(c) Critically evaluate Vincent Viola’s view that corporate governance provisions should vary by country.(8 marks)

正确答案：
(b) Increasingly, firms are becoming aware of their social responsibility and their need to develop strategies that are designed to
meet this responsibility. Such responsibility can take many forms and is not a new phenomenon – many 19th century firms
looked after the housing, education and health needs of the communities where they were located. Michael Porter and Claas
van der Linde in their article ‘Green and competitive’ show how the traditional view that there is ‘an inherent and fixed tradeoff:
ecology versus economy’ is incorrect. This traditional view sees the benefits of government imposed environmental
standards, causing industry’s private costs of prevention and clean up – ‘costs that cause higher prices and reduced
competitiveness’. Porter and Linde argue that with properly designed and implemented environmental standards, firms will
be encouraged to produce innovations that use a range of inputs more efficiently, e.g. energy, labour, raw materials, and in
so doing increase resource productivity and in offsetting the costs of environmental improvement make industry more not less
competitive. All too often in their opinion, companies resort to fighting environmental control through the courts rather than
using innovation to increase resource productivity and meet environmental standards – ‘environmental strategies must
become an issue for general managers’.
CFS are, therefore, correct in seeing environmental standards as a positive step towards becoming more not less competitive.
Key stakeholders in the form. of both government and customers are looking to their suppliers to become more ‘green’. These
challenges are increasingly international and global. Building in positive environmental strategies can help CFS differentiate
itself and through improved resource productivity become more competitive. Clearly, they will need the environmental
scanning devices to become aware of environmental legislation and change. Awareness then can lead to analysis in the
monitoring of macro environmental challenges and the development of a SWOT analysis to match the company’s strengths
and weaknesses against the threats and opportunities created by environmental standards. Tools of strategic analysis such as
PEST, five forces and value chain analysis lend themselves to understanding the significance of the environmental change
and how it can stimulate innovation and, through innovation, competitive advantage.

正确答案：
(c) Non-executive directors
Roles of NEDs
Non-executive directors have four principal roles.
The strategy role recognises that NEDs are full members of the board and thus have the right and responsibility to contribute
to the strategic success of the organisation for the benefit of shareholders. The enterprise must have a clear strategic direction
and NEDs should be able to bring considerable experience from their lives and business experience to bear on ensuring that
chosen strategies are sound. In this role they may challenge any aspect of strategy they see fit and offer advice or input to
help to develop successful strategy.
In the scrutinising or performance role, NEDs are required to hold executive colleagues to account for decisions taken and
company performance. In this respect they are required to represent the shareholders’ interests against the possibility that
agency issues arise to reduce shareholder value.
The risk role involves NEDs ensuring the company has an adequate system of internal controls and systems of risk
management in place. This is often informed by prescribed codes (such as Turnbull in the UK) but some industries, such as
chemicals, have other systems in place, some of which fall under ISO standards. In this role, NEDs should satisfy themselves
on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
Finally, the ‘people’ role involves NEDs overseeing a range of responsibilities with regard to the management of the executive
members of the board. This typically involves issues on appointments and remuneration, but might also involve contractual
or disciplinary issues and succession planning.
Tutorial note: these four roles are as described in the UK Higgs Report and are also contained in the Combined Code 2003.
Tensions in NED roles in the case
This refers to a potential tension in the loyalties of the NEDs. Although the NED is accountable, through the chairman to the
shareholders and thus must always act in the economic best interests of the shareholders, he or she is also a part of the board
of the company and they may, in some situations, advise discretion. Withholding information might be judged correct because
of strategic considerations or longer-term shareholder interests. In most situations, NEDs will argue for greater transparency,
less concealment and more clarity of how and why a given action will be in the interests of shareholders.
The case of mallerite overestimation places the WM NEDs in a position of some tension. Any instinct to conceal the full extent
of the overestimate of the reserve for the possible protection of the company’s short-term value must be balanced against the
duty to serve longer-term strategic interests and the public interest. Whilst concealment would protect the company’s
reputation and share price in the short term, it would be a duty of the NEDs to point out that WM should observe transparency
as far as possible in its dealing with the shareholders and other capital market participants.

正确答案：
(a) Roles of the chairman in corporate governance
The chairman is the leader of the board of directors in a private or public company although other organisations are often run
on similar governance lines. In this role, he or she is responsible for ensuring the board’s effectiveness as a unit, in the service
of the shareholders. This means agreeing and, if necessary, setting the board’s agenda and ensuring that board meetings
take place on a regular basis.
The chairman represents the company to investors and other outside stakeholders/constituents. He or she is often the
‘public face’ of the organisation, especially if the organisation must account for itself in a public manner. Linked to this,
the chairman’s roles include communication with shareholders. This occurs in a statutory sense in the annual report
(where, in many jurisdictions, the chairman must write to shareholders each year in the form. of a chairman’s statement)
and at annual and extraordinary general meetings.
Internally, the chairman ensures that directors receive relevant information in advance of board meetings so that all
discussions and decisions are made by directors fully apprised of the situation under discussion. Finally, his or her role
extends to co-ordinating the contributions of non-executive directors (NEDs) and facilitating good relationships between
executive and non-executive directors.

