Exploring the Key issues relevant to preventing a future financial crisis

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As a professional accountant he or she needs to have a clear idea of corporate governance, sole trader ships, partnerships, limited companies, audit, professional value, ethics and attitudes. This paper describes few ideas of this above topics like Key issues to prevent future financial crisis reoccurring, Implications for legalising the UK Corporate Governance Code, Problems and solution of performance related remuneration of executive directors, Differences and similarities, merits and demerits of sole trader ship, Partnerships and A private limited company, Appointment and removal of external auditors, Audit Report for material matter, Key differences between internal audit and external audit, Code of Ethics for Professional Accountants, Main Threats and mitigation to Objectivity and Integrity

Case 1: Corporate governance

1.1 Key issues to prevent future financial crisis reoccurring:

A good risk management must give greater attention to understanding culture and what drives behaviour, sometimes referred to as the 'control environment'. It can be argued that risk management and compliance in banks became a mathematical exercise which for all practical purposes ignored human nature.

Key issues to prevent future financial crisis reoccurring:

Understanding the control environment, including the competence of the board and staff, the culture, key motivators and the ethical climate.

Understanding the company's strategy and purpose and the associated risks.

Understanding of the business model, the value drivers, the systems and their associated risks.

Balancing risk against reward.

Efficient business processes, including management and financial reporting systems.

Compliance with relevant requirements.

An appreciation that risk management is not about managing individual risks, but about understanding patterns of risk and how they are interrelated.

Understanding all the significant risks threatening, or potentially threatening the company, including those which might kill it.

The board and the company's attitude to risk and their willingness to accept it.

The ability to manage risks so they are within limits of acceptability.

A process of feedback involving monitoring and learning, so that strategic and other key decisions are taken only where the risks are understood and acceptable.

In any complex large organisation, an independent assurance function that gives objective assurance, to the board or the non-executive directors, on each of the above elements.

The board having ownership of, and strong commitment to, risk management, including a clear understanding of the above elements.

1.2 Implications for legalising the UK Corporate Governance Code

In effect the institutional environment for corporate governance seems to be rapidly shifting from self-regulation to compulsory compliance. Particularly, corporate financial reporting and audit committees have been the subject of much regulatory reform. Yet whether or not this new approach to governance policy ultimately promotes shareholders value remains a subject of ongoing debate in the business press and academic literature alike.

In that connection, it has been argued that stiffer regulatory pressure could have the adverse effect of requiring corporate boards to spend more of their valuable time full filling statutory mandates instead of pursuing more productive activities. As a result, the necessary balance between managerial accountability and business health may break down.

Underlying this assertion is the informal claim that higher workloads prompted by intense scrutiny of the firms internal control and reporting systems may come at the expense of NEDs value-enhancing engagement in corporate strategy. As the new governance climate gathers pace, it is thus important to formally examine whether the heightened burden of disclosure requirements and compliance-oriented work, while on the surface understandable, could in reality have inadvertent side-effects. It goes without saying that the compliance with stricter financial reporting standards entails direct costs for firms. In this paper we contend that other indirect, unrecognised economic costs may in reality play an equally pivotal role. Specifically, public policy changes intended to reduce the extent of misrepresentation may actually influence top managements incentive to manipulate the firms (formal) internal control and reporting system. As a result, aggregate welfare and the long-term value of the firms may ultimately suffer.

1.3 Problems and solution of performance related remuneration of executive directors:

The remuneration committee should consider whether the directors should be eligible for annual bonuses. If so, performance conditions should be relevant, stretching and designed to promote the long-term success of the company. Upper limits should be set and disclosed. There may be a case for part payment in shares to be held for a significant period.

The remuneration committee should consider whether the directors should be eligible for benefits under long-term incentive schemes. Traditional share option schemes should be weighed against other kinds of long-term incentive scheme. Executive share options should not be offered at a discount save as permitted by the relevant provisions of the Listing Rules.

