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ICAEW BTF - MEMORY RECAP QUESTIONS &
ANSWERS
Porter's 5 forces model, what is the purpose and what are the elements? - Answer - Analyses the competitive aspect of the task environment:
- Bargaining power of suppliers
- Threat of substitute products or services
- Bargaining power of customers
- Threat of new entrants
- Rivalry among existing firms In terms of the management process, what does leading involve? - Answer - Concerned with generating effort and commitment towards meeting objectives What are the different types of power and their meaning? - Answer - Coercive - physical force or power of punishment Reward - e.g. power to pay you Legitimate - associated with a particular position Expert - from knowing lots Referent - through charisma/charm Negative - power to disrupt operations What are different types of manager? - Answer - Line manager - traditional boss Staff manager - no actual power, has power through giving advice (e.g. HR) Functional manager - best example is IT, hybrid of line and staff manager (has real power in some circumstances) Project manager - has power over a particular project/things that happen in a certain context With regards to internal controls, what are the managers responsible for? What about the board of directors? - Answer - Managers are supposed to implement the controls and monitor them. The board of directors are responsible for policy making, reviewing effectiveness and reporting to shareholders. What are the types of finance activities for a company and what are their responsibilities? - Answer - Finance function (overarching) Management accounting: budgeting, decision making, performance measurement, capital budgeting, pricing --> internal Treasury management: cash budgets, long-term finance decisions, managing financial risk, management of working capital
Financial reporting: financial statements, tax, provision of information to external regulators --> external What are the key features of an organisation? - Answer - Social arrangement that pursues collective goals, controls its own performance, and has a boundary separating it from its environment What are Mintzberg's 5 Ps of strategy? - Answer - Plan - for example a budget Ploy - like a manoeuvre in a competitive game Pattern - something you tend to do Position - matching internal and external factors Perspective - what is your attitude to the environment? What are the stages of the rational planning model? - Answer - SWOT analysis (internal and external) Corporate appraisal Mission, goals and objectives GAP (difference between the appraisal and the mission) Strategic choice Implementation --> review and control (feedback loop) What is cost leadership, differentiation, and focuses? - Answer - Cost leadership simply about producing at the lowest cost in the industry as a whole (note that not necessarily charging the lowest prices Differentiation about providing a product or service that the industry believes to be unique Focus/niche means restricting activities to one section of the market (can have both a cost focus niche and differentiation niche) When would we use a SWOT analysis? - Answer - At the corporate appraisal stage What is risk exposure? - Answer - Simply a measure of the way a business is faced by risks, whether financial/business/etc. What are the fundamental and enhancing qualitative characteristics of financial reporting? - Answer - Fundamental: relevance and faithfulness of representation Enhancing: understandability, comparability, verifiability and timeliness Would a driver mislaying a tablet containing sensitive information constitute a cyber risk? - Answer - Potentially yes, cyber risk also encompasses operational IT risks due to poor systems integrity so if the data would be accessible then this could be a cyber risk
What does integrity imply? - Answer - Professional responsibility Is anyone allowed to say they are an accountant and offer a full range of accountancy services? - Answer - No - while accountant is not a protected term, there are some things (like insolvency/statutory audit) that require certification What is the FRRP and what do they do? - Answer - Financial reporting review panel - they investigate departures from accounting standards by large companies such as those listed on LSE For the AGM of a public company, which committees must be represented by their respected chairs? Can the chairman be a member of the remuneration committee? - Answer - Audit, remuneration and nomination He may be a member, but cannot chair the committee Who is responsible for reviewing arrangements about disclosures of wrongdoing in a company? - Answer - The audit committee When should lead or reviewing audit partners be rotated according to the Sarbanes- Oxley act? According to the act, where does responsibility for the company's internal financial controls lie? - Answer - Every 5 years. Responsibility lies with the CEO and CFO. If listed in the USA must comply with the act What is a mission, vision, goal, and plan? - Answer - Mission lays out the purpose of an organisation (create value for shareholders), as well as how they will do it and what their values are Vision involves some element of looking forward to a future state Goal can be qualitative (aims) or operational and quantitative (objectives). Objectives should be SMART - specific, measurable, achievable, relevant and time bound. Plans state what should be done to achieve an operational objective, standards (targets) specify a desired level of performance. How does delegation work? - Answer - You transfer the power, authority, and responsibility. However, the accountability always lies with the delegater. What are three management roles and examples, what about leadership styles? - Answer - Informational role (minister/MP), interpersonal role (to do with charisma), decisional role (more traditional management).