正确答案：
(ii) Advantages and disadvantages of being non-executive rather than executive
The UK Combined Code, for example, allows for risk committees to be made up of either executive or non-executive
members.
Advantages of non-executive membership
Separation and detachment from the content being discussed is more likely to bring independent scrutiny.
Sensitive issues relating to one or more areas of executive oversight can be aired without vested interests being present.
Non-executive directors often bring specific expertise that will be more relevant to a risk problem than more
operationally-minded executive directors will have.
Chen’s four members, being from different backgrounds, are likely to bring a range of perspectives and suggested
strategies which may enrich the options open to the committee when considering specific risks.
Disadvantages of non-executive membership (advantages of executive membership)
Direct input and relevant information would be available from executives working directly with the products, systems
and procedures being discussed if they were on the committee. Non-executives are less likely to have specialist
knowledge of products, systems and procedures being discussed and will therefore be less likely to be able to comment
intelligently during meetings.
The membership, of four people, none of whom ‘had direct experience of Chen’s industry or products’ could produce
decisions taken without relevant information that an executive member could provide.
Non-executive directors will need to report their findings to the executive board. This reporting stage slows down the
process, thus requiring more time before actions can be implemented, and introducing the possibility of some
misunderstanding.

正确答案：
(b) Internal control statement
The United States Securities and Exchange Commission (SEC) guidelines are to disclose in the annual report as follows:
A statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting
for the company. This will always include the nature and extent of involvement by the chairman and chief executive, but may
also specify the other members of the board involved in the internal controls over financial reporting. The purpose is for
shareholders to be clear about who is accountable for the controls.
A statement identifying the framework used by management to evaluate the effectiveness of this internal control. This will
usually involve a description of the key metrics, measurement methods (e.g. rates of compliance, fair value measures, etc)
and tolerances allowed within these. Within a rules-based environment, these are likely to be underpinned by law.
Management’s assessment of the effectiveness of this internal control as at the end of the company’s most recent fiscal year.
This may involve reporting on rates of compliance, failures, costs, resources committed and outputs (if measurable) achieved.
A statement that its auditor has issued an attestation report on management’s assessment. Any qualification to the attestation
should be reported in this statement.
Tutorial note: guidance from other corporate governance codes is also acceptable.

正确答案：
(c) It would appear that in operating a bus service to the Western region of Geeland that GBC is fulfilling a social objective since
a contribution loss amounting to $38,400 ($230,400 – $268,800) was made as a consequence of operating the route to
the Western region during 2007. As an organisation which is partially funded by the government it is highly probable that
GBC has objectives which differ from those of TTC which is a profit-seeking organisation.
The value of a social service such as the provision of public transport can be quantified, albeit, in non-financial times. It is
possible to apply quantitative measures to the bus service itself, the most obvious ones being the number of passengers
carried and the number of passenger miles travelled.
The cost of the provision of alternative transport to the Western region might also enable a value to be placed on the current
service by GBC.
It might be possible to estimate quantitatively some of the social benefits resulting from the provision of the transport facility
to and from the Western region. For example, GBC could undertake a survey of the population of the Western region in order
to help estimate the extent to which rural depopulation would otherwise have occurred had the transport facility not been
made.
The application of the technique of cost-benefit analysis makes it possible to estimate money values for non-monetary
benefits. Social benefits can therefore be expressed in financial terms. It is highly probable that the fact that the Western region
is served by GBC will increase the attractiveness of living in a rural area, which may in turn precipitate an increase in property
values in the Western region and the financial benefit could be expressed in terms of the aggregate increase in property values
in the region as a whole.

正确答案：
(d) Governments may act as an aid to business performance in the following ways:
– A government can increase aggregate demand for goods and services by increased government spending and/or by
reducing taxation so that firms (and individuals) have more after tax income available to spend.
– Government policy may encourage firms to locate to particular areas. This is particularly the case where there is high
unemployment in such areas.
– Government policy via the use of quotas and import tariffs might make it more difficult for overseas firms to compete in
domestic markets.
– A government can regulate monopolies in particular with regard to the prices they charge and the quality of their goods
and services.
– Government policy can regulate the activities of those firms which do not act in the best interests of the environment.
(Alternative relevant discussion would be acceptable)