In normal circumstances, shares granted or other forms of deferred remuneration should not vest, and options should not be exercisable, in less than three years. Directors should be encouraged to hold their shares for a further period after vesting or exercise, subject to the need to finance any costs of acquisition and associated tax liabilities.

Any new long-term incentive schemes which are proposed should be approved by shareholders and should preferably replace any existing schemes or, at least, form part of a well considered overall plan incorporating existing schemes.

The total potentially available rewards should not be excessive. Payouts or grants under all incentive schemes, including new grants under existing share option schemes, should be subject to challenging performance criteria reflecting the company's objectives, including non-financial performance metrics where appropriate. Remuneration incentives should be compatible with risk policies and systems.

Grants under executive share option and other long-term incentive schemes should normally be phased rather than awarded in one large block. Consideration should be given to the use of provisions that permit the company to reclaim variable components in exceptional circumstances of misstatement or misconduct.

In general, only basic salary should be pensionable. The remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and any other changes in pensionable remuneration, especially for directors close to retirement.

Case 2: Sole Trader Ships, Partnerships and Limited Liability Companies:

2.1 Differences and similarities of running a business as sole trader ship, Partnerships and A private limited company:

Sole trader: A person who carry his business on himself or herself and a person who is responsible entirely for its own organization. He invests money into the business and own assets. There is not distinction between the business and the proprietor. In law they are viewed as one. Any liabilities that the business has, must be ultimately found from the proprietors own personal wealth should the business not be able to pay them.

Partnership: It is the relation which subsists between persons carrying on a business in common with a view of profit. It is in effect a sole trader but has more than one person who owns the business.

Private Limited Liability Company: Company is limited by shares or guarantee and is the way the majority of companies are formed.

Characteristics of private limited company:

No minimum share capital requirement

Name must be end with limited unless unlimited

Cannot offer share debenture to public

Can be limited of unlimited by shares or guarantee

No any requirement of capital paid up or premium

Must have at least 1 shareholder

Must have at least 1 director with a different person being the company secretary

No any requirement of company secretary qualification

Accounts filed within 7 months of the year end

Rules are less straight

Can pass a resolution dispensing of AGM and reappointment of auditors

Can commence business on incorporation not need to wait for trading certificate.

2.2 Merits and Demerits of sole trader ship, Partnerships and A private limited company:

Sole trader:


no formal procedures

No detailed accounts required


Self accountability

Personal supervision

All profits are owners


Unlimited liability

Dependence on owner to invest money

Death of the owner

Owner may have only one skill

Small size organization



Often more money can be raised to start the business if more than one person is involved.

Need to keep records for Inland Revenue (and also for VAT if registered), but there are no other legal requirements. Each partner should submit a P/SE/1 and taxed as an individual. If any partner leave the partnership tax liability will follow (unlike in the past when the remaining partner had to pay it).

The workload can be shared.


All personal assets of each partner are at risk if the business fails. Personal bankruptcy can occur.

Decisions are taken jointly. The agreement may specify different levels of decision making for each partner. Either way a stalemate could easily arise, or the decision making process could be hampered, if a decision cannot be reached without the major shareholder present.

Private Limited Liability Company:


Limited liability can usually protect directors, who act in good faith, from legal actions brought against them.


There is considerably more administration involved in running a Limited Company than there is for a Partnership or Sole Trader.

Even with no other staff, the "owner" or director of the company is considered to be an employee of the company; therefore the more expensive Class 1 National Insurance Contributions must be paid.

Company cannot keep your business affairs private. They have to hold an Annual General Meeting (AGM) for all the share holders and must also submit an Annual Reports to the Companies Registration Office, along with a fee (currently £15.00)

Case 3: Audit

3.1: Appointment and removal of external auditors:


Normally appointed annually

By shareholders resolution

In particular circumstances, eg first auditors, casual vacancy,

directors can appoint auditors


Resolution by shareholders

Auditors entitled to:

Notice of resolution

Make written representation

Speak at shareholders meetings until their term of office have expired

3.2 Audit Report for material matter:

Qualified audit report for material matter

Qualified audit report should be expressed when auditors concludes that an unqualified opinion cannot be expressed

There is disagreement with management but It is not so material and pervasive so that adverse opinion is required Or

There is limitation on scope of audit but it is not so material or pervasive so that disclaimer of opinion is required

The above stated situation leads to a qualified opinion.