Exercising authority (traditional power), autonomy (giving more freedom), leadership (inspiring effort from others, more innate). What are examples of different business cultures (Ray Quinn)? - Answer - Human relations culture (inward looking and flexible) - IT department Internal process culture (inward looking and controlling) - call centre Open systems culture (outward looking and flexible) - media company Rational goal culture (outward looking and controlling) - supermarket What are the implications of Taylorism for organisational management? - Answer - Main motivator is high wages Managers job is just to tell people what to do Workers jobs are to do what they are told and get paid Essentially people are like machines! What are Herzberg's motivating factors? How do they relate to the Maslow hierarchy of needs? - Answer - Hygiene factors are like at the bottom of the hierarchy, if they are absent they will demotivate. Motivating factors are towards the top, these are required for positive motivation. Hygiene factor is like health and safety, motivating factor is like a sense of achievement. What are stages of group formation? - Answer - Forming, storming, norming, performing What are Belbin's ream roles? - Answer - Leader - like a strategist, not imposing Shaper - like a deputy, may be aggressive and challenging Plant - thoughtful and thought provoking - plants seeds and ideas Evaluator - the sanity check Resource investigator - acts as bridge to outside world Company worker - practical and efficient, actually does the work Team worker - deals with relationships within the team Finisher - enforce deadlines What are the 4 Cs of HRM? What are hard and soft approaches? - Answer - Commitment, competence, congruence, cost-effectiveness (short term) Hard approach emphasises the resources element of HRM (Taylorism). Soft approach emphasises the 4 Cs.
What is the span of control? What are tall and flat businesses? What are three characteristics a wide and flat organisation are likely to exhibit? - Answer - The number of people reporting to one person. Businesses that are tall generally have a narrow span of control, those that are flat generally have wide spans of control. Tall businesses include hospitals, flat businesses might be an editorial team at a newspaper. Greater need to delegate, better communication between strategic apex and operating core, large spans of control. What are mechanistic and organic structures? - Answer - Mechanistic structures are like bureaucracies, large technostructure and standardisation. Organic organisations like a combination between adhocracy and professional bureaucracy. Good example is google, committed and competent staff with shared values and culture. What are Mintzberg's 5 Ps of strategy? What are 3 levels of strategy? - Answer - Plan - e.g. a budget Ploy - tactics Pattern - consistency of behaviour Position - how business relates to its environment Perspective - attitude/way of looking at the world Corporate (executive level), Business (Tactical level), Functional (operational) What is an alternative to strategic planning? - Answer - Emergent approach - basically the opposite of rational planning. Examples might include viagra/adult friend finder. How might we approach strategic options generation? What about strategic options evaluation? - Answer - Porters generic strategies, Ansoff's product/market strategies Stakeholder analysis, risk analysis How might we evaluate static environments? What about dynamic ones? What about aspects of the environment more generally? - Answer - 4 Ss - static, single, simple, safe 4 Ds - dynamic, diverse, difficult, dangerous PESTEL analysis: political, economic, social, technological, ecological, legal
What are Kotler's four kinds of competitor and response profiles? - Answer - Brand competitors (coke/pepsi) - basically the same Industry competitors (tesco/spa) - similar industry profile Generic competitors (Ipad/Thomas cook - compete for same income) Form competitors (match/lighter) - satisfy the same need Response profiles:
- laid back (no response)
- tiger (aggressive response)
- selective (reacts to some but not all)
- stochastic (unpredictable) What are the 9 Ms of a typical resource audit? - Answer - Machinery Make-up Management MI Markets Materials Men Methods Money Analysing Porter's value chain, what are primary activities and supporting activities? - Answer - Primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) Supporting activities (firm infrastructure, human resource management, technology development, procurement) What is the BCG matrix, what should a company do in each quadrant? - Answer - Low market share and high growth - question mark. Should harvest or build. High market share and high growth - star. Should build. High market share but low growth - cash cow. Should hold or harvest. Low market share and low growth - dog. Should hold or divest. How can we analyse stakeholders attention? - Answer - Level of interest high and power held high - these are key players, e.g. the funders. Care lots about these people. Level of interest high but power low - this might be the public. Perhaps we keep them informed but they can't necessarily hurt us. Level of power high but level of interest low - this might be the regulator. We basically don't want to mess things up with them.