正确答案：
(c) Specific inquiries – accounting for construction contracts
Tutorial note: This answer is illustrative of the types of inquiry that should be made. Other relevant answer points will be
awarded similar credit. For each full mark to be earned an inquiry should address the specifics of Robson (e.g. that its
accounting policies are ‘generally less prudent’). The identification of asset overstatement/liability understatement may
reduce the purchase price offered by Prescott.
■ Are any constructions being undertaken without signed contracts?
Tutorial note: Any expenditure on constructions without contracts (e.g. of a speculative nature, perhaps to keep the
workforce employed) must be accounted for under IAS ‘Inventories’; revenue cannot be recognised nor profit taken.
■ Is full provision made for future losses foreseen on loss-making contracts?
Tutorial note: The information in the brief is that ‘provisions are made’. The level of provision is not indicated and
could be less than full.
■ Which contracts started during the year are likely to be/have been identified as loss-making (for which no provision has
yet been made)?
Tutorial note: Profits and losses are only determined by contract at each financial year end.
■ What are management’s assumptions and judgments on the likely future outcome on the Sarwar contract (and other
actual and contingent liabilities)?
Tutorial note: Robson would be imprudent if it underestimates the probability of an unfavourable outcome (or
overestimates the likelihood of successful recourse).
■ What claims history has Robson experienced? (What proportion of contracts have been subject to claims? What
proportion of claims brought have been successful? How have they been settled? Under insurance? Out-of-court
settlement?) How effective are the penalty clauses? (Is Robson having to pay penalties for overrunning on contracts?)
■ What are the actual useful lives of assets used in construction? What level of losses are made on disposal?
Tutorial note: If such assets are depreciated over useful lives that are estimated to be too long, depreciation costs
incurred to date (and estimated depreciation to be included in costs to completion) will be understated. This will result
in too much profit/too little loss being calculated on contracts.
■ What is the cause of losses on contracts? For example, if due to theft of building supplies Robson’s management is not
exercising sufficient control over the company’s assets.

正确答案：
(c) Examination procedures
■ The arithmetic accuracy of the PFI should be confirmed, i.e. subtotals and totals should be recast and agreed.
■ The actual information for the year to 31 December 2006 that is shown as comparative information should be agreed
to the audited financial statements for that year to ensure consistency.
■ Balances and transaction totals for the quarter to 31 March 2007 should be agreed to general ledger account balances
at that date. The net book value of property, plant and equipment should be agreed to the non-current asset register;
accounts receivable/payable to control accounts and cash at bank to a bank reconciliation statement.
■ Tenders for the new equipment should be inspected to confirm the additional cost included in property, plant and
equipment included in the forecast for the year to 31 December 2008 and that it can be purchased with the funds being
lent by the bank.
■ The reasonableness of all new assumptions should be considered. For example, the expected useful life of the new
equipment, the capacity at which it will be operating, the volume of new product that can be sold, and at what price.
■ The forecast income statement should be reviewed for completeness of costs associated with the expansion. For
example, operating expenses should include salaries of additional equipment operatives or supervisors.
■ The consistency of accounting practices reflected in the forecast with International Financial Reporting Standards (IFRS)
should be considered. For example, the intangible asset might be expected to be less than $10,000 at 31 December
2008 as it should be carried at amortised cost.
■ The cost of property, plant and equipment at 31 December 2008 is $280,000 more than as at 31 December 2007.
Consideration should be given to the adequacy of borrowing $250,000 if the actual investment is $30,000 more.
■ The terms of existing borrowings (both non-current and short-term) should be reviewed to ensure that the forecast takes
full account of existing repayment schedules. For example, to confirm that only $23,000 of term borrowings will become
current by the end of 2007.
Trends should be reviewed and fluctuations explained, for example:
■ Revenue for the first quarter of 2007 is only 22% of revenue for 2006 and so may appear to be understated. However,
revenue may not be understated if sales are seasonal and the first quarter is traditionally ‘quieter’.
■ Forecast revenue for 2007 is 18% up on 2006. However, forecast revenue for 2008 is only 19% up on 2007. As the
growth in 2007 is before the investment in new plant and equipment it does not look as though the new investment
will be contributing significantly to increased growth in the first year.
■ The gross profit % is maintained at around 29% for the three years. However, the earnings before interest and tax (EBIT)
% is forecast to fall by 2% for 2008. Earnings after interest might be worrying to the potential lender as this is forecast
to rise from 12·2% in 2006 to 13·7% in 2007 but then fall to 7·6% in 2008.
The reasonableness of relationships between income statement and balance sheet items should be considered. For example:
■ The average collection period at each of the balance sheet dates presented is 66, 69, 66 and 66 days respectively (e.g.
71/394 × 365 = 66 days). Although it may be realistic to assume that the current average collection period may be
maintained in future it is possible that it could deteriorate if, for example, new customers taken on to launch the new
product are not as credit worthy as the existing customer base.
■ The number of days sales in inventory at each balance sheet date is 66, 88, 66 and 65 days respectively (e.g. 50/278
× 365 = 66 days). The reason for the increase to 88 at the end of the first quarter must be established and
management’s assertion that 66 days will be re-established as the ‘norm’ corroborated.
■ As the $42,000 movement on retained earnings from 2007 to 2008 is the earnings before income tax for 2008 it may
be that there is no tax in 2008 or that tax effects have not been forecast. (However, some deferred tax effect might be
expected if the investment in new plant and equipment is likely to attract accelerated capital allowances.)