Qualified opinion should be expressed as being "Subject to" or "except" for

All qualification are given at one place in auditor report and they should be above opinion paragraph

All qualification should be qualified individually and their impact of P&L & B/S should be ascertained

In case qualification cannot be qualified then this fact is to be disclosed by an auditor

The aggregate effect of all qualification is also required to be computed and aggregate affect on P&L & B/s needs to be disclosed.

In case the aggregate affect is so material that it leads to distortion of view expressed in financial statement then instead of qualified report, an auditor is required to uses adverse opinion.

3.3 Key differences between internal audit and external audit:

The main differences between internal and external audit functions

1. Position inside the organization

The internal auditors' are part of the organization. Their objectives are determined by professional standards, the board, and management. Their primary clients are management and the board.

External auditors are not part of the organization, but are engaged by it. Their objectives are set primarily by statute and their primary client - the board of directors.

2. Objectives

The internal auditor's scope of work is comprehensive. It serves the organization by helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes.

The primary mission of the external auditors is to provide an independent opinion on the organization's financial statements, annually.

3. Independence

Internal audit must be independent from the audited activities.

External audit is independent from its client, the organization, its independence being specific to liberal professions.

4. Approach of internal control

Internal audit regards all the aspects regarding the organization's internal control system.

External audit regards the internal control system only from the materiality perspective, which permits them to eliminate those errors that aren't significant, because they don't have influences over the financial results.

5. Applying of the audit

Internal audit covers all the organization transactions.

External audit covers only those operations that have a contribution at the financial results and the performances of the organization.

6. Frequency of the audit

Internal audit performs during the entire year, having specific missions established in according with the level of risks identified for each auditable entity.

External audit is an activity with a yearly frequency, as a rule, at the end of the year.

7. Approach of risk

The importance of risk for the planning of internal audit activity is very high.

External audit uses the information of risks for the determination of nature, period of time and necessary audit procedures that should be performed in the auditable area, taking into consideration only financial aspects.

8. Approach of fraud

Internal audit is concerned about the frauds from all activities from the organization.

External audit is concerned only about the fraud from financial areas.

Case 4: Professional Values, Ethics and Attitudes:

4.1: Code of Ethics for Professional Accountants:

A professional accountant is required to comply with the following fundamental principles:

(a) Integrity

A professional accountant should be straightforward and honest in all professional and business relationships.

(b) Objectivity

A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

(c) Professional Competence and Due Care

A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.

(d) Confidentiality

A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties.

(e) Professional Behaviour

A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

4.2 Main Threats and mitigation to Objectivity and Integrity


(a) Self-interest threat: Occurs when a firm of a member of the assurance team has some financial or other interest in an assurance client.

(b) Self-review threat: Occurs when a previous judgement needs to be re-evaluated by members responsible for that judgement.

(c) Advocacy threat: Occurs when members promote a position or opinion to the point that subsequent objectivity may be compromised.

(d) Familiarity threat: Occurs when, because of a close relationship, members become too sympathetic to the interests of others.

(e) Intimidation threat: Occurs when members are deterred from acting objectively by threats, actual or perceived.


Education, training and experience requirements

CPD requirements

Corporate governance codes

Professional standards

Professional or regulatory monitoring and disciplinary procedures

Ethics and conduct programmes

Recruitment procedures

Strong internal controls

Disciplinary processes

Leadership that stresses importance of ethical behaviour

Quality control procedures

Training and education

Different partners and teams for provision of non-assurance services

Procedures to empower employees to communicate ethical concerns to senior levels without fear of retribution

Consultation with another appropriate professional accountant


At last it can be said that this paper is going to help us in future practical fields as a professional accountants.