Low probability and impact - accept (do nothing) What are key differences between crises and disasters? - Answer - A crisis impacts on customers, employees and other stakeholders, it therefore impacts externally. Can have a financial crisis (go bust), PR crisis (major cock-up), or strategic crisis (out of touch). By contrast, disaster typically doesn't have a direct impact on stakeholders. Disasters can lead to a crisis if left unchecked. A good example might be a fire at an office or factory. Disasters threaten business operations but can be mitigated with good contingency planning. What are the key characteristics of good information? - Answer - ACCURATE: accurate, complete, cost-beneficial, user-targeted, relevant, authoritative, timely, easy to use What are the 4 Vs of big data? Which is unique to big data? - Answer - Volume, Velocity, Variety, Veracity Key point is the velocity which is unique What is the distinction between structured and unstructured data? - Answer - Structured
- obtained with a particular purpose in mind (e.g. survey) Unstructured - obtained without a particular purpose (e.g. captured data from smartphones, or user generated data like tweets) What are the two underlying assumptions that financial information must be prepared under? What does the IASB say are the key qualitative characteristics of useful financial statements? - Answer - Accruals basis accounting and going concern. Understandability, relevance, reliability, comparability. What is a management information system? How does it differ from an information management system? - Answer - MIS converts data from mainly internal sources into information enabling managers to make better decisions. An example would be management accounts. Information management systems are more general. What are types of information management system and their uses? - Answer - Executive support system: pools internal and external sources, allows senior managers make strategic, unstructured decisions. Decision support system: like an analytical model, e.g. net present value calculation Expert system: captures human expertise in a limited domain of knowledge to allow users to benefit, e.g. credit rating system
Knowledge work systems: facilitate creation and integration of new knowledge, e.g. intranet Office automation system: increases workplace productivity, e.g. Microsoft office AI: self-learning information processing What are key controls for information security? - Answer - Physical access: personnel, doors locked, etc. Integrity: data verification, data validation (check digits, range checks, limit checks) Backup: disaster recovery plan/regular backups/cloud storage Logical access system: basically passwords, need to know identity /authentication of the user Personnel selection: job rotation, review and supervision What is the overarching function, and three sub-functions, of the finance department? - Answer - Overarching function of recording financial transactions (ledgers, entry books, etc.) Sub-functions: Management accounting (internal audience, pricing, budgeting, decision making, etc.) Treasury management (getting money for the business, cash budgets, finance decisions, managing risk, forex, etc.) Financial reporting (external audience, financial statements, tax, external regulation How do not for profit organisations measure their performance? - Answer - The three Es (efficiency, economy, effectiveness) What are critical success factors and key performance indicators? Give an example of a pizza place. - Answer - Critical success factors are generic things an organisation must do well to succeed. Key performance indicators are how we measure the achievement of CSFs. For example, a pizza place might have the CSF of speed of service, and a KPI may be number of complaints, mystery shopper results, how many times they had to give free pizza, etc. How can we distinguish debt holders and equity holders in terms of risk and return? - Answer - Debt holders face lower risk but lower returns (debt often secured by fixed/floating charges, rank higher to receive capital back)
Deposits: slightly higher risk and return than treasury bills (though not much) CDs (certificates of deposit): large, fixed term, tradable Gilts: longer term government debt, larger range of maturities and rates based on money market rates Bonds: company debt, decent liquidity, higher risk and return Commercial paper: similar to bonds, but for large companies How may a business access finance? - Answer -- National stock markets
- Banking system (primary and secondary banks)
- Bond market (large organisations, large amounts of money)
- Leasing
- Debt factoring (usually smaller businesses, great for cashflow)
- International markets (can raise money in different currencies, mitigate forex risk) What are some advantages and disadvantages of sources of debt finance? - Answer - Overdraft: good because flexible and interest cost can be low since only paid when overdrawn. Bad because is risky as must be repaid on demand, can be expensive if permanently in overdraft Debt factoring: good because gets cash right away, and low risk. However, can be a bad deal How might a business finance itself throughout its growth? - Answer -- First savings, small scale.