正确答案：
(ii) Control weakness
ISA 260 contains guidance on the type of issues that should be communicated. One of the matters identified is a control
weakness in the capital expenditure transaction cycle. The assets for which no authorisation was obtained amount to
0·3% of total assets (225,000/78 million x 100%), which is clearly immaterial. However, regardless of materiality, the
auditor should ensure that the weakness is brought to the attention of the management, with a clear indication of the
implication of the weakness, and recommendations as to how the control weakness should be eliminated.
The auditor is providing information to help those charged with governance improve the internal systems and controls
and ultimately reduce business risk. In this case there is a high risk of fraud, as the lack of authorisation for purchase
of office equipment could allow expenditure on assets not used for bona fide business purposes.
Disagreement with accounting treatment of brand
Audit procedures have revealed a breach of IAS 38 Intangible Assets, in which internally generated brand names are
specifically prohibited from being recognised. Blod Co has recognised an internally generated brand name which is
material to the statement of financial position (balance sheet) as it represents 12·8% of total assets (10/78 x 100%).
The statement of financial position (balance sheet) therefore contains a material misstatement.
The report to those charged with governance should clearly explain the rules on recognition of internally generated brand
names, to ensure that the management has all relevant technical facts available. In the report the auditors should
request that the financial statements be corrected, and clarify that if the brand is not derecognised, then the audit opinion
will be qualified on the grounds of a material disagreement – an ‘except for’ opinion would be provided. Once the breach
of IAS 38 is made clear to the management in the report, they then have the opportunity to discuss the matter and
decide whether to amend the financial statements, thereby avoiding a qualified audit opinion.
Audit inefficiencies
Documentation relating to inventories was not always made readily available to the auditors. This seems to be due to
poor administration by the client rather than a deliberate attempt to conceal information. The report should contain a
brief description of the problems encountered by the audit team. The management should be made aware that
significant delay to the receipt of necessary paperwork can cause inefficiencies in the audit process. This may seem a
relatively trivial issue, but it could lead to an increase in audit fee. Management should react to these comments by
ensuring as far as possible that all requested documentation is made available to the auditors in a timely fashion.

正确答案：
(b) The main disagreement over a shift to fair value measurement is the debate over relevance versus reliability. It is argued that
historical cost financial statements are not relevant because they do not provide information about current exchange values
for the entity’s assets which to some extent determine the value of the shares of the entity. However, the information provided
by fair values may be unreliable because it may not be based on arm’s-length transactions. Proponents of fair value
accounting argue that this measurement is more relevant to decision makers even if it is less reliable and would produce
balance sheets that are more representative of a company’s value. However it can be argued that relevant information that is
unreliable is of no use to an investor. One advantage of historical cost financial information is that it produces earnings
numbers that are not based on appraisals or other valuation techniques. Therefore, the income statement is less likely to be
subject to manipulation by management. In addition, historical cost balance sheet figures comprise actual purchase prices,
not estimates of current values that can be altered to improve various financial ratios. Because historical cost statements rely
less on estimates and more on ‘hard’ numbers, it can be said that historical cost financial statements are more reliable than
fair value financial statements. Furthermore, fair value measurements may be less reliable than historical costs measures
because fair value accounting provides management with the opportunity to manipulate the reported profit for the period.
Developing reliable methods of measuring fair value so that investors trust the information reported in financial statements is
critical.
Fair value measurement could be said to be more relevant than historical cost as it is based on market values and not entity
specific measurement on initial recognition, so long as fair values can be reliably measured. Generally the fair value of the
consideration given or received (effectively historical cost) also represents the fair value of the item at the date of initial
recognition. However there are many cases where significant differences between historical cost and fair value can arise on
initial recognition.
Historical cost does not purport to measure the value received. It cannot be assumed that the price paid can be recovered in
the market place. Hence the need for some additional measure of recoverable value and impairment testing of assets.
Historical cost can be an entity specific measurement. The recorded historical cost can be lower or higher than its fair value.
For example the valuation of inventory is determined by the costing method adopted by the entity and this can vary from
entity to entity. Historical cost often requires the allocation of costs to an asset or liability. These costs are attributed to assets,
liabilities and expenses, and are often allocated arbitrarily. An example of this is self constructed assets. Rules set out in
accounting standards help produce some consistency of historical cost measurements but such rules cannot improve
representational faithfulness.
Another problem with historical cost arises as regards costs incurred prior to an asset being recognised. Historical costs
recorded from development expenditure cannot be capitalised if they are incurred prior to the asset meeting the recognition
criteria in IAS38 ‘Intangible Assets’. Thus the historical cost amount does not represent the fair value of the consideration
given to create the asset.
The relevance of historical cost has traditionally been based on a cost/revenue matching principle. The objective has been to
expense the cost of the asset when the revenue to which the asset has contributed is recognised. If the historical cost of the
asset differs from its fair value on initial recognition then the matching process in future periods becomes arbitrary. The
measurement of assets at fair value will enhance the matching objective. Historical cost may have use in predicting future
net reported income but does not have any necessary implications for future cash flows. Fair value does embody the market’s
expectations for those future cash flows.
However, historical cost is grounded in actual transaction amounts and has existed for many years to the extent that it is
supported by practical experience and familiarity. Historical cost is accepted as a reliable measure especially where no other
relevant measurement basis can be applied.

