
changes to them, to all employees and appropriate training and education on such policies and
procedures.
 Policies and procedures to empower and encourage employees to communicate to senior level
within the employing organisation any ethical issues that concern them without fear of retribution.
 Consultation with another appropriate professional accountant.

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Safeguards for Accountants in Public Practice:


Depending upon the circumstances giving rise to the conflict, application of one of the following safeguards
is generally necessary:

 Notifying the client of the firm’s business interest or activities that may represent a conflict of
interest and obtaining their consent to act in such circumstances; or
 Notifying all known relevant parties that the professional accountant in public practice is acting
for two or more parties in respect of a matter where their respective interests are in conflict and
obtaining their consent to so act; or
 Notifying the client that the professional accountant in public practice does not act exclusively for
any one client in the provision of proposed services (for example, in a particular market sector or
with respect to a specific service) and obtaining their consent to so act.

The professional accountant shall also determine whether to apply one or more of the following additional
safeguards:

 The use of separate engagement teams;


 Procedures to prevent access to information (for example, strict physical separation of such teams,
confidential and secure data filing);
 Clear guidelines for members of the engagement team on issues of security and confidentiality;
 The use of confidentiality agreements signed by employees and partners of the firm; and
 Regular review of the application of safeguards by a senior individual not involved with relevant
client engagements.

All materials of safeguards are sourced from: Handbook of the code of ethics for the processional
accountants (IFAC, 2010)

Check understanding

1. All these are safeguard created by the profession, legislation or regulation except?

A. Continuing education requirements


B. Peer review of quality control
C. Professional monitoring processes
D. Internal policies to monitor compliance with independence ethics

2. Using same engagement team for audit purpose by many listed firms is preferred as it ensures easy
access to information and negotiation for lower professional fee.
(True/False)

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