- More growth, remortgage and leasing
- Become ltd, perhaps share issue
- Business angel/VC investment, loans and debt factoring
- Very large now, secured debt and issue more shares
- Multinational company, become plc How do bills of exchange and letters of credit help to reduce exchange risk? What other ways are there to mitigate this risk? - Answer - A bill of exchange is drawn up by the exporter and sent to the buyers bank. The bank accepts the obligation to pay the bill, meaning payment is guaranteed. The seller may then sell/discount the bill to a third party in return for cash now (provides liquidity and mitigates risk of irrecoverable debt. Letter of credit provides a payment method where the exporter makes a deal with the buyer and a participating bank before the sale takes place. Seller (exporter) receives immediate payment less some discount, and the buyer gets a credit period before paying. Can also get more straightforward export credit insurance.
What are the three basic aspects of the professional accountants work? - Answer - Maintaining control and safeguarding assets Financial management Financial reporting What are criteria for ICAEW membership? - Answer - 2 A levels or equivalent, 450 days training with an approved organisation, professional examinations, certificate of suitability of membership, admission and subscription fees. To maintain membership must obey rules and regulations, undertake continuing professional development. For public practice: must hold a practicing certificate, code of ethics, and be covered by professional indemnity insurance. What are the reserved areas of practice? According to the companies act, what does being a qualified chartered accountant allow you to be appointed as? - Answer -- Statutory audit
- Investment business
- Insolvency practice
- Probate Note that accountant is not a protected term. According to the companies act this qualifies you to be company secretary if the company is listed. What are the 5 fundamental ethical principals? - Answer - Confidentiality, Objectivity, Professional competence and due care, Integrity, Professional behaviour What is IFAC and its aims? What are the UK members? What is the CCAB and who are the members? - Answer - IFAC is the international federation of accountants - aims to protect public interest by ensuring high quality practices in accounting. Members are basically every UK accounting body. CCAB is the consultative committee of accountancy bodies. UK members are ICAEW, ICAS, Chartered accountants Ireland, ACCA, CIPFA. Notably CIMA is not a member since the focus is generally more on audit since accounting more regulated by the FRC. What area the three elements of regulation in the accounting profession? - Answer -- Government legislation
- The profession (self regulation)
- Oversight mechanism (FRC) What is the PO team, and what do they have statutory power over? - Answer - An organ of the FRC, main responsibility for supervision of auditing profession, statutory
What is the actuarial policy team and what do they do? - Answer - Part of the codes and standards committee within the FRC. Concerned with improving and establishing actuarial standards (generally technical stuff). How are financial services regulated in the UK? What are some smaller financial regulators that might affect the work of professional accountants? - Answer - Twin peaks regulatory regime: Prudential Regulation Authority (PRA) which is part of the Bank of England, and the Financial Conduct Authority (FCA) which is an independent body. These financial bodies are relevant because they deal with regulation of financial instruments, investments, etc. Also, UKLA is part of the FCA and regulates all companies listed on public exchanges in the UK. Smaller regulators include the financial ombudsman and the pensions regulator. What is the professional standards department? How is it different from the PD? - Answer - Professional standards department (PSD) is part of the ICAEW, responsible for dealing internally with complaints against members. A complaint that is very serious will be passed onto the FRC's PD which is the overarching discipline body. What is the ICAEW complaints and disciplinary procedure? What does the disciplinary committee have the power to do? - Answer - The professional standards department has a number of steps in dealing with an issue:
- Conciliation: try to find a practical solution without resort to formal investigation
- Investigation Committee: gather evidence on the issue from the affected parties, if proven the accountant might accept a disciplinary order or a caution
- Disciplinary Committee: if misconduct is serious, not enough to accept disciplinary order or a caution. More serious punishment (could be struck off) Disciplinary committee fine the firm, exclude ICAEW membership, or even take away the firms practising certificate. Note that there is an appeals committee consisting of 3 chartered accountants, one non-accountant member, and legal chairman. On what grounds may a client make a complaint against an ICAEW member? There are three key ones. - Answer - Breaking the ICAEW code or departing from regulation Departing from ICAEW guidance Bringing the ICAEW into disrepute.