正确答案：
(c) Choo Wang’s remuneration package
Benefits of PRP
In general terms, performance-related pay serves to align directors’ and shareholders’ interests in that the performancerelated
element can be made to reflect those things held to be important to shareholders (such as financial targets). This, in
turn, serves to motivate directors, especially if they are directly responsible for a cost or revenue/profit budget or centre. The
possibility of additional income serves to motivate directors towards higher performance and this, in turn, can assist in
recruitment and retention. Finally, performance-related pay can increase the board’s control over strategic planning and
implementation by aligning rewards against strategic objectives.
Critical evaluation of Choo Wang’s package
Choo Wang’s package appears to have a number of advantages and shortcomings. It was strategically correct to include some
element of pay linked specifically to Southland success. This will increase Choo’s motivation to make it successful and indeed,
he has said as much – he appears to be highly motivated and aware that additional income rests upon its success. Against
these advantages, it appears that the performance-related component does not take account of, or discount in any way for,
the risk of the Southland investment. The bonus does not become payable on a sliding scale but only on a single payout basis
when the factory reaches an ‘ambitious’ level of output. Accordingly, Choo has more incentive to be accepting of risk with
decisions on the Southland investment than risk averse. This may be what was planned, but such a bias should be pointed
out. Clearly, the company should accept some risk but recklessness should be discouraged. In conclusion, Choo’s PRP
package could have been better designed, especially if the Southland investment is seen as strategically risky.

正确答案：

(c) (i) For the secrecy option
Important developments at SHC
This is an exciting time for the management and shareholders of Swan Hill Company. The research and development
staff at SHC have made a groundbreaking discovery (called the ‘sink method’) that will enable your company to produce
its major product at lower cost, in higher volumes and at a much higher quality than our competitors will be able to
using, as they do, the existing production technology. The sink process also produces at a lower rate of environmental
emissions which, as I’m sure shareholders will agree, is a very welcome development.
When considering the options following the discovery, your board decided that we should press ahead with the
investment needed to transform. the production facilities without offering the use of the technology to competitors under
a licensing arrangement. This means that once the new sink production comes on stream, SHC shareholders can, your
board believes, look forward to a significant strengthening of our competitive position.
The business case for this option is overwhelming. By pushing ahead with the investment needed to implement the sink
method, the possibility exists to gain a substantial competitive advantage over all of SHC’s competitors. It will place SHC
in a near monopolist position in the short term and in a dominant position long term. This will, in turn, give the company
pricing power in the industry and the likelihood of superior profits for many years to come. We would expect SHC to
experience substantial ‘overnight’ growth and the returns from this will reward shareholders’ loyalty and significantly
increase the value of the company. Existing shareholders can reasonably expect a significant increase in the value of
their holdings over the very short term and also over the longer term.
Ethical implications of the secrecy option
In addition to the overwhelming business case, however, there is a strong ethical case for the secrecy option. SHC
recognises that it is the moral purpose of SHC to make profits in order to reward those who have risked their own money
to support it over many years. Whilst some companies pursue costly programmes intended to serve multiple stakeholder
interests, SHC recognises that it is required to comply with the demands of its legal owners, its shareholders, and not
to dilute those demands with other concerns that will reduce shareholder returns. This is an important part of the agency
relationship: the SHC board will always serve the best economic interests of its shareholders: its legal owners. The SHC
board believes that any action taken that renders shareholder returns suboptimal is a threat to shareholder value and an
abuse of the agency position. Your board will always seek to maximise shareholder wealth; hence our decision to pursue
the secrecy option in this case. The secrecy option offers the possibility of optimal shareholder value and because
shareholders invest in SHC to maximise returns, that is the only ethical action for the board to pursue. Happily, this
option will also protect the employees’ welfare in SHC’s hometown of Swan Hill and demonstrate its commitment to the
locality. This, in turn, will help to manage two of the key value-adding resources in the company, its employees and its
reputation. This will help in local recruitment and staff retention in future years.
(ii) For the licensing option
Important developments at SHC
Your board was recently faced with a very difficult business and ethical decision. After the discovery by SHC scientists
of the groundbreaking sink production method, we had a choice of keeping the new production technology secret or
sharing the breakthrough under a licensing arrangement with our competitors. After a lengthy discussion, your board
decided that we should pursue the licensing option and I would like to explain our reasons for this on both business and
ethical grounds.
In terms of the business case for licensing, I would like shareholders to understand that although the secrecy option may
have offered SHC the possibility of an unassailable competitive advantage, in reality, it would have incurred a number
of risks. Because of the speed with which we would have needed to have acted, it would have necessitated a large
increase in our borrowing, bringing about a substantial change in our financial structure. This would, in turn, increase
liquidity pressures and make us more vulnerable to rising interest rates. A second risk with the secrecy option would
involve the security of the sink technology ‘secret’. If the sink process was leaked or discovered by competitors and
subsequently copied, our lack of a legally binding patent would mean we would have no legal way to stop them
proceeding with their own version of the sink process.
As well as avoiding the risks, however, the licensing option offers a number of specific business advantages. The royalties
from the licences granted to competitors are expected to be very large indeed. These will be used over the coming years
to extend our existing competitive advantage in the future. Finally, the ‘improvement sharing’ clause in the licensing
contract will ensure that the sink process will be improved and perfected with several manufacturers using the
technology at the same time. SHC’s sink production may, in consequence, improve at a faster rate than would have
been the case were we to have pursued the secrecy option.
Ethical implications of the licensing option
In addition to the business case, there is also a powerful ethical case for the decision we have taken. As a good,
responsible corporate citizen, Swan Hill Company acknowledges its many stakeholders and recognises the impacts that
a business decision has on others. Your board recognises that in addition to external stakeholders having influence over
our operations, our decisions can also affect others. In this case, we have carefully considered the likelihood that keeping
the new technology a secret from our competitors would radically reshape the industry. The superior environmental
performance of the sink process over existing methods will also mean that when fully adopted, the environmental
emissions of the entire industry will be reduced. SHC is very proud of this contribution to this reduction in overall
environmental impact.
There seems little doubt that the secrecy option would have had far-reaching and unfortunate effects upon our industry
and our competitors. The licensing option will allow competitors, and their employees and shareholders, to survive. It
is a compassionate act on our part and shows mercy to the other competitors in the industry. It recognises the number
of impacts that a business decision has and would be the fairest (and most just) option given the number of people
affected.

正确答案：
(a) (i) Describe rules-based
In a rules-based jurisdiction, corporate governance provisions are legally binding and enforceable in law.
Non-compliance is punishable by fines or ultimately (in extremis) by delisting and director prosecutions.
There is limited latitude for interpretation of the provisions to match individual circumstances (‘one size fits all’). Some
have described this as a ‘box ticking’ exercise as companies seek to comply despite some provisions applying to their
individual circumstances more than others.
Investor confidence is underpinned by the quality of the legislation rather than the degree of compliance (which will be
total for the most part).

正确答案：
(b) Growth may be measured in a number of ways which are as follows:
Cash flow
This is a very important measure of growth as it ultimately determines the amount of funds available for re-investment by any
business.
Sales revenue
Growth in sales revenues generated is only of real value to investors if it precipitates growth in profits.
Profitability
There are many measures relating to profit which include sales margin, earnings before interest, taxation, depreciation and
amortisation (EBITDA) and earnings per share. More sophisticated measures such as return on capital employed and residual
income consider the size of the investment relative to the level of profits earned. In general terms, measures of profitability
are only meaningful if they are used as a basis for comparisons over time or in conjunction with other measures of
performance. Growth rate in profitability are useful when compared with other companies and also with other industries.
Return on investment
A growing return upon invested capital suggests that capital is being used more and more productively. Indicators of a growing
return would be measured by reference to dividend payment and capital growth.
Market share
Growth in market share is generally seen as positive as it can generate economies of scale.
Number of products/service offerings
Growth is only regarded as useful if products and services are profitable.
Number of employees
Measures of productivity such as value added per employee and profit per employee are often used by shareholders in
assessing growth. Very often an increased headcount is a measure of success in circumstances where more people are
needed in order to deliver a service to a required standard. However it is incumbent on management to ensure that all
employees are utilised in an effective manner.
It is a widely held belief that growth requires profits and that growth produces profits. Profits are essential in order to prevent
a company which has achieved growth from becoming a target for a take-over or in a worse case scenario goes into
liquidation. Hence it is fundamental that a business is profitable throughout its existence. Growth accompanied by growth in
profits is also likely to aid the long-term survival of an organisation. CSG operates in Swingland which experiences fluctuations
in its economic climate and in this respect the exploitation of profitable growth opportunities will help CSG to survive at the
expense of its competitors who do not exploit such opportunities.
Note: Alternative relevant discussion and examples would be accepted.