What is the principal role of corporate governance? - Answer - To protect the stakeholders of a company. Key issues involve domination of the board by a particular interest, inadequate controls, lack of independent scrutiny, overemphasis on short-term profitability. What are the 4 broad perspectives on the objectives of corporate governance? - Answer - Corporate perspective: simply we want to maximise the wealth of the shareholders. Public policy perspective: ensure the company meets objectives of shareholders plus interests of other stakeholders and the public at large. Most broad perspective. Stakeholder perspective: all about aligning the interests of shareholders and companies with those of other stakeholders. Decisions will enhance perception of the business in the eyes of all stakeholders. Stewardship perspective on corporate governance: we act in the best interests of the company, we are stewards of the company resources. What are the contrasts between bank-based and market-based financial systems? What is an example of each? - Answer - Bank based: France and Germany.
- Households bear little risk and allocate more assets towards cash equivalents, comparatively more government regulation and banks are highly concentrated and integrated.
- Bank lending most important source of business finance after retained earnings.
- Markets are volatile and speculative because companies are dependent on bank finance. (since interest rate constant but profits fluctuate)
- Less home ownership. Market based: UK and USA
- Households bare more risk, greater access to investments in physical assets (house)
- Institutional shareholders have great deal of influence (lots of indirect investment)
- Markets more important than banks for long-term finance, comparatively unregulated and fragmented.
- Banks have less close relationships with the businesses they lend to What are the five main principals for companies of the UK corporate governance code? What is the disclosure principal that companies must meet under UKLA rules? - Answer - Leadership Board effectiveness Accountability/Audit Remuneration Investor relationships Must either comply or explain why not.
Transparency Truth What are statutory requirements for all companies in addition to values? - Answer - Equal opportunity for all No discrimination on any grounds Freedom of information What are the attributes and behaviours of ethical leaders? - Answer - Openness Courage Fair mindedness Ability to listen Honesty Is having more opportunity to delegate a key opportunity of a flat business or a narrow business? - Answer - Flat business Define a risk-seeking attitude - Answer - An investment should not be undertaken if there is an alternative investment offering a higher risk What order should an organisation respond to risk? - Answer - Avoidance, reduction, sharing (transfer), then acceptance If a company automates jobs, and borrows, do both these increase finance risk? What are the types of finance risk, are they general? - Answer - Yes, since they decrease liquidity (this is a type of financial risk). Finance risk is general as it applies to all businesses. Types of finance risk include liquidity risk, gearing, default, and credit risk. What are the elements of business risk? - Answer - Strategy, enterprise, product, economic (e.g. having your product respond badly to a downturn), technology, property. What are on the cyber essentials scheme of the UK government? - Answer - Implement access controls, install internet gateways, use patch management software, malware protection, secure configuration. According to the IASB framework, when is financial information useful? - Answer - When it both influences the decisions of users of the information and establishes management accountability. What are ways in which big data can create value for a business? - Answer - Transparency, performance improvement, market segmentation and customisation, decision making, innovation, and risk management.
What are the three main components of a company control system? - Answer - Measurement of performance and comparison against targets, establishment of standards or targets to express planned performance, follow-up action to correct adverse results What is the main concern of the suppliers of an entity and the shareholders as readers of the financial statements? - Answer - Primary concern of suppliers is liquidity, primary concern for shareholders is risk and return What is the fiduciary relationship between a bank and the customer? - Answer - The bank is expected to act with good faith towards the customer What trading risk is the inability to finance the credit given to customers? - Answer - Liquidity risk (not credit risk) Which part of the bank of England is responsible for the stability and resilience of the whole UK financial system? - Answer - The Financial Policy Committee (not the FCA) What are the key controls which can ensure information security? - Answer - Prevention
- stop happening Detection - for example logs, can find out when changes have been made Deterrence - e.g. contract Recovery procedures - e.g. backups and checkpoint programmes Correction procedures - instituting stricter controls to ensure vulnerability is dealt with Threat avoidance - changing the design of the system Good data should be ACCURATE, what are these concepts? - Answer - Accurate, complete, cost-beneficial, user-targeted, relevant, authoritative, timely, easy to use. Which role would usually process sales invoices and reconcile cash and bank. Which role would plan and prepare budgets and appraise potential investment projects? - Answer - Financial accountant would do the first two, management accountant would do the last two. Difference between independence of mind and independence in appearance? - Answer
- Independence of mind is about your actual objectivity. Independence in appearance means avoiding situations where someone else could reasonably question your objectivity. How long must you have traded before being listed on London stock exchange? - Answer - 3 years.