正确答案：
(b) A central feature of many performance measurement systems is the widespread use of league tables that display each
business unit’s performance relative to one another. In the case of service organisations such as TSC the use of league tables
emphasises the company’s critical success factors of profitability and quality of service by reporting results on a weekly basis
at the depot level. The fact that such league tables are used by management will actively encourage competition, in terms of
performance, among depots. The individual position of a business unit in the league table is keenly observed both by the
manager of that unit and his/her peers.
In theory, performance is transparent. In practice although each depot performs essentially the same function and is subject
to the same modes of measurement, circumstances pertaining to different business units may vary significantly. Some depots
may be situated near to the hub (main distribution centre), some may be located far away and some may be in urban zones
with well developed road networks whilst others may be in remote rural areas. Measuring performance via a league table
makes no allowance whatsoever for these relative differences, hence, inequality is built into the performance measurement
system.
Moreover, depot managers might be held responsible for areas over which they have no formal control. The network nature
of the business suggests that there will be a high degree of interdependence of depots; the depot responsible for collection
will very often not be the depot responsible for delivery. Therefore, it is frequently the case that business may be gained for
which the collecting depot receives the revenue, but for which the delivering depot bears the cost. Obviously this impacts
upon the profit statements of both depots. The formal system might not recognise such difficulties, the corporate view being
that ‘the business needs to be managed’; the depots should therefore see any such anomalies as mild constraints to work
around rather than barriers to break down. In such circumstances delivering depots and collecting depots should discuss such
problems on an informal basis. Such informal discussions are aided by close communications between depots recognising
the interdependencies of the business.

正确答案：
(c) Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs using
activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational
decisions in an organisation. Activity-based costing establishes relationships between overhead costs and activities so that
overhead costs can be more precisely allocated to products, services, or customer segments. Activity-based management
focuses on managing activities to reduce costs and improve customer value.
Kaplan and Cooper (1998) divide ABM into operational ABM and strategic ABM:
Operational ABM is about ‘doing things right’, using ABC information to improve efficiency. Those activities which add value
to the product can be identified and improved. Activities that don’t add value are the ones that need to be reduced to cut costs
without reducing product value.
Strategic ABM is about ‘doing the right things’, using ABC information to decide which products to develop and which
activities to use. This can also be used for customer profitability analysis, identifying which customers are the most profitable
and focusing on them more.
A risk with ABM is that some activities have an implicit value, not necessarily reflected in a financial value added to any
product. For instance a particularly pleasant workplace can help attract and retain the best staff, but may not be identified as
adding value in operational ABM. A customer that represents a loss based on committed activities, but that opens up leads
in a new market, may be identified as a low value customer by a strategic ABM process.
ABM can give middle managers an understanding of costs to other teams to help them make decisions that benefit the whole
organisation, not just their activities’ bottom line.

正确答案：

(a) (i) Roles of a risk manager
Providing overall leadership, vision and direction, involving the establishment of risk management (RM) policies,
establishing RM systems etc. Seeking opportunities for improvement or tightening of systems.
Developing and promoting RM competences, systems, culture, procedures, protocols and patterns of behaviour. It is
important to understand that risk management is as much about instituting and embedding risk systems as much as
issuing written procedure. The systems must be capable of accurate risk assessment which seem not to be the case at
H&Z as he didn’t account for variables other than impact/hazard.
Reporting on the above to management and risk committee as appropriate. Reporting information should be in a form
able to be used for the generation of external reporting as necessary. John’s issuing of ‘advice’ will usually be less useful
than full reporting information containing all of the information necessary for management to decide on risk policy.

Ensuring compliance with relevant codes, regulations, statutes, etc. This may be at national level (e.g. Sarbanes Oxley)
or it may be industry specific. Banks, oil, mining and some parts of the tourism industry, for example, all have internal
risk rules that risk managers are required to comply with.
[Tutorial note: do not reward bullet lists. Study texts both use lists but question says ‘describe’.]
(ii) John Pentanol’s understanding of his role
John appears to misunderstand the role of a risk manager in four ways.
Whereas the establishment of RM policies is usually the most important first step in risk management, John launched
straight into detailed risk assessments (as he saw it). It is much more important, initially, to gain an understanding of
the business, its strategies, controls and risk exposures. The assessment comes once the policy has been put in place.
It is important for the risk manager to report fully on the risks in the organisation and John’s issuing of ‘advice’ will usually
be less useful than full reporting information. Full reporting would contain all of the information necessary for
management to decide on risk policy.
He told Jane Xylene that his role as risk manager involved eliminating ‘all of the highest risks at H&Z Company’ which
is an incorrect view. Jane Xylene was correct to say that entrepreneurial risk was important, for example.
The risk manager is an operational role in a company such as H&Z Company and it will usually be up to senior
management to decide on important matters such as withdrawal from risky activities. John was being presumptuous
and overstepping his role in issuing advice on withdrawal from Risk 3. It is his job to report on risks to senior
management and for them to make such decisions based on the information he provides.

(b) Criticise John’s advice
The advice is based on an incomplete and flawed risk assessment. Most simple risk assessment frameworks comprise at least
two variables of which impact or hazard is only one. The other key variable is probability. Risk impact has to be weighed
against probability and the fact that a risk has a high potential impact does not mean the risk should be avoided as long as
the probability is within acceptable limits. It is the weighted combination of hazard/impact and probability that forms the basis
for meaningful risk assessment.
John appears to be very certain of his impact assessments but the case does not tell us on what information the assessment
is made. It is important to recognise that ‘hard’ data is very difficult to obtain on both impact and probability. Both measures
are often made with a degree of assumption and absolute measures such as John’s ranking of Risks 1, 2 and 3 are not as
straightforward as he suggests.
John also overlooks a key strategic reason for H&Z bearing the risks in the first place, which is the return achievable by the
bearing of risk. Every investment and business strategy carries a degree of risk and this must be weighed against the financial
return that can be expected by the bearing of the risk.
(c) (i) Define ‘entrepreneurial risk’
Entrepreneurial risk is the necessary risk associated with any new business venture or opportunity. It is most clearly seen
in entrepreneurial business activity, hence its name. In ‘Ansoff’ terms, entrepreneurial risk is expressed in terms of the
unknowns of the market/customer reception of a new venture or of product uncertainties, for example product design,
construction, etc. There is also entrepreneurial risk in uncertainties concerning the competences and skills of the
entrepreneurs themselves.
Entrepreneurial risk is necessary, as Jane Xylene suggested, because it is from taking these risks that business
opportunities arise. The fact that the opportunity may not be as hoped does not mean it should not be pursued. Any
new product, new market development or new activity is a potential source of entrepreneurial risk but these are also the
sources of future revenue streams and hence growth in company value.

(ii) Critically evaluate Jane Xylene’s view of risk management
There are a number of arguments against risk management in general. These arguments apply against the totality of risk
management and also of the employment of inappropriate risk measures.
There is a cost associated with all elements of risk management which must obviously be borne by the company.
Disruption to normal organisational practices and procedures as risk systems are complied with.
Slowing (introducing friction to) the seizing of new business opportunities or the development of internal systems as they
are scrutinised for risk.
‘STOP’ errors can occur as a result of risk management systems where a practice or opportunity has been stopped on
the grounds of its risk when it should have been allowed to proceed. This may be the case with Risk 3 in the case.
(Contrast with ‘GO’ errors which are the opposite of STOP errors.)
There are also arguments for risk management people and systems in H&Z. The most obvious benefit is that an effective
risk system identifies those risks that could detract from the achievements of the company’s strategic objectives. In this
respect, it can prevent costly mistakes by advising against those actions that may lose the company value. It also has
the effect of reassuring investors and capital markets that the company is aware of and is in the process of managing
its risks. Where relevant, risk management is necessary for compliance with codes, listing rules or statutory instruments.

正确答案：
(c) Likely effectiveness of standard questionnaires
Most group auditors obtain information from other auditors through questionnaires in the form. of yes/no requests and/or
detailed questions.
Standard yes/no questionnaires are widely used because, for example, they:
■ can be completed more quickly by someone already familiar with their form. and content;
■ facilitate summarisation of responses from other auditors by the group auditor.
However, a standard questionnaire may be less effective than a ‘bespoke’ one in that it is likely to ask unnecessary questions.
This may result in the other auditor finding the questions to be ‘not applicable’ and regarding completion of the questionnaire
as a form-filling exercise, rather than providing the group auditor with essential information.
Nevertheless, there is a danger that questionnaires that are not based on some standard form. may overlook or otherwise omit
some significant issues and therefore fail to alert the group auditor to a potential risk area.
Thus a balance needs to be struck between requesting enough information for the group auditor to form. their own view
without requesting meaningless ‘box-ticking’ questions that do not deal with the issues. Questionnaires that get longer and
longer are likely to lose their effectiveness especially if they are to be used in different locations/jurisdictions.
Questionnaires will cover a broad range of topics such as qualifications, competence/experience, compliance with ISAs (and
ISQC 1), audit findings, subsequent events, etc. Therefore there will be a tendency to length (completeness) rather than
quality (relevance).
In conclusion, questionnaires should:
■ avoid over-use of yes/no questions which may encourage laxity;
■ not ask for information that has already been provided or which is unnecessary; and
■ be adequately tailored.

参考答案：D